SEATTLE — Two principals of defunct Seattle investment management firm Quellos Group and a Los Angeles lawyer were indicted in a tax shelter scheme that allegedly created more than $1.3 billion in fraudulent losses for prominent clients, including media mogul and billionaire investor Haim Saban.
The operation was "one of the largest tax fraud schemes ever uncovered in this country," U.S. Atty. Jeffrey C. Sullivan in Seattle said Thursday.
Saban and four other clients were apparently unaware of the alleged fraud, having been offered written legal opinions from well-known law firms and assurances from their own tax attorneys that the tax shelter was legal. They paid about $400 million in back taxes, plus penalties, and were not accused of any wrongdoing.
The indictment names as defendants Los Angeles lawyer Matthew G. Krane, Quellos founder and Chief Executive Jeffrey Greenstein and Quellos principal Charles Wilk, also a lawyer. It charges the two former Quellos principals with conspiracy to defraud the Internal Revenue Service, tax evasion and money laundering, among other charges.
Krane, charged with money laundering, is accused of secretly receiving a $36-million kickback for enticing Saban, one of his long-standing Los Angeles clients, to funnel the bulk of more than $1 billion in proceeds from the sale of Fox Family Worldwide Inc. into money-losing investment vehicles, which Saban had been repeatedly assured were legal as a tax shelter.
Greenstein and Wilk are accused of setting up a complex series of sham transactions through a shell company on the Isle of Man to blend wealthy investors' earnings with an equal number of stock losses to avoid owing capital gains taxes. But, the indictment alleges, the losing stocks didn't exist, the company that supposedly acquired the stocks had neither employees nor earnings and the blended investment vehicles were a fraud. The two men "misled some of this country's wealthiest citizens to commit tax fraud," Sullivan said.
Quellos was once one of the world's largest managers of mutual funds made up of hedge funds. The company sold its fund of funds business to New York asset manager BlackRock for $1.7 billion in 2007, and the remainder of the company closed. Prosecutors said the portion of the business sold to BlackRock had no connection to the transactions outlined in the indictment.
