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NewsNotables – Issue 67

Tax Evaders Flock to IRS to Confess Their Sins

The Wall Street Journal, July 30, 2009

Wealthy taxpayers have inundated the Internal Revenue Service with requests to come clean for tax evasion amid a government crackdown on undeclared income from overseas accounts. The volume has been so great the IRS issued a streamlined, three page form for taxpayers seeking entry into its temporary voluntary-disclosure program.

Two main factors appear to be driving the clemency-seeking spree:

The IRS disclosure program offers Americans the possibility that they may face civil charges, which can carry lower penalties than criminal charges, for voluntary details of tax evasion.

Also, the IRS and the U.S. Justice Department are investigating taxpayers who failed to report income earned from undeclared accounts with Swiss bank UBS AG. Billions of dollars of revenue are lost to offshore tax evasion annually. U.S. taxpayers are required to declare income earned from foreign financial accounts. Countries with bank secrecy laws such as Switzerland have made it easier for Americans to conceal assets and income from the IRS. In February, UBS agreed to a $780 million criminal settlement that called for UBS to turn over 250 names. In a separate civil matter, the IRS and Justice Department are trying to force UBS to hand over the identities of U.S. residents linked to 52,000 accounts.

Comment: This is a difficult dilemma for me. On one hand, I applaud the effort by the IRS and Justice Department for making progress in identifying and prosecuting U.S. taxpayer evasion cheats. This will not only pick up billions for dollars currently, but untold billions in years to come. On the other hand, I can’t justify in my mind giving fraudulent taxpayers leniency. They have knowingly set up accounts and blatantly cheated the IRS billions of dollars over many years. I understand that the IRS may be getting billions of dollars that they may not have if the leniency agreement had not been offered, but I struggle with letting off blatant tax cheaters.

Toll’s CEO Tallies Gains in Stock Sale

The Wall Street Journal, September 14, 2009

Robert Toll, CEO of Toll Brothers Inc., has reaped about $50 million from sales of stock in the luxury home builder this year, benefitting from a recent jump in the share price amid investor hopes for a recovery in the housing market. Last week, Mr. Toll, exercised about 791,000 stock options shares awarded almost a decade ago. The options were due to expire in December of this year. The shares exercised along with the earlier sales that weren’t triggered by options brought Mr. Toll’s total stock sales for the year to 2.8 million shares. Mr. Toll reported remaining direct and indirect holdings of 15.9 million shares, or nearly 10% of the company’s outstanding shares.

The company’s stock has recovered from less than $16 per share in early July to a recent range of about $20 to $23. Mr. Toll spoke encouragingly about the housing market August 27 in presenting results for the company’s fiscal third quarter ended July 31. The company reported a loss of $472 million for the quarter, largely reflecting write downs of asset values, but Mr. Toll said: “We believe declining cancellations and more solid demand indicate that the housing market is stabilizing.”

In a conference call with investors, he said stronger housing demand in recent months “makes us feel a whole lot better.” In response to questions about the outlook for the economy and further waves of foreclosures, however, he said Toll hadn’t purchased much land recently. He said, “so while we’re optimistic, we’re also unwilling to make bets on the future being much different than the current market.”

Comment: The gain from exercising stock options that were close to expiring is quite different than the CEO selling company stock in the open market to investors that may have been influenced by his comments. The investors that bought shares in the open market during the rally may or may not have been hurt, time will tell. The issue here is that if Toll’s comments influenced their stock rally, the benefit of the stock options he exercised may have been greatly enhanced.

Home-Buyer Credit Is Focus of Inquiry

The Wall Street Journal, October 20, 2009

The Internal Revenue Service is examining more than 100,000 suspicious claims for the first-time homeowner tax break, another sign of trouble. The measure was adopted in February as part of the economic stimulus bill, which gives first-time buyers an $8,000 tax credit in an effort to boost sales and stimulate the housing market. The program is set to end November 30, 2009.

More than a million claims for the credit have been received so far, and the housing industry experts estimate that the credit has helped generate about 350,000 home sales. Lawmakers and tax experts say that there is evidence that a significant number of the claims might prove to be unjustified, or even fraudulent.

The IRS said it is investigating 167 “criminal schemes” involving the credit, according to the subcommittee. At a recent hearing of the White House tax advisory panel, Bonnie Speedy, national director of the AARP Tax-Aide, a volunteer service for low-income people, suggested the abuse of the home purchase credit appeared to be widespread, in part because of the relatively loose standards for claiming the credit. Ms. Speedy states that the credit “has some fraud issues because it’s not being done at the time of the sale.” Taxpayers don’t have to file their claims as part of a real estate transaction and instead can file or amend their income tax returns to claim the credit.

A spokesman for the National Association of Realtors, Lucien Salvant, said “Anytime there is a lot of money around, there is going to be people attracted to it with evil intent.”

Comment: We would like to think that programs such as these would be used by honest people with high ethical standard,s but I’m afraid that’s not the case. I agree with Lucien Salvant’s statement above and wonder why someone in our government wouldn’t have realized the situation and made qualification a little more stringent and tied the credit with an actual real estate purchase.

An article in the October 23rd Wall Street Journal stated that more than 500 people under the age of 18, including a 4-year-old child, also had their names on applications for the credit, which has no minimum age requirement. Most of the claims were made by parents who purchased a home but were ineligible for the credit. This article also states that 19,000 filers who hadn’t bought homes claimed and received $139 million in tax credits. This appears to be another program that our government thought acting quickly was more important than doing it right with adequate safeguards.

The Strong Case Against Raj Rajaratnam

CNN Money.com October 23, 2009

Insider trading cases are notoriously hard for the government to prove, but the use of a wiretap gives the prosecution a very strong case against Raj Rajaratnam, the billionaire hedge fund manager and founder of the Galleon Group, accused of trading on illegal information obtained by a web of information including executives at IBM, McKinsey and Intel Capital. An informant Roomy Khan allowed the wiretap conversation between she and Rajaratnam as part of her work to help the government build its case against six people.

The government alleges that Danielle Chiesi and Mark Kurland, who worked at the hedge fund New Castle, swapped illegally obtained information with Rajaratnam. It says that they received this information from the other three defendants also named in the case; Robert Moffat, an executive at IBM, Anil Kumar, a director at McKinsey and Rajiv Goel, who worked at Intel Capital.

“The recordings help prosecutors destroy the ‘mosaic defense’, the most common defense against insider trading,” says James Angel, a business professor at Georgetown University. “With the mosaic theory defendants try to say that by using lots of little bits of legal information and tips that fall into a gray area, they made investment decisions. It says no one intended to do anything wrong.” In this case, the U.S. Attorney’s complaint released in mid October includes conversations recorded by tapping phones owned by Rajaratnam and others involved in the case.

Wiretaps are rare in insider trading cases and these conversations show the speakers involved in the schemes knew they were doing something wrong. For example, Danielle Chiesi was caught on tape saying, “You put me in jail if you talk … I’m dead if this leaks. I really am … and my career is over. I’ll be like Martha (expletive) Stewart.” With the recorded conversations, it’s harder for the defendants to claim that their conversations were misconstrued.

Comment: Insider trading has been in the news often over the years, but what makes this case a little different is the diverse defendants. Besides the hedge-fund participants, you have a person from Fortune 500 company-IBM, a person from a highly respected (and expensive) consulting firm-McKinsey and Co. and a person from Intel Capital. This case is not a slam dunk, but at minimum, the careers of the participants have been ruined and the demise of the Galleon Group.


By Roger Eigsti
Board President,
Institute for Business, Technology, and Ethics

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