Feds say Quellos leaders used deceit to save clients $400 million in taxes. A three-year-old report by a U.S. Senate
subcommittee has resulted in a federal grand-jury has indictment of a former CEO of Quellos Group, a Seattle-based investment firm that asset manager BlackRock
acquired in 2007 and subsequently re-named BlackRock Alternative Investments, and another former principal of the firm on charges of developing, promoting and operating a fraudulent tax-evasion program.

The former Quellos executives on the hook are Jeffrey Greenstein, former CEO of the firm, and Chuck Wilk, a tax attorney who was director of the firm's Private Client Group. Also indicted is Matthew Krane, a Los Angeles-based attorney who is alleged to have received a $36-million kickback from Quellos for directing his client Haim Saban, a Hollywood producer who masterminded the children's television series "Mighty Morphin Power Rangers," to the Quellos tax-evasion scheme.

Enablers

The New York Times says Quellos counted former U.S. president Bill Clinton and his wife U.S. secretary of state Hillary Clinton among the firm's high-profile clients.

Federal prosecutors say Quellos facilitated around $400 million in fraudulent tax savings in 2000 and 2001 for a group of ultra-wealthy clients -- including Saban and Robert Wood Johnson IV, an heir to the Johnson & Johnson
consumer-products fortune -- and received fees of approximately $86 million from the program.

"We are keenly aware of the difference between aggressive tax planning and blatant tax fraud," the U.S. Internal Revenue Service's (IRS) head of criminal investigation Eileen Mayer said at a press conference yesterday. "We know what's going on and we're going to stop it."

Saban and Johnson testified to the Senate Permanent Subcommittee on Investigations, a branch of the Committee on Homeland Security and Governmental Affairs, on Quellos in 2006, saying that they thought the firm's tax-sheltering program -- which involved the creation of bogus, loss-showing (and frequently mind-numbingly complex) securities transactions in offshore tax havens including Austria and the Isle of Man -- was on the up-and-up. They and the other individuals who benefited from Quellos' alleged machinations have not been indicted, and they have long since settled up with the IRS.

A 402-page report by the subcommittee called Tax Haven Abuses: The Enablers, the Tools and Secrecy, published in August 2006, covers the practice of using tax-haven secrecy laws to evade taxation. It devotes an entire chapter to Quellos' tax-shelter program ("Point case History: Offshore Securities Portfolio," page 55 (PDF page 60)).

"The U.S. tax-shelter promoter, Quellos, concocted a tax shelter that was based upon the fabrication of billions of dollars worth of fake securities transactions that were used to generate billions of dollars in fake capital losses and offset real taxable capital gains of U.S. taxpayers so they could avoid paying taxes to the U.S. Treasury," the report says.

The indictment alleges that Greenstein, who founded Quellos as Quadra Capital Management in 1994, lied to the subcommittee about the working of the firm's tax-avoidance program. He faces 18 counts of conspiracy, fraud and tax evasion.

Jeff Robinson,a Seattle-based attorney who represents Greenstein, told the Seattle Times that the transactions underlying Quellos tax-shelter program were "vetted by world-class professionals, including numerous tax experts upon whom Mr. Greenstein, who is not a tax professional, relied in his role as CEO of Quellos."

Wilk's attorney, John Keker of the San Francisco-based law firm Keker & Van Nest , told the same newspaper that his client was innocent of wrongdoing in the matter.

"The evidence will show that while working with Quellos colleagues and with advisers and clients in the structuring of these complex transactions, Mr. Wilk obtained and provided appropriate information and advice," Keker writes in a statement published by the Seattle Times.

Greenstein and Wilk are scheduled to appear in U.S. District Court in Seattle on 18 June 2009. There's no word on when Krane, who has been detained in Los Angeles on charges of passport fraud, will appear.

New York-based BlackRock paid $1.7 billion for Quellos in October 2007. -FWR

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