September 19, 2020

DealBook: Swiss Bank Pleads Guilty to Tax Law Violations

Preet S. Bharara, the United States attorney in Manhattan.Daniel Barry for The New York TimesPreet S. Bharara, the United States attorney in Manhattan.

Switzerland’s oldest private bank on Thursday admitted to helping Americans evade United States taxes, the first time a foreign financial institution has pleaded guilty to tax law violations.

Representatives for Wegelin Company, a Swiss bank founded in 1741, appeared in Federal District Court in Manhattan and acknowledged that for nearly a decade the firm helped dozens of wealthy American customers dodge taxes by hiding more than $1.2 billion in secret accounts.

As part of guilty plea, Wegelin agreed to pay $74 million in fines, restitution and forfeiture proceeds to the United States government. Several Wegelin executives appeared at the hearing before Judge Jed S. Rakoff, including one of its managing partners, Konrad Hummler, a well-known figure in the Swiss private banking industry.

“From about 2002 through 2010, Wegelin agreed with certain U.S. taxpayers to evade the tax obligations of these U.S. taxpayer clients, who filed false tax returns with the I.R.S.” Otto Bruderer, another Wegelin partner, said in court. “Wegelin was aware the conduct was wrong.”

Mr. Bruderer said that Wegelin assisted the American clients because it believed that it would not be prosecuted in the United States because it had no offices here, and had acted in accordance with Swiss law. He also noted that the conduct was common practice in the Swiss banking industry.

Although Wegelin ceases to exist as a business, the firm’s partners sold its non-American client accounts last January to the Raiffeisen Group, an Austrian bank, just before its indictment. That move was sharply criticized by Judge Rakoff in a court hearing last year as a “fraud upon fraud.”

Nevertheless, Wegelin’s admission of guilt represents a victory for the Obama administration in its sweeping crackdown on Americans using offshore banks to evade taxes. It also demonstrates the long arm of the Justice Department, extracting a guilty plea from a foreign company with no business operations in the United States.

The case strikes another blow at Swiss banking secrecy, a shadowy world that United States authorities have penetrated recently after decades of looking the other way. For years, secrecy has been a hallmark — and an attractive selling point — of Switzerland’s private banks, which, alongside chocolate and watchmaking, are one of the country’s best-known businesses.

In 2009, UBS avoided criminal charges by striking a so-called deferred prosecution agreement in which it paid a $780 million fine and turned over the names of about 4,500 clandestine accounts believed to hold the assets of American taxpayers. Around the same time, the Internal Revenue Service initiated an amnesty program that allowed Americans to avoid criminal liability by divulging offshore accounts. The program was a success, yielding more than $2.7 billion in taxes and penalties from about 30,000 taxpayers.

As part of the push to eliminate tax cheats, a federal grand jury in Manhattan indicted Wegelin last February. The firm’s elaborate scheme involved its Swiss bankers’ opening secret accounts for American clients using code names and setting up sham entities to avoid detection in far-flung locales, including Panama and Liechtenstein.

“There is no excuse for wealthy Americans flouting their responsibilities as citizens of this great country to pay their taxes, and there is no excuse for foreign financial institutions helping them to do so,” said Preet Bharara, the United States attorney in Manhattan. “Today’s guilty plea is a watershed moment in our efforts to hold to account both the individuals and the banks — wherever they may be in the world — who are engaging in unlawful conduct that deprives the U.S. Treasury of billions of dollars of tax revenue.”

Mr. Bharara’s office had also brought an indictment against three Wegelin executives last year, but they are expected to avoid facing the charges because a treaty between Switzerland and the United States does not provide for extradition of Swiss individuals for tax crimes.

The Justice Department said that Wegelin had lured clients away from larger Swiss financial institutions like UBS after those banks came under investigation. As of December 2010, Wegelin had about $25 billion in assets under management.

From its headquarters in St. Gallen, a quiet mountain town in northeast Switzerland, Wegelin pitched itself as a safe haven for American taxpayers because it had no operations in the United States. A Web site marketing Wegelin’s services said, “Neither the Swiss government nor any other government can obtain information about your bank account.”

Included in the $74 million in penalties is about $16 million in forfeited proceeds that Wegelin held in a UBS bank account in Stamford, Conn. The account, prosecutors said, was used to launder money from Switzerland to American clients and conceal that money from United States tax authorities.

The balance of the penalties is more than $20 million in restitution for taxes evaded, about $16 million in fees on American taxpayer client accounts and a fine of about $22 million. Wegelin was represented by Richard M. Strassberg of the law firm Goodwin Procter.

Just two months after the case was brought against UBS, Wegelin raised the hackles of the Justice Department. In April 2009, Mr. Hummler, the Wegelin partner, wrote an eight-page note titled “Farewell America.” The memo by Mr. Hummler, who served as chairman of the Swiss Private Bankers Association, championed Swiss banking laws and said that Wegelin was in the process of recommending that its clients exit all direct investments in United States securities. Mainly, though, the note was a rambling jeremiad against the United States.

“The U.S.A. has fought by far the largest number of wars, sometimes with, but mostly without a U.N. mandate,” Mr. Hummler wrote. “It has broken the international laws of war, maintained secret prisons, and fought an absurd war against drugs.”

“A country,” he continued, “whose underclass enjoys neither the benefits of an adequate education, nor a halfway functional health care system; a country whose economic system is increasingly inclined to overconsumption, and in which saving and investing have increasingly become alien concepts, a situation that has undoubtedly been one of the driving forces behind the current recession, with all its catastrophic consequences for the whole world.”

After representatives of Wegelin failed to appear in federal court at the time of its indictment last February, federal prosecutors labeled the Swiss bank a “fugitive.”

The typically colorful Judge Rakoff was subdued during Thursday’s hearing. But in a court session last January, he blasted Wegelin for selling its non-United States business just before an indictment, suggesting that it was a blatant effort to shield its assets from the United States government.

If an American partnership had taken those actions, Judge Rakoff said, “the government would be here saying with perhaps considerable force that this was a fraud upon fraud compounding the prior alleged crime with patent evasions and consciousness of guilt.”

Daniel Levy, a federal prosecutor, did not disagree. “That would be one reasonable view of the facts,” he said.

This post has been revised to reflect the following correction:

Correction: January 3, 2013

An earlier version of this post gave an incorrect name for the managing partner at Wegelin Company who served as chairman of the Swiss Private Bankers Association. It is Konrad Hummler, not Karl.

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Judge Says S.E.C. Misled Two Courts in Citi Case

Judge Jed S. Rakoff of the Federal District Court in Manhattan issued a supplemental order saying that the S.E.C. appeared to file a “materially misleading” request with the Court of Appeals for the Second Circuit earlier this week, when the commission sought an emergency halt to further proceedings in the case.

The S.E.C. was seeking the temporary stay while it appealed Judge Rakoff’s earlier decision to reject a proposed $285 million settlement between the two parties and to order the two sides to prepare for a July trial.

Judge Rakoff said the S.E.C.’s filing to the appeals court was misleading in its argument that an emergency halt was needed because Citigroup had until Jan. 3 to file an answer in district court to the S.E.C.’s fraud case against it.

Judge Rakoff said the S.E.C. knew or should have known that Citigroup was planning to ask him to dismiss the case entirely, negating the urgency to halt proceedings. The appeals court granted the temporary stay on Tuesday, saying it would consider a longer halt on Jan. 17.

The case involves S.E.C. charges that Citigroup misled customers when it sold $1 billion in mortgage-related securities without telling investors that it was betting against some of the mortgage investments in the portfolio.

Judge Rakoff said that, in addition, the S.E.C. and Citigroup each misled the district court by not telling him that the S.E.C., with Citigroup’s approval, had applied to the appeals court for the emergency stay more than four hours before he issued a decision on the S.E.C.’s same request for a stay in his court.

He said that the S.E.C. had the chance and the obligation to tell him about its emergency motion to the Court of Appeals after it was filed on Tuesday, because the commission and Citigroup had a telephone conference call with Judge Rakoff about his management of the case. In that conversation, Citigroup asked Judge Rakoff to be allowed to file extra pages in its coming motion to dismiss the case.

By not informing him of its appeals court plea, “there appears to have been a similar misleading of this court,” the judge wrote, because both the S.E.C. and Citigroup “held back from this court material information it needed to do its job.”

The judge even complained that he had spent the Christmas holiday considering the stay request and drafting an opinion in order to speed the case along.

Judge Rakoff said that the purpose of the supplemental order, which was filed in his court, was “both to make the Court of Appeals aware of this background and to attempt to prevent similar recurrences.” It ordered the parties to “promptly notify this court of any filings in the Court of Appeals.”

John Nester, an S.E.C. spokesman, said: “We will respond as appropriate in the proceedings before the Court of Appeals.” A Citigroup spokeswoman declined to comment on the new filing.

Judge Rakoff has sharply rebuked the S.E.C. over its method of settling fraud cases over the last two years. In 2009, he rejected a proposed settlement between the S.E.C. and Bank of America over charges that the bank misled its shareholders in filings regarding its takeover of Merrill Lynch.

In the Citigroup case, the judge took aim at the S.E.C.’s practice of settling cases without making the defendant either confirm or deny the charges. Such an agreement means there is no established set of facts in the case, the judge said, robbing judges of the ability to determine whether a proposed settlement is “fair, reasonable, adequate and in the public interest.”

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Madoff Trustee Says Mets Ruling Won’t Be as Bad as First Thought

The trustee for Bernard L. Madoff’s fraud victims said on Thursday that he had overestimated how much his recovery efforts would be affected by a court ruling this week in his case against the owners of the New York Mets.

The practical effect of the ruling, released on Tuesday by Judge Jed S. Rakoff of United States District Court in Manhattan, will be to reduce the amount of money the trustee, Irving H. Picard, can seek in court by $6.2 billion — not by $11 billion, as the trustee’s lawyers reported on Wednesday.

In his ruling in the Mets case, Judge Rakoff allowed the trustee to seek only the return of fictional profits paid out to the Mets owners, Fred Wilpon and Saul Katz, during the two years before the Madoff fraud collapsed in December 2008.

The trustee had sought to recover fictional profits paid out in the six years before the collapse, citing provisions of New York State law that allow for a six-year recovery window. The judge also threw out the trustee’s bid to recover so-called preference claims, the cash paid out to the team’s owners in the final 90 days of the fraud.

By reducing the time window and eliminating preference claims — actions that lawyers said would most likely apply to all the lawsuits the trustee has pending in Federal Bankruptcy Court in Manhattan — the decision still “has significant potential ramifications that could affect recoveries as well as distributions” in the legal efforts to unwind Mr. Madoff’s epic Ponzi scheme, Mr. Picard said in a written statement released on Thursday.

If the ruling had come at the onset of the fraud case, the effect would have roughly matched the estimate given on Wednesday by Mr. Picard’s lawyer, David J. Sheehan. But some cases have already been settled out of court and most likely will not be affected by the ruling; once those were sifted out, the effect was reduced to $6.2 billion, made up of at least $2.7 billion in fictional profits and $3.5 billion in preference claims.

It says much about the scale of the case that an adverse effect of $6.2 billion, rather than $11 billion, can be viewed with relief among lawyers trying to recover cash to repay Mr. Madoff’s victims, who claimed paper losses of almost $65 billion and cash losses of about $18 billion.

Mr. Picard has filed lawsuits seeking a total of about $100 billion from a number of giant global banks and large investors. He has previously said that any money he recovers in excess of the $18 billion in cash principal lost by many Madoff investors could be used to cover general fraud claims that can be asserted by all investors bilked by Mr. Madoff, even if they recovered all their principal before the fraud collapsed.

The trustee has already collected $10.6 billion, largely through out-of-court settlements, and had been scheduled to make his first cash distribution to eligible investors on Friday. But “in an abundance of caution,” Mr. Sheehan said on Thursday, the trustee has decided to delay those payments until his staff can more fully examine the implications of Judge Rakoff’s ruling on the roster of eligible claims.

“We know how difficult this delay is for those who have waited so long to recover the money they lost to Madoff,” he said. “We are committed to completing this analysis quickly and moving forward with this important distribution as soon as we possibly can.”

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DealBook: 2 Defendants Sentenced in Insider Trading Case

Zvi Goffer received a 10-year sentence, among the longest insider trading sentences ever.Andrew Kelly/ReutersZvi Goffer received a 10-year sentence, among the longest insider trading sentences ever.

Two of the more colorful characters caught in the government’s vast insider trading investigation were sentenced on Wednesday, three weeks before its central figure — Raj Rajaratnam — was set to learn his fate.

Zvi Goffer, a former hedge fund trader, received a 10-year sentence from Judge Richard J. Sullivan in Federal District Court in Manhattan, among the longest insider trading sentences ever.

“This will be used to send a message to Wall Street,” Judge Sullivan said. “These crimes are not going to be tolerated.”

Three hours later, in the same courthouse, Winifred Jiau, a former technology industry consultant, received a four-year term from Judge Jed S. Rakoff.

Insider trading, said Judge Rakoff, “strikes at the integrity of the marketplace, which is a very important asset of the United States.”

Wednesday’s proceedings served as something of an undercard for the main event — the sentencing of Mr. Rajaratnam, the former head of the Galleon Group hedge fund whom the government calls “the modern face of insider trading.” Mr. Rajaratnam’s sentencing before Judge Richard J. Holwell, originally scheduled for Sept. 27, was pushed back without explanation on Wednesday to Oct. 13.

Federal prosecutors have asked the judge to sentence Mr. Rajaratnam to up to 24 years, a term that would be the longest insider-trading sentence ever.

Like Mr. Rajaratnam, both Mr. Goffer and Ms. Jiau fought the government’s charges, took their cases to trial and lost.

Mr. Goffer, who briefly worked at Galleon under Mr. Rajaratnam, was convicted of leading an insider trading ring that earned millions of dollars in illegal profits by receiving advanced word of big mergers from corporate lawyers. Ms. Jiau, a consultant for the Silicon Valley expert network firm Primary Global Research, was found guilty of leaking secret information about technology companies to hedge fund traders.

The United States attorney in Manhattan has brought insider trading charges against 54 people, 44 of whom have pleaded guilty. All six defendants who have taken their cases to trial have been convicted.

The prison terms handed down on Wednesday highlighted the disparate approaches that judges take to sentencing, and could offer some insight into the sentencing of Mr. Rajaratnam.

In the case of Mr. Goffer, his 10-year sentence was effectively at the low end of the recommended range suggested by nonbinding federal sentencing guidelines. In the case of insider trading crimes, the guidelines are largely based on the dollar amount of the illegal gains. The government had suggested a range of 121 to 151 months for Mr. Goffer.

Ms. Jiau, however, was sentenced to four years in prison, a term well below the range of six and a half to eight years suggested by the guidelines. Judge Rakoff has long been a critic of the guidelines.

“There’s no way I’m going to impose a guideline sentence in this case,” Judge Rakoff said. “The guidelines give the mirage of something that can be obtained with arithmetic certainty.”

The proceedings also illustrated judges’ different approaches in sentencing defendants who take their cases to trial versus defendants who plead guilty and cooperate with the government. Judges have shown leniency in sentencing insider trading defendants who have admitted wrongdoing. Under the guidelines, defendants can shave time off their sentences if they accept responsibility for their crimes.

Judge Sullivan told Mr. Goffer that there were negative consequences to fighting the government’s charges and not accepting responsibility until after the fact. “You decided to gamble with your future,” the judge said. “And you lost.”

In contrast, Judge Rakoff said during Ms. Jiau’s proceeding that it was important not to draw a negative inference from a defendant who went to trial.

“Every American has the right to put the government to its proof,” said Judge Rakoff. “Even though we want to give credit for acceptance of responsibility, we don’t want to place such a premium on it that we discourage people from exercising their constitutional rights.”

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DealBook: S.E.C. Drops an Insider Proceeding Against Rajat Gupta

Rajat K. Gupta, a former director of Goldman Sachs.Seokyong Lee/Bloomberg NewsRajat K. Gupta, a former director of Goldman Sachs.

8:26 p.m. | Updated

The Securities and Exchange Commission has dropped its administrative proceeding against Rajat K. Gupta, a former director of Goldman Sachs and Procter Gamble, handing him a victory in his legal battle with the agency.

“The commission has determined that it is in the public interest to dismiss these proceedings,” the S.E.C. said in a two-page order filed late Thursday.

In March, the S.E.C. filed an unusual civil administrative proceeding against Mr. Gupta that accused him of leaking secret board discussions to Raj Rajaratnam, the hedge fund billionaire, now convicted. The proceeding would have been heard by an S.E.C. administrative law judge in Washington.

In response to the administrative action, Mr. Gupta’s lawyers fired back with a lawsuit against the S.E.C. that accused it of denying Mr. Gupta his right to a jury trial and treating him differently than the other Mr. Rajaratnam-related defendants, all of whom the agency sued in federal court.

Last month, the presiding judge in the case, Jed S. Rakoff, issued a ruling that allowed Mr. Gupta’s lawsuit to proceed and criticized the S.E.C. for bringing the administrative proceeding instead of a federal lawsuit.

“Mr. Gupta is very pleased that as a result of his lawsuit, the S.E.C. has dismissed its administrative proceeding and he will no longer be singled out for disparate treatment,” Gary P. Naftalis, a lawyer for Mr. Gupta, said in a statement. “As we’ve said previously, the S.E.C.’s allegations are totally baseless and cannot withstand scrutiny.”

Mr. Gupta, who also served as the head of the consulting firm McKinsey Company, has agreed to drop his lawsuit against the S.E.C., according to court papers filed Thursday.

The S.E.C. can still sue Mr. Gupta in federal court before Judge Rakoff. Federal prosecutors, meanwhile, have not brought criminal charges against Mr. Gupta but called him an unindicted co-conspirator of Mr. Rajaratnam.

A spokeswoman for the United States attorney’s office in Manhattan declined to comment. An S.E.C. spokesman said that “the staff is fully committed to the case and will proceed as appropriate.”

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