Jury Convicts Former CFO of Florida Resorts of Tax Offenses, Conspiracy, and Bank Fraud

(Parker Tax Publishing April 2017)

The former Chief Financial Officer of Cay Clubs Resorts and Marinas faces decades in prison after being convicted of conspiracy, bank fraud, and tax offenses. Trial evidence established that Cay Clubs failed to report more than $74 million in income after raising more than $300 million selling dilapidated properties to unwary investors. 2017 PTC 123.

On March 3, David Schwarz was convicted of conspiracy to commit bank fraud, in violation of 18 U.S.C. Section 1349, two counts of bank fraud, in violation of 18 U.S.C. Section 1344, and one count of interference with the administration of the IRS, in violation of Code Sec. 7212(a). Schwarz faces a statutory maximum of 30 years in prison for each of the conspiracy and bank fraud offenses, and three years for the tax offense. Sentencing is scheduled for May 1, 2017, at the federal courthouse in Key West.

Schwarz was the Vice President and Chief Financial Officer (CFO) of Cay Clubs Resorts and Marinas (Cay Clubs), which operated purported luxury resorts in the Florida Keys, Clearwater, Orlando, Las Vegas, and elsewhere. Between 2004 and 2008, Cay Clubs grew to more than 1,000 employees and became one of the largest employers in the Florida Keys. Schwarz, who was the one-third owner, and Fred Davis Clark, Jr., who was the two-thirds owner, began Cay Clubs in 2004 with fraudulent sales of Cay Clubs units to insiders, using money from Cay Clubs bank accounts to fund the cash to close for purchases, while obtaining mortgage financing from lending institutions. These fraudulent sales were used in marketing materials to falsely show demand for Cay Clubs units and to inflate prices, as Cay Clubs was in reality purchasing units from itself. Proceeds of these sales were diverted to Schwarz and Clark.

Trial evidence established that Cay Clubs raised more than $300 million from approximately 1,400 investors, who purchased units in Cay Clubs developments. Schwarz and Clark failed to remodel the dilapidated properties as they promised investors, while taking millions of dollars out of the company for their own benefit. During the operation of Cay Clubs from 2004 through 2008, Schwarz and Clark diverted more than $30 million in proceeds for themselves, including millions of dollars in cash transfers, which were used to purchase property and other businesses, including a gold mine, a rum distillery, aircraft, and a coal reclamation business.

Trial evidence further showed that as Cay Clubs faced dwindling sales due to its failure to upgrade the dilapidated properties in 2006, Schwarz, Clark, and others engaged in additional fraudulent sales of Cay Clubs units to insiders, including Clark's family members. These mortgage loans were used to prevent Cay Clubs from defaulting on commercial debts. The documents used to obtain these mortgages included falsified signatures and notary attestations, and had Cay Clubs acting as the seller while Schwarz provided the cash to close so that mortgage loans could be obtained to fund the sales.

In the course of this scheme, Schwarz and Clark did not file any corporate tax return for $74 million in income generated by the Cay Clubs entities. Furthermore, neither Schwarz nor Clark filed any individual tax return for these years until after an investigation of Cay Clubs by the U.S. Securities and Exchange Commission (SEC). In 2010 and 2011, Schwarz filed false individual tax returns for tax years 2004, 2005, and 2006, respectively, in which he substantially underreported his income for these tax years and concealed his receipt of millions of dollars in proceeds.

On December 11, 2015, Dave Clark, was convicted by a federal jury in connection with related bank fraud charges and obstruction of the SEC. He was sentenced on February 21, 2016, to 40 years in prison. Former Cay Clubs sales executives Barry Graham and Ricky Lynn Stokes previously pled guilty to conspiracy to commit bank fraud in related cases and were sentenced to 60 months, and 30 months, respectively.

For a discussion of the penalties for interfering with the administration of the Internal Revenue laws, see Parker Tax ¶265,148.

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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