Cravath, Bryan Cave in Hedge Fund Tax Fraud Scam

Federal prosecutors today unsealed an indictment charging the chief executive of what used to be one of the world's largest investment funds with constructing elaborate tax shelters for some of his wealthiest clients. The executive, Jeffrey Greenstein, former head of the Seattle-based fund Quellos Group, and two other defendants (including a Quellos in-house lawyer) face 18 counts related to tax evasion and fraud for a scheme that netted them $86 million in fees and allowed six clients to avoid paying about $400 million in federal taxes, according to the indictment.

What's interesting for our purposes is that the indictment details how lawyers from Cravath, Swaine & Moore and Bryan Cave blessed the shelters with letters indicating to the taxpayers that they were legal and would withstand scrutiny from the Internal Revenue Service. (The firms are identified as C.S.M. and B.C. in the indictment, but two sources familiar with the matter confirm they are Cravath and Bryan Cave. In addition, a 2006 Congressional investigation mentioned the role the two firms played in the Quellos tax shelters, and at least one lawyer, Lewis Steinberg, then of Cravath and currently at Linklaters, testified before a Congressional subcommittee.)

Those sources say it is extremely unlikely the named firms or their lawyers will be charged with any crime, and the indictment accuses Greenstein and the other defendants of lying to outside firm lawyers in order to get those attorneys to bless the tax shelters.

The scheme involved the creation of sham offshore funds that would engage in fabricated money-losing securities transactions in order to produce fictitious capital losses, according to the indictment. Greenstein and Charles Wilk, an in-house lawyer at Quellos, provided the "C.S.M." and "B.C." lawyers with documentation outlining what appeared to be legitimate operations, the indictment says. Full story