An irreverent Wall Street Blog
by Bill Singer
by Bill Singer
Peculiar American Not Bound By USA Tax Law Headed For Prison
January 10, 2014
Imagine it's Christmas Eve and you're a defendant in a criminal case. Also imagine that you lost that case in federal District Court but, having been a relatively good boy all year long, you are now hoping that Santa Claus will bring you a victory on appeal at the Circuit Court. You hear the soft thud of the sled and the tapping hooves of the reindeer on your roof. You hear the whoosh of Santa plummeting down your chimney and the crash as he knocks himself unconscious and begins to smoke from the embers in your fireplace. Then, with glee in your eye, you remove from Santa's somewhat lifeless hand the envelope addressed to you from the Circuit Court. With great anticipation you rip the parcel open to learn of your fate.
In United States of America v. Ronald Ottaviano (3rd Circuit, December 24, 2013) , we are presented with an appeal by a defendant who had been found guilty in federal District Court of mail and wire fraud, money laundering, tax evasion, and conspiracy to defraud the Internal Revenue Service. Ah, but such a brief and prosaic explanation does little justice to the complexities of this criminal prosecution - and certainly fails to present the colorful sideshow that it became. For example, consider the 3rd Circuit's intriguing introduction of the dispute:
Ottaviano is one of those peculiar Americans who does not believe himself bound by United States tax law. Not content to subject only himself to the penalties that flow inevitably from this belief, Ottaviano marketed his views to others for his own financial gain. Through his company, Mid-Atlantic Trusts and Administrators, Ottaviano offered financial products he claimed would help others elude the IRS and have the government pay their debts.Mid-Atlantic‘s principal offering was the ―Pure Trust Organization (PTO), which Ottaviano marketed as a means to hide assets from creditors and the IRS. Although PTOs appeared to be legitimate trusts for which Ottaviano and his company would act as trustees, in actuality customers had unlimited access to and control over the accounts-which made them sham trusts. Mid-Atlantic charged customers $3,000 to start a PTO, after which the company would open a bank account for the customer, often using a false employer identification number and representing that someone other than the customer had ―created the PTO or exchanged assets into it. Mid-Atlantic would then give the customer a debit card, checkbooks, and the online account password, as well as stamps bearing the trustees‘ signatures, giving customers full control of the assets.To maintain the appearance of propriety, PTO customers‘ bank statements were mailed to Ottaviano‘s home before he forwarded them to customers. Mid-Atlantic also gave customers an elaborate binder of ―trust documents‖ with an ―official‖ section in the front and secret instructions in the back, behind a page prominently labeled ―KEEP THIS MANUAL PRIVATE. This section explained that customers could access money in the account whenever and however they wanted as long as they made it appear as if the trustees were making the decisions.Pages 2 - 3 of the Opinion
Like I said, this one is a puzzler and offers more than enough comic relief. As more fully set forth in the Court's Opinion, Ottaviano apparently came upon his tax scheme in 2007 while attending a tax protestor's seminar where the idea of a Beneficiaries in Common ("BIC") debt-elimination plan was discussed. While I feel wholly inadequate to even embark upon a explanation of this BIC thingamagig, consider the often hysterical effort launched by the Court:
[W]hen the United States abandoned the gold standard in 1933, the country went bankrupt and the citizenry became debtors. At that point, the U.S. Treasury created secret accounts for each citizen, tied to Social Security numbers or birth certificates. By filing certain documents with the federal and state governments, a citizen could access his account and transform himself from debtor to creditor, forcing the U.S. Treasury to take out millions of dollars and pay off customers‘ ―public debts, such as mortgages, credit cards, taxes, and criminal fines and penalties.
And so, according to the federal prosecutors' allegations, Ottaviano sold his plan for $3,500 a pop to each eager individual but with a lovely $2,000 discount of $5,000 per joint purchase. Once you were the proud owner of one of Ottaviano BICs, Mid-Atlantic would provide you with the keystone of the concept: a $300 million indemnity bond. And just what were you supposed to do with this bond? Oh, that's a simple answer: You submitted it to the Secretary of the Treasury, who, according to Ottaviano, only had 15 days to reject the tender; and if that rejection did not occur, why, geez, lucky you, the Secretary opened some account in your name, which you funded by submitting a $50 million bond.
Where'd you get that whopping second bond? Not to worry, Mid-Atlantic had a seemingly endless supply. And now, you might ask, where did all these machinations leave you? Ummm, that's a tad more difficult to explain but as best I understand (and, trust me, I have no idea at this point what the hell I'm talking about here), you were now deemed "bonded" and could require the Treasury to spend up to $25 million on your behalf and you could kick in another $25 million on your own. By 2008, it seems that the feds were less than happy with the flood of paperwork and bonds emanating from Mid-Atlantic and Ottaviano's clients.
Hammering It Home
At the May 2011 jury trial in the District of New Jersey, of the five defendants only Ottaviano opted to represent himself, with court-appointed standby counsel available to serve as a resource. At trial, Ottaviano called thirteen witnesses, but had difficulty getting them to appear on the right day and time. The District Court is depicted as tested to its limits and the Judge apparently tried to regain control of the trial. At some point, the Court's patience appeared to have worn thin:
OTTAVIANO: When I stipulated to the fake diploma, I did that based on the fact that I lied and I wanted to lessen the impact of it, and when I was cross-examined by your Honor and hammered on that issue-THE COURT: I didn‘t, Mr. Ottaviano. The transcript will speak for itself. Don‘t characterize it as hammering. I have a right to ask you questions, particularly, and I‘ll tell you why in a minute. But let me hear your position.
Swift Verdict
After only some 4 ˝ hours of deliberation, the jury found Ottaviano guilty on all counts on December 16, 2011; thereafter, he was sentenced to 62 months in prison and ordered to pay $1,520,553.70 in restitution.
No Excuse For Judicial Conduct, But . . .
As such, Ottaviano appealed to the Circuit Court arguing, among other issues, that the District Court denied him a fair trial in violation of his Fifth Amendment right to due process of law when it cross-examined him. By way of spoiler alert, bah humbug!, on Christmas Eve, the Circuit Court sustained the District Court, although not without a mild rebuke.
In this case, the District Court erred in questioning Ottaviano. It skeptically questioned him at length during his direct examination and, after the Government completed its thorough cross-examination, ―follow[ed] up on prosecutors‘ questions about Ottaviano‘s fake educational credentials with a barrage of its own. On redirect, the Court repeatedly interrupted again, challenging Ottaviano about his assertions and his witnesses‘ testimony. Then, at the end of redirect, the judge renewed his indignation about Ottaviano‘s false educational credentials, prodding him for approximately five pages of the trial transcript and inviting him to speculate on the ultimate issue in the case.The Government attempts to downplay the District Court‘s incursions. While it is easy to see how Ottaviano‘s testimony would have tested even the most patient jurist, that is no excuse for a judge to abandon his . . . proper role and assume that of an advocate. Adedoyin, 369 F.3d at 342 (internal quotation marks omitted).Notwithstanding the Circuit Court's reservations, it found that the prosecutors had "presented overwhelming evidence of Ottaviano‘s guilt at a lengthy trial, the great majority of which was conducted fairly and properly. Viewing the record as a whole, we cannot say that Ottaviano received an unconstitutional trial. Accordingly, we will affirm his judgment of conviction."