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10 Notorious Tax Cheats: Paul Daugerdas, Tax Attorney Turned Multibillion Dollar Cheat

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Calling him “the most prolific, pernicious and utterly unrepentant tax cheat in United States history,” prosecutors called for a lengthy sentence for former Jenkens & Gilchrist Chicago head Paul Daugerdas – and they got it. Last June, Daugerdas was sentenced to 15 years in prison for his role in a multi-billion tax fraud scheme. It was a relief for prosecutors who had pursued a long and difficult road to put Daugerdas behind bars.

Daugerdas, an accountant and an attorney, began his tax career in 1975 at the accounting firm of Arthur Andersen. Daugerdas quickly rose to partner at Andersen and would spend most of his professional life at the firm until he was forced to resign among allegations that he was diverting fees to himself. Daugerdas moved on to Altheimer & Gray and finally, as the head of the Chicago office of Jenkens & Gilchrist, which would be his last stop as a tax professional.

It was Daugerdas, according to prosecutors, who would take the lead role in a scheme to design tax shelters meant to generate fraudulent losses for wealthy clients from 1994 to 2000. Those losses allowed wealthy clients to reduce or completely eliminate income taxes – to the tune of $7 billion. Not only did Daugerdas help build and promote the schemes, he helped defend and perpetuate them, writing opinion letters which claimed the tax shelter losses or deductions would “more likely than not” survive IRS challenge and falsifying documents to substantiate the tax claims.

The tax shelters dreamed up and promoted by the Daugerdas and his cronies, alleged prosecutors, were “Short Sales,” “Short Options Strategy” (SOS), “Swaps,” and “HOMER.” The two most damaging to the Treasury were the Short Sale tax shelter which generated at least $2.6 billion in false and fraudulent tax losses and the SOS tax shelter which generated at least $3.9 billion in false and fraudulent tax losses.

The tax shelters eventually raised eyebrows, including those at Forbes. Janet Novack linked the shelters to Daugerdas in 2002, finding at least one law firm (Jenkens) with an “intriguing involvement in tax shelters.”

Eventually the feds followed the trail of false losses directly to Jenkens. In 2007, the firm released a statement admitting that its lawyers “developed and marketed fraudulent tax shelters, with fraudulent tax opinions” and said it “deeply regret[s] our involvement in this tax practice, and the serious harm it caused to the United States Treasury.” As a result, Jenkens agreed to pay $76 million as a civil penalty and cooperate with an investigation of the firm or individual lawyers involved in the tax shelter practice. With that, the handwriting was on the wall.

Jenkens & Gilchrist would eventually shut their doors altogether, the result of shrinking profits from bad publicity (pro tip: taxpayers may get nervous following announcements that their lawyers are associated with tax fraud). A decade before it wrapped, the firm had been considered the fastest growing law firm in the United States.

Still, it was eerily quiet following the closures and the announcement of the civil penalty. The tax world was waiting for the other shoe to drop. In 2009, it did, when seven tax professionals were charged in the scheme, including Daugerdas and fellow former Jenkens attorneys Erwin Mayer and Donna Guerin. Also indicted were Denis Field and Robert Greisman, originally from BDO Seidman and Raymond Craig Brubaker and David Parse, formerly of “Bank A” (“Bank A” was not named in the indictment but was eventually outed as Deutsche Bank). The 27 count indictment included conspiracy to defraud the IRS, tax evasion, and impeding and impairing the lawful functioning of the IRS.

In the indictment (you can read the indictment here as a pdf), prosecutors had alleged that Daugerdas was not content to simply help wealthy clients evade tax with the schemes: he took advantage of them himself in order to reduce his personal income tax liabilities. While he was said to have raked in $95 million in fees directly related to the promotion of the schemes, Daugerdas paid less than $8,000 in personal income taxes.

Daugerdas pleaded not guilty to the charges. In 2011, after three months at a trial which included 9,200 pages of testimony from 41 witnesses and during which the federal government produced more than 22,000,000 documents during discovery, Daugerdas was convicted. The government was elated at a successful end to the “biggest tax fraud prosecution ever.”

Only it wasn’t quite the end. Sitting on the jury was one Catherine M. Conrad. Conrad, it turns out, made a number of misrepresentations and otherwise outright lied about her background during the jury selection process. Why? A former lawyer, it seems that she harbored a grudge against those in the legal profession. She lied in order to get on the jury, telling the Court that “[Defendants are] fricken crooks and they should be in jail and you know that.” She went on to allege that “most attorneys” are “career criminals.”

With that, Daugerdas’ conviction was vacated and he was granted a new trial. He was tried again in October 2013 and this time, after a seven week long trial, Daugerdas was convicted of conspiring to defraud the IRS, to evade taxes, and to commit mail and wire fraud, and of corruptly endeavoring to obstruct and impede the internal revenue laws. He was also convicted on four counts of tax evasion relating to the use of various tax shelters for specified clients, and of mail fraud.

At his sentencing, Judge Pauley said Daugerdas “was at the apex of tax shelter racketeers who tapped into the greed of the super wealthy who did not want to pay taxes.” While Daugerdas hoped for just 30 months in prison, he was sentenced to 15 years and ordered to forfeit $164.7 million (his wife is fighting the forfeiture). He was also ordered to pay $371 million in restitution.

It practically goes without saying that Daugerdas’ career is over but putting a nail in that coffin, on September of 2014, he consented to disbarment in the state of Illiois.

At age 63 at his sentencing, he will very likely serve out the rest of his life in prison. Daugerdas has appealed his sentence but a recent bid for bail pending that appeal was rejected.

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