Ex-Hedgies Accused In Tax Shelter Scam

Jun 8 2009 | 12:39pm ET

A pair of executives for a one-time hedge fund to the stars has been charged with setting up bogus tax shelters for their clients.

Jeffrey Greenstein, the former CEO of Seattle-based Quellos Group, and Charles Wilk, a principal of the firm, were indicted last week on tax fraud, wire fraud and money laundering charges. According to prosecutors, Greenstein and Wilk designed a tax shelter scheme that offered clients stock that had depreciated in value in order to offset large capital gains. But authorities say the shares never existed; a Senate investigation in 2006 found that Quellos created the bogus tax shelters with some $9.6 billion in phony securities transactions.

According to prosecutors, the Quellos pair offered phony documents to both clients and tax attorneys to push their program. Quellos earned more than $136 million on the phony shelters, the indictment alleges.

Among the law firms apparently taken in by Quellos’ alleged ruse are such prominent names at Cravath Swain & Moore and Bryan Cave.

“Taxpayers cannot enter into financial arrangements that create false losses in investment programs for the purpose of decreasing their tax liability,” Eileen Meyer, head of the Internal Revenue Service’s criminal investigation division, said. “A top priority for the IRS is the investigation and prosecution of income tax evasion by high net-worth individuals, both domestic and offshore.”

A lawyer for Greenstein said his client denies all the charges.

Also charged in the alleged scheme is Matthew Krane, a lawyer for one of their clients. Krane is already in jail, awaiting trial on passport fraud charges in Los Angeles. According to the indictment, Krane pushed one of his clients, Hollywood producer Haim Saban, to buy the tax shelters in exchange for $36 million in kickbacks.

At its peak, Quellos boasted a large number of high-profile clients, including former U.S. President Bill Clinton and his wife, now Secretary of State Hillary Rodham Clinton, and the owner of the New York Jets and Johnson & Johnson heir Robert Wood Johnson IV. The firm sold its fund of hedge funds business to BlackRock in 2007—the group is now called BlackRock Alternative Advisors—and shut down the rest of its business that year. Greenstein remained in an advisory role at BlackRock until a few months ago.

The trio is due in court on June 18.

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