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. He believed he wasdoing the best for his clients, and they agreed, until the entire auction-rate securities market failed, which had nothing to do with him,he said.14Tzolov disappeared on May 9, 2009, from a Manhattan homewhere he had been under house arrest, being fi rst arrested in 2008and then released to house arrest after surrendering his passport andposting a $3 million bond.An electronic monitor on his ankle had 298 hi s t or y of gr e e dbeen removed.Defense attorney Ben Brafman had said he lost contactwith his client weeks ago. We have no idea where he is or what mayhave happened to him, the lawyer said.Brooklyn Federal Judge JackWeinstein angrily ordered prosecutors to seize $3 million in assets thatwere posted as bail for Tzolov.They moved to seize $3 million worthof property belonging to two men who had signed Tzolov s bond,Dimitre Ivanov and Kamen Kiriakov.The government seized Tzolov s ninth-fl oor apartment at 225Fifth Avenue in Manhattan, Ivanov s 18th-fl oor apartment at 325 FifthAvenue in Manhattan, and Kiriakov s residence in North Miami Beach,Florida.Both of the latter men identified themselves on court papers asTzolov s friends.After a worldwide manhunt, Tzolov was captured on July 15 justoutside Marbella, Spain, accompanied by a bodyguard and carrying falsedocuments, according to Spanish authorities.He waived extraditionand was returned to New York.This time, he pleaded guilty to federalsecurities fraud charges.Asked by the judge why he absconded, Julian Tzolov replied:  Igot scared. 15The former broker for Credit Suisse s private banking division alsopleaded guilty to bail jumping and visa fraud, among other charges.Butler was sentenced to five years in prison.The guidelines calledfor a much longer sentence, but Judge Weinstein did not agree withthe government s $1.1 billion loss calculation.He also took into accountfamily circumstances.The judge also fined Butler $5 million, andordered him to forfeit $500,000.The judge said Butler s trial  laid barethe pernicious and pervasive culture of corruption in the financial-servicesindustry which he said is  beset by avarice. The blame for this condition is shared not only by individualdefendants like Butler, but also the institutions that employ them,he said.Weinstein cited several factors that he said may have contributed toButler s crimes, including a failure by government regulators and leg-islators to monitor and supervise the markets, the investors who didn t exert reasonable control and supervision over transactions, and  afailure by Credit Suisse, Butler s employer, and other financial institu-tions to adequately supervise. 16 Auction-Rate Securities 299Tzolov, who is being held without bail, still awaits sentencingscheduled for September 27, 2010; he will likely receive an addi-tional sentence for absconding, and will be deported after he serves hissentence.Civil complaints that were fi led in connection with the CreditSuisse case by STMicroelectronics, a semiconductor company, painta classic picture of greed and glory on Wall Street.In one instance,the two brokers, they allege, misled a client, claiming there was anadministrative error in filing a trade ticket, when in fact the auctionfor the client s securities had failed.They then persuaded the cus-tomer to invest $25 million more in securities backed by student loans.Instead, they invested that money in riskier securities.David Walker, aspokesman for Credit Suisse, said,  Credit Suisse immediately informedour regulators, and we have continued to assist the authorities. ButSTMicroelectronics, one of the bank s clients, disputes Credit Suisse sversion of events.The company claims that Credit Suisse Securitiesengaged in a  bold and sophisticated scheme to defraud ST. 17 Thecompany suggests that Credit Suisse was aware that its brokers weremoving clients money into risky auction-rate securities as part ofa scheme to get those securities off the bank s own books and earnhigher fees for its services.Walker, the Credit Suisse spokesman, said:  We do not commenton meritless lawsuits. 18 However, in a securities filing and a relatedpress release, STMicroelectronics said that an arbitration panel ofthe Financial Industry Regulatory Authority (FINRA) in a full andfinal resolution of the issues submitted for determination awardedSTMicroelectronics, in connection with the sales by Credit SuisseSecurities (USA) LLC of unauthorized auction-rate securities to thecompany, an amount of approximately $406 million comprising com-pensatory damages, as well as interest, attorney s fees, and consequentialdamages, which were assessed against Credit Suisse.In addition, STwas entitled to retain the about $25 million interest award, which hadalready been paid.19Tzolov and Butler were also accused on July 14, 2009, in a sepa-rate 14-count indictment in the Southern District of New York inManhattan of operating a wire fraud scheme to sell auction-rate securi-ties.Manhattan and Brooklyn are separate judicial districts. 300 hi s t or y of gr e e dThe case is U.S.v.Tzolov, 08-CR-370, U.S.District Court, EasternDistrict of New York (Brooklyn).ARS securities signifi cantly contributed to and were affected bythe market collapse of 2008.They involved many of the largest finan-cial institutions and not just rogue brokers.The civil and criminal casesironically arose from a fraud pitched as an ARS when it really wasn t,even though the ARS securities market itself blew up. Chapter 30$132 Million Tax-FreeExchange FraudSECTION 1031n many cases we have seen, the client is complicit in the fraud, oris willfully blind to the impossibility of continued outsized returns.INot always.Sometimes, the client is just an innocent victim.In thischapter, we look at a mysterious and little-known corner of the financialworld, whose sole raison d tre is [legal] tax deferral.The niche wascreated by Section 1031 of the tax code, and like other arcane niches islittle understood, underregulated, and ripe for fraud.The Tax CodeThe sale of real property is subject to capital gains tax based on thesales price less adjusted basis (cost less depreciation deducted).Forappreciated properties held for many years, this can be a substantialsum.Under Section 1031 (1031 cases) of the United States InternalRevenue Code (26 U.S.C. 1031), the exchange of certain types ofproperty may defer the recognition of capital gains or losses due uponsale, and hence defer any capital gains taxes otherwise due.301 302 hi s t or y of gr e e dOriginally, 1031 cases needed to be simultaneous transfers ofownership.But since Starker vs.U.S.(602 F.2d 1341), a contract toexchange properties in the future is practically the same as a simulta-neous transfer.It is under this case, decided in 1979, that the rules forelection of a delayed 1031 originated.To elect the 1031 recognition, ataxpayer must identify the property for exchange before closing, iden-tify the replacement property within 45 days of closing, and acquire thereplacement property within 180 days of closing [ Pobierz całość w formacie PDF ]