Prison Time Increased for Lawyer/CPA Who Used Sophisticated Means to Conceal Crimes

(Parker Tax Publishing June 2022)

A district court rejected a motion by a formerly practicing lawyer and CPA, who ran a Ponzi scheme that defrauded many elderly and poor out of their life savings, to reconsider imposing a "sophisticated means" enhancement to his prison sentence. The court found that the former practitioner's creation of 1099 forms and resulting tax returns for many of the investors perpetuated the lie that his clients' investments were safe and earning interest and such illusory compliance with the law, the court concluded, showed a greater level of planning or concealment than a typical fraud of its kind. U.S. v. Marshall, 2022 PTC 115 (N.D. Ind. 2022).

Background

In 1998, Sven Eric Marshall incorporated Trust & Investment Advisory Services of Indiana, Inc. (TIAS) in South Bend, Indiana. Marshall, a CPA and lawyer, was the president and registered agent for TIAS and engaged in the business of investment services. He also offered tax preparation and financial accounting services. Marshall recruited investors to invest with either him or TIAS and promised them that their investment would have rates of returns between 4 percent and 8.5 percent per year. When investors invested money, Marshall issued them documents which indicated that the interest on the investment would be either paid monthly or would be compounded monthly into the investor's investment account. After making their investments with Marshall, some investors received a monthly check from Marshall or TIAS corresponding to their monthly interest, while other investors received notice that their monthly interest was being compounded into their original investment. For all investors, every month, Marshall mailed a TIAS statement to each investor, showing the purported current balance of the investors' investments.

As part of his TIAS business, Marshall opened a TIAS account at First Source Bank. Court documents indicated that while Marshall may have attempted to make legitimate investments, Ponzi-type transfers began by 2003. For example, in November 2003, TIAS received $500,000 from an estate. That money was not invested but rather used for payments to other investors. The estate was later made whole with the money from new investors. Even in 2018, when the scheme was no longer sustainable, Marshall continued obtaining new investments from clients knowing that the money would be used to prop up his house of cards and to pay himself, not to bring financial security to people who were vulnerable to begin with. Most of Marshall's victims were elderly and unsophisticated in managing their finances. Some of them turned over to Marshall the entirety, or a substantial portion, of their life savings or retirement funds.

In 2016, Marshall began withdrawing investors' money from the TIAS account, leaving the account almost empty. However, continuing through February 2018, Marshall continued to mail a monthly TIAS statement to each investor showing the purported current balance of the investment accounts. Although the TIAS account was almost empty, these monthly statements indicated that the account of each investor contained the investor's full investment. In order to hide the existence of the scheme and to prevent other financial accountants from inquiring about the status of the investments, Marshall offered, and did provide, free tax preparation work to his investors.

Around January 2018, Marshall stopped communicating with his investors, closed his office, and did not provide a forwarding address or contact information. He was subsequently arrested in Florida and charged in Indiana with mail fraud, securities fraud, and bank fraud to which he pled guilty. In sentencing Marshall, a district court applied the 2-level "sophisticated means" enhancement. According to the court, the enhancement was appropriate because Marshall's conduct involved a "greater level of planning or concealment than a typical fraud of its kind." The court found that Marshall did not simply solicit investment money and run with it. Instead, he ran a Ponzi scheme, taking money from investors for his own use and covering up that fact with the money from subsequent investors, thus creating the appearance that all was well with their money, TIAS, and Marshall himself. The court noted that Marshall created hundreds of fraudulent TIAS business documents purportedly showing stable investments; produced false Form 1099 tax forms; filed false tax returns for his investment clients; and moved money around dozens of accounts in order to fund payments when they became due. Such activity, the court said, falls within the sophisticated means enhancement under sentencing guidelines. Marshall filed a motion asking the court to reconsider application of the sophisticated means enhancement to his prison sentence.

Marshall's Arguments Against the Sophisticated Means Enhancement

Marshall argued that producing 1099 tax forms and filing tax returns on what was imaginary interest income for some of his clients didn't reflect sophisticated means designed to cover up his crimes. Instead, he said, he relied on Reg. Sec. 1.451-2(a) for the premise that income although not actually reduced to a taxpayer's possession is constructively received by the taxpayer in the tax year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the tax year if notice of intention to withdraw had been given. According to Marshall, he was obligated by law to report to the IRS his clients' purported interest earnings on their investments as income, which, according to him, proved that he was not using sophisticated means to carry out or conceal his crimes.

Marshall also relied on Wright v. Comm'r, T.C. Memo. 1989-557, which held that a taxpayer constructively received income in the year in which the investment accrued, not the year in which the taxpayer liquidated the investment, even though the accrued investment was the result of a Ponzi scheme.

Finally, Marshall argued that the government was seeking the sophisticated means enhancement against him even though it did not seek the same enhancement in a recent case in the same district. In U.S. v. Nordan, No. 1:19-CR-100 DRL-SLC (N.D. Ind. 2021), Brian Nordan embezzled more than $3 million from his employer and pleaded guilty to wire fraud. Although the court observed in its sentencing memorandum that Nordan's schemes "were multifaceted and sophisticated seemingly callous and calculated," no sophisticated means enhancement was applied to him. According to Marshall, if the Nordan fraud did not involve sophisticated means - even when it was "multifaceted and sophisticated," then his fraud certainly did not involve sophisticated means for purposes of the guidelines.

Analysis

The district court denied Marshall's motion, after stating that Marshall misunderstood the reasons that the count imposed the sophisticated means enhancement to his prison sentence. The court noted that, while it was true that some of the investors chose and received monthly interest payments, many others elected to roll over their interest amounts. As to this latter group, the court observed, Marshall's creation of 1099 tax forms and his filing of tax returns on the purportedly accrued interest, whether legally required or not, was a fiction - a fraud, to be exact.

The reported interest, the court said, did not exist as it was not made available so that the investors could draw upon it at any time as required by Reg. Sec. 1.451-2(a). Rather, Marshall had stolen the investors' money, which resulted in the money being unavailable for withdrawal. As Ponzi schemes do, the court continued, Marshall's scheme also came to a crashing end because the new money dried up and could not be withdrawn by older investors. Therefore, Marshall's creation of 1099 forms and resulting tax returns perpetuated the lie that the investments were safe at TIAS and were earning interest. According to the court, such illusory compliance with the law showed a greater level of planning or concealment than a typical fraud of its kind.

The court differentiated Marshall's situation from the circumstances in the Wright case. There, the court noted, the Tax Court was asked to consider how to categorize certain income received by the taxpayers, who were not victims and who had received the full amount of their investments and interest before the Ponzi scheme was discovered. The Tax Court concluded that the taxpayers in Wright had constructive income, noting that they had not asserted any substantial limitations or restrictions on their ability to withdraw funds. According to the Tax Court, upon those facts, where and how the schemers got the funds to pay the taxpayers was immaterial. This, the district court said, was in contrast with many of Marshall's investment victims who did have substantial limitations on withdrawing their funds. As a result, the district court was not persuaded by Marshall's argument to reconsider its ruling on the sophisticated means enhancement.

With respect to Marshall's argument involving the Nordan sentencing, the court said that the two cases were not comparable. The court noted that Nordan embezzled money from his employer and unlike Marshall, he did not run a Ponzi scheme to defraud vulnerable investors; he did not mail hundreds of fraudulent business documents to his victims; he did not create tax documents premised on illusory income; and he did not make fraudulent misrepresentations to financial institutions as a fiduciary of other people's investments.

For a discussion of criminal penalties for aiding and assisting in the preparation of fraudulent or false returns, see Parker Tax ¶277,110.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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