Paul Daugerdas was found not guilty by the jury at his trial on three counts of personal tax evasion, which were charged against him. He was also found not guilty on six counts of tax evasion relating to transactions on which he advised clients. The transactions in which he and his clients engaged and for which he was acquitted were the same as the approximately 1,500 transactions on which he advised and that the prosecutors argued were included in a vast conspiracy for which they said he should be sentenced because they were illegal – even though that conclusion makes no sense in light of the acquittals.

The conspiracy charge on which Daugerdas was found guilty was clearly extremely limited in scope based on any reasonable interpretation of the verdicts that the jury rendered. It makes no sense that a huge conspiracy existed based on transactions that were of the same type as those that were the subject of not guilty verdicts, especially not guilty verdicts on personal individual transactions. The only four tax evasion charges on which Daugerdas was found guilty had one thing in common – they all involved corrections to investment transactions that the prosecutors argued were “backdating” – even though Deutsche Bank issued revised brokerage statements with “as if” transaction dates and there was no evidence presented that Daugerdas actually had any personal knowledge of the details of the documentation, which were handled by his associates, partners, paralegals, and secretary, as was his firm’s typical legal practice and as to which witnesses testified.

In addition to the fact that the not guilty verdicts clearly showed that there was no giant conspiracy, and that the guilty conspiracy verdict was based only on the four counts with documentation issues, the attorneys for Daugerdas conducted post-verdict interviews of jurors, who confirmed that the government “failed to prove its main case regarding the [alleged] tax shelter fraud against Mr. Daugerdas” and that there was “not enough proof to convict Mr. Daugerdas.” Further, “the jury agreed with the defense that Mr. Daugerdas acted in good faith when he used the tax shelters to avoid payment of taxes for himself and his clients.” The jurors said that the limited documentation issues were “the sole basis for all the convictions against Mr. Daugerdas, including the conspiracy counts.”

As further evidence of these conclusions, the jurors interviewed said that the jury acquitted Denis Field, the co-defendant of Mr. Daugerdas and the former chairman of BDO Seidman, because there was no evidence presented that he or his firm were involved with any of the dating and documentation issues.

In spite of the obvious conclusions evident from the decisions of the jury, the government nonetheless argued for an overarching conspiracy and urged that self-serving theory on the court and to the press.

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Paul Daugerdas was a tax attorney who advised wealthy clients on ways in which he legitimately believed and concluded that they could avoid paying tax by engaging in certain structured investment transactions. From a philosophical standpoint, many people are of the belief that they should not attempt to avoid paying taxes, and therefore are somewhat antagonistic to those who would advise others (especially wealthy individuals) on how to do so. To those with such self-righteous beliefs, tax lawyers are particularly unsympathetic. Philosophical and moral beliefs, however, are not within the purview of the honest conclusions reached by professional attorneys after a thorough and rigorous analysis of the law – their conclusions are based upon the law itself, and not on what some people think the law should be, or their beliefs about how it should be applied, or policy.

Historically, when the Internal Revenue Service (IRS) believed that some types of transactions did not achieve the results that professional advisors concluded that they did, or took the position that a loss of revenue warranted a confrontational approach, they would conduct an audit of the individual taxpayer and attempt to challenge the transactions in a court of law. In the mid 2000’s, however, in an apparent attempt to accelerate their attacks and short-circuit the appropriate and legitimate process, the IRS and the Department of Justice launched an offensive against tax professionals, launching criminal investigations in an attempt to frighten them into ceasing the provision of legal and accounting advice. The scare tactic was largely successful, as being the target of criminal investigations terrified the conservative managements of most professional firms.

As Richard Sandler said in his book, “Witness to a Prosecution,” when the government decides it is going after you, it will stop at nothing. In a quote attributed to Lavrently Beria, head of the Soviet secret police under Stalin (and/or to jurist Andrey Vyshinsky or Stalin himself), “Show me the man and I’ll find you the crime.” In a speech delivered by then U.S. Attorney General Robert H. Jackson to the Conference on United States Attorneys on April 1, 1940: “If the prosecutor is obliged to pick his cases, it follows that he can choose his defendants.Therein lies the most dangerous power of the prosecutor: that he will pick people that he thinks he should get, rather than pick cases that need to be prosecuted…

In such a case, it is not a question of discovering the commission of a crime and then looking for the man who committed it, it is a question of picking the man and then searching the law books, or putting investigators to work, to pin some offense on him.”

The government began its investigation of Daugerdas and his firm, Jenkens & Gilchrist, in 2002. The tactics utilized by the government exceeded the norms and legal ethical standards. They demanded the names of the clients who had engaged in the tax advantaged structured investment transactions which had been opined on by Daugerdas and Jenkens. While the names of clients are not in and of themselves typically subject to the attorney-client privilege, such names ARE subject to the attorney-client privilege when linked to the advice given, as was the case in this situation. The demand was equivalent to asking a law firm to give up to the government the names of all of their clients to whom they gave advice on their clients’ robberies, burglaries, or other alleged crimes. While Jenkens initially assured Daugerdas that they would uphold and vigorously defend him and the privilege, “all the way to the Supreme Court,” they caved in to government pressure, and gave up their clients’ names. The government then proceeded to summons and subpoena the Jenkens clients’ files, which Jenkens also gave up, and spent the next seven years (until 2009), “ investigating” the clients (and intimidating, threatening and coercing them) before bringing an indictment against Daugerdas and his partners (and Deutsche Bank brokers and BDO Seidman partners) in 2009. In addition to the lawfare against Daugerdas, Jenkens, Deutsche Bank, and BDO Seidman, the government also proceeded with investigations against Ernst & Young, Price WaterhouseCoopers, KPMG, and the law firm of Brown & Wood, among others, effectively successfully chilling the market for any moderately aggressive tax advice.

The procedures in place at Jenkens & Gilchrist for issuing tax opinions were extensive. Every opinion needed to be reviewed and signed off by a second partner, and then reviewed and approved by another tax partner in a different office (typically the co-head of the tax practice, who was located in the Austin, Texas office and was also a board member). The opinions themselves were not based on wild interpretations of the tax law, in fact, most were based on the opinion of the Tax Court in the case of Helmer v. Commissioner (34 T.C.M 727, 1975), in which the IRS successfully argued (to the detriment of George Helmer, the taxpayer) that a short position in an option was not a liability for tax purposes. By utilizing the theory of that case and the short option proceeds to create a cost (or tax basis) in an investment partnership, taxpayers were able to generate significant tax deductions. The government also argued that the investments, many of which were engaged in ,with, and through Deutsche Bank, did not have a “reasonable prospect of economic profit” (a test required to be satisfied in order for an investment to be recognized for tax purposes, and generally referred to as the “economic substance” test), however Deutsche Bank assured Daugerdas, and the testimony of the Deutsche Bank brokers at trial reiterated, that Deutsche Bank represented to Daugerdas and his clients that there was at least a one in three likelihood of earning an economic profit (which is more than a “reasonable” possibility).

Virtually all of the clients of Daugerdas and Jenkens were successful, wealthy, and sophisticated businessmen and investors, and for the most part they did not rely exclusively on Daugerdas and Jenkens for their tax opinion. Almost all had a number of other attorneys, accountants, and financial advisors with whom they consulted before engaging in the tax advantaged transactions and taking tax positions based on the Jenkens opinion. For example, one of the clients was a trust for the benefit of Lamar Hunt and his family. Lamar Hunt was the owner of the Kansas City Chiefs football team, the Columbus Crew soccer team, and the principal founder of Major League Soccer, World Championship Tennis, and the American Football League, which eventually merged with the National Football League. The Hunt organization obtained a second written opinion confirming the efficacy of the tax strategy from the law firm of Baker & McKenzie, and another informal opinion from the law firm of Winston & Strawn. In addition, the Hunt organization employed its own tax professional on its staff, who had a Masters Degree in taxation and who had been the Tax Director for a publicly-held company. The Hunt tax official was called as a witness by the government at the Daugerdas trial, and on cross-examination, when asked about his opinion on whether he believed the investment transaction that had been engaged in had economic substance, he circumspectly declined to answer, stating that he was not a tax lawyer (but he nonetheless recommended the transaction to his employer, being eminently aware of the tax economic substance test). Rather than further developing the rationale that the tax transaction was viable and Daugerdas’ belief in his opinion was warranted, the judge decided to ask his own question, inquiring as to whether it was true that Lamar Hunt had coined the term “Super Bowl.” The witness answered that the story was that Lamar had come up with the name after watching one of his children playing with a popular toy at the time, the “super ball” (an especially springy bouncing ball).

It is difficult to conceive that Daugerdas could possibly have had mens rea, or some conscious knowledge of illicit criminal intent, or was aware that his opinions were somehow improper, when all of the lawyers at his law firm, and all of the lawyers, accountants, and financial advisors representing his clients, agreed with and confirmed his understanding of the law.

At the trial, the government failed to provide any evidence whatsoever that Daugerdas knew or believed that the transactions were criminally illegal and that he nonetheless recommended and opined as to their viability. In fact, the government itself introduced a BDO Seidman memorandum into evidence (in an apparent attempt to show that BDO had some questions) that directly stated that in discussions with Daugerdas he vigorously reiterated his belief in the viability of the tax strategy and his opinion. The government clearly failed to disprove beyond a reasonable doubt that Daugerdas sincerely believed that he was not violating the law, which they were required to do.

The government also failed to provide any evidence that Daugerdas was involved with the corrective documentation regarding certain transactions which they characterized as “backdating.” Certain transactions were apparently incorrectly implemented, and the Jenkens staff involved corrected those transactions with the concurrence of Deutsche Bank, who issued corrected brokerage statements with “as if” transaction dates. Testimony at the trial from Daugerdas’s secretary and the brokerage assistant at Deutsche Bank confirmed that Daugerdas was not involved in any discussions or communications regarding the errors or their corrections.

At the trial, the judge refused to give the attorneys for Daugerdas sufficient time to make the necessary closing arguments. After initially allowing the time, the judge then recanted and reduced the time that he had previously said that he would permit. The attorneys strenuously argued to keep the additional time, but the judge indicated that he would only give them the reduced time, since the attorney for Daugerdas’s co-defendant, BDO Chairman Denis Field, argued for equal time (despite the fact that Daugerdas was charged with many more counts than Field) and the judge agreed. For some reason known only to the judge, he decided that he wanted all of the closing arguments completed on one day, after a complicated trial that had lasted for weeks.

Daugerdas was charged with conspiracy, mail fraud, obstruction, and tax evasion. At the trial. Daugerdas was found not guilty by the jury on three counts of personal tax evasion which were charged against him. He was also found not guilty on six counts of tax evasion relating to transactions on which he advised clients. The transactions in which he and his clients engaged and for which he was acquitted were the same as the approximately 1,500 transactions on which he advised and that the prosecutors argued were included in a vast conspiracy for which they said he should be sentenced because they were illegal – even though that conclusion makes no sense in light of the acquittals.

The only four tax evasion charges on which Daugerdas was found guilty had one thing in common – they all involved the corrections to investment transactions that the prosecutors argued were “backdating” – even though Deutsche Bank issued had issued the revised brokerage statements with “as if” transaction dates and there was no evidence presented that Daugerdas actually had any personal knowledge of the details of the documentation, which were handled by his associates, partners, paralegals, and secretary, as was his firm’s typical legal practice and as to which witnesses testified. Significantly, during the closing argument by Daugerdas’ attorney, as he was just about to address the alleged issue of “backdating,” the judge cut off the argument due to his unfathomable time constraint that he had imposed in order to complete all arguments in one day, seriously adversely impacting the defense.

In addition, in criminal trials the prosecution is afforded a rebuttal after the defense provides its closing argument. The rebuttal is supposed to address (and rebut) only those arguments raised by the defense in its closing argument. Instead, the government proposed a completely separate crime of tax evasion, mail fraud, and conspiracy based on the isolated allegedly “backdated” transactions, which had previously been proposed only within the context of the alleged economic substance fraud. Because the defense is not allowed a rebuttal, there was no opportunity to address this new argument by the government. The court declined to give any curative instruction to the jury to correct the government’s improper argument. Even worse, during jury deliberations, when the jury inquired as to the proper interpretation of the annual accounting rule that was the basis of the government’s alleged “backdating” argument, the judge refused to give Daugerdas’s proposed responses and allowed the government to propose new (and disputed) legal authority for violations of the annual accounting rule.

Another huge problem with the government’s summation was their impermissible burden-shifting arguments. It is well established that a defendant has no burden of proof or obligation to produce evidence. Nevertheless, a central theme of the government’s rebuttal was that Daugerdas failed to come forth with any evidence to support his good faith belief in the propriety of his opinions (and ignoring the evidence of others), effectively arguing that his failure to testify was somehow evidence of guilt. Again, there was no curative instruction to the jury, and Daugerdas’s motion for a mistrial was denied, with the court stating “[The government’s] comments were within bounds, although this Court thought they were very close to the line.”

In addition to the fact that the not guilty verdicts clearly showed that there was no giant conspiracy, and that the guilty conspiracy verdict was based only on the four counts with documentation issues, the attorneys for Daugerdas conducted post-verdict interviews of jurors, who confirmed that the government “failed to prove its main case regarding the [alleged] tax shelter fraud against Mr. Daugerdas” and that there was “not enough proof to convict Mr. Daugerdas.” Further, “the jury agreed with the defense that Mr. Daugerdas acted in good faith when he used the tax shelters to avoid payment of taxes for himself and his clients.” The jurors said that the limited documentation issues were “the sole basis for all the convictions against Mr. Daugerdas, including the conspiracy counts.”

As further evidence of these conclusions, the jurors interviewed said that the jury acquitted BDO Chairman Denis Field, the co defendant of Mr. Daugerdas because there was no evidence presented that he or his firm were involved with any of the dating and documentation issues.

In spite of the obvious conclusions evident from the decisions of the jury, the government nonetheless argued for an overarching conspiracy and urged that self-serving theory on the court and to the press.