U.S. Department of Justice indicts taxpayer for FBAR violation and tax evasion

On November 17, 2011, a grand jury in the Northern District of California returned an indictment against Ashvin Desai alleging violation of 26 U.S.C. sections 7201 (tax evasion) and 7206(2) (aiding in the preparation of a false tax return); 31 U.S.C. sections 5314 and 5322 (failure to file report of foreign bank and financial accounts). A copy of the indictment can be found here.

The indictment against Mr. Desai provides as follows:

“[The Defendant] who during the calendar year 2008 was married, did willfully attempt to evade and defeat a large part of the income tax due and owing by him and his spouse to the United States of America for the calendar year 2008, by preparing and causing to be prepared, and by signing and causing to be signed, a false and fraudulent joint U.S. Individual Income Tax Return, Form 1040, on behalf of himself and his wife, which was filed with the Internal Revenue Service. In that false income tax return, it was stated that their joint taxable income for the calendar year 2008 was $69,917.84 and that the amount of tax due and owing thereon was $6,156.88. In fact, as DESAI then and there knew, their joint taxable income for the calendar year was in excess of the amount stated on the return, and, upon the additional taxable income an additional tax was due and owing to the United States of America, and he had an interest in, and signature or other authority over, bank accounts located in India during calendar year 2008.”

The significance of this criminal indictment is that the IRSs and the U.S. Department of Justices investigation of those holding unreported foreign bank accounts at HSBC have now started to produce tax evasion and FBAR failure to file cases against U.S. citizens who have attempted to use HSBC to avoid paying taxes to the U.S. government. This appears to be the first of many such cases as Title 31 violations are the criminal charge of the moment.

The attorneys at Fuerst Ittleman have experience defending against IRS investigations/audits and Department of Justice investigations and criminal prosecutions for those with unreported foreign bank accounts and unreported/under-reported income. You can reach an attorney by emailing us at: contact@fidjlaw.com.

Absolute Poker Co-Owner Pleads Guilty To Conspiracy To Violate UIGEA, Wire Fraud, And Mail Fraud In Connection With Internet Poker Site Operation

On December 20, 2011, Brent Beckley, co-owner of Absolute Poker, an internet poker website, pled guilty to conspiracy to violate the Unlawful Internet Gambling Enforcement Act (“UIGEA”), mail fraud, and wire fraud in connection to his operation of the internet poker website. In pleading guilty before Magistrate Judge Ronald Ellis of the United States District Court for the Southern District of New York, Beckley admitted his wrongdoing: “I knew that it was illegal to accept credit cards from players to gamble on the internet.”

While internet pay-for-play poker remains very popular, generating $5.1 billion in revenues last year alone, Beckley’s prosecution stems from a larger effort by Federal prosecutors to target internet gambling websites for violations of federal law. Although the law does not specifically address internet pay for play poker sites, UIGEA defines “unlawful internet gambling” as: 1) placing, receiving or transmitting a bet, 2) by means of the Internet, even in part, 3) but only if that bet is unlawful under any other federal or state law applicable in the place where the bet is initiated, received or otherwise made. However, since UIGEA’s passage, debate has raged over whether pay for play poker actually violates federal law with poker sites and federal prosecutors reaching opposite conclusions. Internet poker site operators have argued that UIGEA does not apply because poker should be classified as a game of skill, not a game of chance, and thus beyond the reach of UIGEA.

As we previously reported, on April 15, 2011, federal prosecutors indicted eleven people, including Mr. Beckley, in connection with their involvement in running internet poker websites PokerStars, Full Tilt Poker, and Absolute Poker. Prosecutors alleged that after the passage of a 2006 law which prohibited banks from processing payments to offshore gambling websites, the defendants engaged in a fraudulent scheme to deceive US banks and financial institutions as to the true identity of the funds being transferred by using third party payment processors to make funds appear as payments for goods and services to non-existent online merchants and fake companies.

Beckley is scheduled to be sentenced on April 19, 2012 and is expected to receive between 12 and 18 months imprisonment as punishment. If you have questions pertaining to UIGEA, the BSA, anti-money laundering compliance, and how to ensure that your business maintains regulatory compliance at both the state and federal levels, or for information about Fuerst Ittleman’s experience litigating white collar criminal cases, please contact us at contact@fidjlaw.com.

FDA and FTC Team up to Target HCG Weight Loss Products

On December 6, 2011, the U.S. Food and Drug Administration (FDA) announced the issuance of seven Warning Letters to companies marketing human chorionic gonadotropin (HCG) products for weight loss. Found here, the announcement highlights the various ways in which current marketing of these products is not compliant with federal law.

First, because these products are intended for use in the diagnosis, cure, mitigation or treatment of disease, they are considered drugs by the FDA. Noting that HCG is a FDA-approved prescription drug, FDA has found that these products are “new drugs” within the meaning of the Federal Food, Drug & Cosmetic Act (FDCA). Under the FDCA, a “new drug” is defined as:

[a]ny drug . . . the composition of which is such that such drug is not generally recognized, among experts qualified by scientific training and experience to evaluate the safety and effectiveness of drugs, as safe and effective for use under the condition prescribed, recommended, or suggested in the labeling thereof.

21 U.S.C. § 321(p).

In targeting these HCG diet products, the FDA has determined that they constitute “new drugs” under the FDCA because companies marketing the products do not possess any evidence showing that the drugs are recognized as safe for their intended uses.

Further, with cooperation from the Federal Trade Commission (FTC), the agencies have targeted these companies for making unsubstantiated claims regarding the effectiveness of HCG products. While both agencies require that promotional statements be truthful and non-misleading, the recent Warning Letters allege that these companies do not possess the necessary scientific evidence to support their weight loss claims.

Under the FTC Act, the FTC has shared jurisdiction with the FDA over claims made in the marketing of FDA-regulated products. Thus, when FDA-regulated products, like the HCG diet products in the present circumstances are at issue, the agencies often work together to target non-compliant parties, with both being able to require companies to take corrective action. For more information about FDA and FTC cooperative efforts, see our previous report here.

For more information regarding FDA and FTC enforcement measures or compliance, please contact us at contact@fidjlaw.com

Third Circuit Vacates Sentence of John M. Crim in Commonwealth Trust Company Tax Shelter Criminal Tax Case

On December 12, 2011, the Third Circuit Court of Appeals entered an opinion and order in the consolidated case of United States of America, v. John M. Crim, et al.  case numbers 08-3028, 08-3931, 08-4077, and 08-4316.  The consolidated cases involved the appeals from the convictions obtained by the United States against  John M. Crim, John Brownlee, Constance Taylor, and Anthony Trimble.  John M. Crim was represented on appeal by Fuerst Ittlemans Senior Tax Associate Joseph A. DiRuzzo, III. Mr. Crim was not represented at trial by Mr. DiRuzzo.

The facts of the case are somewhat complex, and are, in relevant part, as follows:  Mr. Crim founded the Commonwealth Trust Company (“CTC”), and according to the Government used CTC to assist taxpayers in evading their federal income tax obligations.  CTC allegedly marketed both domestic and offshore trusts to be used to siphon off income and profits from domestic taxpayers and advised taxpayers not to file federal income tax returns.  CTC also allegedly advocated the use of liens to avoid IRS seizures and tax liens.

The Government indicted Crim, Brownlee, Taylor, and Trimble and charged violations of 18 USC section 371 (conspiracy to defraud the United States), commonly referred to as a Klien conspiracy and 26 USC section 7212 (the “omnibus clause” prohibiting the administration of the Internal Revenue Code) in the Eastern District of Pennsylvania.  Crim, Brownlee, Taylor, and Trimble were convicted at trial of all counts.  

On appeal, Mr. Crim raised various issues, such as the improper admission at trial of evidence concerning CTCs celebrity client Wesley Snipes (who was convicted of failing to file income tax returns as a result of heading CTCs advice); that the restitution order was improperly entered; and that the 96 month sentence on both counts was procedurally improper.

The Third Circuit ultimately held that the sentence imposed against Mr. Crim was improper and vacated his sentence and remanded to the District Court for resentencing.  The Third Circuit also remanded Mr. Crims case for clarification of the restitution order. A full copy of the opinion can be found here.

A petition for rehearing en banc was filed and was denied on December 12, 2011.  Joseph A. DiRuzzo, III will be filing a petition on behalf of Mr. Crim before the U.S. Supreme Court early next year.

Among other things, what the Third Circuits Decision in the Crim teaches is that having an attorney who is well versed in substantive tax and substantive criminal law is an absolute necessity in a criminal tax case.  Having an attorney who is versed in one area of the law but not the other may result in opportunities being lost for a criminal defendant.  The attorneys at Fuerst Ittleman have proficiency in substantive tax law and criminal law and have experience litigating civil tax cases, criminal cases, and criminal tax cases.  You can contact an attorney by emailing us at contact@fidjlaw.com.

FDA Issues Two Draft Guidances Regarding Investigational Device Exemptions

On November 10, 2011, the U.S. Food and Drug Administration (FDA) issued two new draft guidance documents regarding Investigational Device Exemptions (IDE) applications for early feasibility studies and clinical investigations. The Agency seeks to foster early-stage development of medical devices in the United States, contribute to medical research, and address important clinical needs to improve patient care.

An IDE allows investigational devices to be used in feasibility or clinical studies in order to collect safety and effectiveness data required to support a Premarket Approval (PMA) application or a Premarket Notification [510(k)] submission to the FDA. All clinical evaluations of investigational devices, unless exempt, must have an approved IDE
before the study is initiated. 21 CFR 812. Please see our previous report for more information concerning PMA and 510(k) submissions for medical devices.

Draft Guidance for Investigational Device Exemptions (IDE) for Early Feasibility Medical Device Clinical Studies, Including Certain First in Human (FIH) Studies

The draft guidance regarding IDE applications for early feasibility studies applies to medical devices of significant risk in the early stages of development. Early feasibility studies allow for early clinical evaluation of devices to provide proof of principle and initial clinical safety data to better inform the final design of the device. The guidance permits studies to start earlier in the device development process than previously allowed. However, initiation of early feasibility studies must be justified by a risk-benefit analysis and adequate human subject protection measures. The new draft guidance also permits select device modifications to be made without FDA approval.

FDA Decisions for Investigational Device Exemption (IDE) Clinical Investigations
The draft guidance regarding IDE applications for clinical investigations clarifies the FDA’s process for approving clinical trials of medical devices. The draft guidance describes the Agencys methods which allow clinical investigations of devices to begin under certain circumstances even when there are outstanding issues regarding the IDE application. Those methods include: approval with conditions, staged approval, and communication of outstanding issues related to the IDE through future considerations.

The FDA permits an IDE application that receives an approval with conditions to enroll patients in studies while certain issues are being resolved. Those issues may include: data analysis methods that can be resolved prior to gathering the data, minor divergences from study endpoints, or study design assumptions. A staged approval allows studies to begin with a smaller group of subjects while applicants gather additional data, prior to beginning larger general enrollment.

Fuerst Ittleman is well-equipped to assist members of FDA-regulated industry navigate the laws and regulations applicable to medical devices. For more information about the current regulatory framework surrounding medical devices, please contact us at contact@fidjlaw.com.

Merck Agrees to $950 Million in Fines for Unlawful Promotion of Vioxx

On November 22, 2011, the U.S. Justice Department announced that Merck had agreed to a settlement of $950 million in connection with the allegedly unlawful promotion of the painkiller Vioxx. Found here, the criminal information details the charges against Merck, showing how the companys promotional practices resulted in a violation of the Federal Food, Drug and Cosmetic Act (FDCA). In November 1998, Vioxx was approved for the relief of symptoms associated with osteoarthritis, treatment of dysmenorrheal and general pain management. On April 11, 2002, the U.S. Food and Drug Administration (FDA) approved Vioxx for the treatment of rheumatoid arthritis, an additional indication. However, in its case against Merck, the Government alleged that the company had been promoting Vioxx for the treatment of rheumatoid arthritis long before it had been approved for this use. According to the Government, this unlawful off-label promotion by Merck resulted in a violation of the FDCA, as Vioxx was considered misbranded under the Act. Ultimately, Merck agreed to plead guilty to a misdemeanor and $950 million in fines.

In the Merck case, because the company was actively involved in marketing Vioxx for uses that were not approved by the FDA, it was charged with introducing a misbranded drug into interstate commerce. Under 21 U.S.C. § 352(f)(1) a drug is deemed misbranded if it fails to bear adequate directions for use. Under the FDCA and its accompanying regulations, the FDA approves drugs for specific uses by requiring sponsors to submit data showing drugs are safe and effective for their intended uses and limits the promotion of drugs to these specified uses by approving proposed labeling. Because Vioxx was promoted for a use not shown in the product labeling, it was considered misbranded by the FDA as the label failed to display this indication and thus lacked adequate directions for use.

For more information about the FDA drug approval process, please contact us at contact@fidjlaw.com.

FDA Initiates Enforcement Against Dietary Supplement Manufacturer

On November 23, 2011, the U.S. Food and Drug Administration (FDA) announced the initiation of enforcement measures against a dietary supplement manufacturer, charging the company with several violations of the Federal Food, Drug and Cosmetic Act (FDCA). The FDAs complaint seeks a permanent injunction aimed at preventing ATF Fitness Products, Inc. (ATF) from continuing to sell its products. The complaint alleges that over 400 of ATFs dietary supplement products are in violation of the FDCA.

While this suit was recently instituted against ATF, the Complaint shows how the company has been on FDAs radar since 2004. According to FDA, ATF has “a long history of violating the Act.” In March 2004, FDA issued a Warning Letter to the Company in connection with its distribution of an adulterated dietary supplement. Later, in November 2004, FDA issued another Warning Letter, citing the president of ATF for the distribution of adulterated dietary supplements. Finding that ATF was not taking proper corrective actions to remedy these violations, the warnings ultimately culminated in a seizure action in 2006, detailed here. The most recent FDA action began after a FDA inspection conducted in March-April 2011 revealed several deviations from FDAs current good manufacturing practices (cGMPs). In particular, FDA found that several ingredients and products were being substituted during the manufacturing process without the changes being reflected in product labeling.

In addition to cGMP violations, FDAs inspection also revealed that ATF failed to report serious adverse events. Under 21 U.S.C. § 379aa-1, manufacturers of dietary supplements are required to notify the FDA within 15 days of learning of a serious adverse event. A serious adverse event is defined under the Act as an event that results in:

(i) death; (ii) a life-threatening experience; (iii) inpatient hospitalization; (iv) a persistent or significant disability or incapacity; or (v) a congenital anomaly or birth defect.

21 U.S.C. § 379aa-1(a)(2).

According to the FDA, ATF received a complaint that one of its customers had experienced a spike in blood pressure and mild heart attack, requiring hospitalization. Despite having received this complaint in July 2010, ATF did not report this event, resulting in what FDA claims was another violation of federal law.

Given the past violations of the FDCA and the several deficiencies discovered upon the recent inspection, FDA ultimately instituted the present action against ATF. While warning letters are not uncommon, the remedial measures that companies take in response to them are often determinative of how the FDA will proceed.

For more information about FDA enforcement action or regulatory compliance, please contact us at contact@fidjlaw.com.

8th Circuit rules in favor of the Government of the U.S. Virgin Islands in Coffey v. Commissioner

Today, the 8th Circuit Court of Appeals reversed and remanded, in a published and precedential opinion, a decision of the Tax Court in Coffey v. Commissioner, (8th Cir., case # 11-1362).  The 8th Circuit examined, similar to the Third Circuit in Appleton v. Commissioner, 430 Fed. Appx. 135 (3d Cir. 2011)(unpublished) (Appleton II), a decision of the Tax Court which incorporated by reference the holding and analysis of Appleton v. Commissioner, 135 T.C. 461 (2010) (Appleton I).

In Appleton I, the Tax Court held that the Government of the U.S. Virgin Islands lacked the ability to intervene under Rule 24 of the Federal Rules of Civil Procedure, made applicable to the Tax Court via Tax Court Rule 1.  The Government of the U.S. Virgin Islands sought to intervene either as of right (Rule 24(a)(2)) or permissively (Rule 24(b)(2)).  The Tax Court ruled in Appleton I that the Government of the U.S. Virgin Islands could not show that it had “neither demonstrated that its participation as a party is necessary to advocate for an unaddressed issue nor shown that its intervention will not delay resolution of this matter” and further stated that the participation of the Government of the U.S. Virgin Islands in the Tax Court litigation “could result in trial complications as well as delay the resolution of the issue in which movant asserts an interest.”

However, Judge Benton, in writing for the 8th Circuit, noted that neither of these concerns comported with the legal standard for Rule 24 intervention.  The 8th Circuit agreed with the 3rd Circuit that the appropriate standard is whether there is “undue delay” or “prejudice that adjudication of the original parties rights.”  Based on this erroneous view of the law, the Tax Court abused its discretion by denying the Government of the U.S. Virgin Islands intervention.

The ramifications of this ruling is that the pending cases before the 11th Circuit (Cooper v. Commissioner (11-10617); McGrogan v. Commissioner (11-10618); Huff v. Commissioner (11-10608)) and the 4th Circuit (McHenry v. Commissioner (11-1239)) are more likely to have an outcome in favor of the Government of the U.S. Virgin Islands.  The 4th Circuit has set oral argument in McHenry v. Commissioner for January 25, 2012, in Richmond, Virginia. Additionally, the outcomes in the pending motions to intervene in the Tax Court (Teffeau v. Commissioner (27904-10)) are more likely to be ruled in favor of the Government of the U.S. Virgin Islands.

A full copy of the 8th Circuits opinion can be found here.

The attorneys at Fuerst Ittleman have extensive experience litigating against the U.S. Government in tax cases in at both the trial and appellate court levels.  Likewise, Fuerst Ittlemans attorneys have extensive experience litigating USVI residency cases and cases against the USVI Government, and Joseph DiRuzzo of Fuerst Ittleman is licensed to practice in the USVI.  You can contact us by emailing us at contact@fidjlaw.com, or by calling us at 305.350.5690.

FDA Issues Warning to Mylan Over CGMP Violations

On November 22, 2011, the U.S. Food and Drug Administration (FDA) published a Warning Letter to Mylan, Inc. Found here, the October 13, 2011 Warning Letter cites Mylan for “significant violations of current good manufacturing practice regulations.” The Warning Letter came as a result of inspections of Mylans Puerto Rico plant, which took place in January and February of 2011. While the Warning Letter came roughly seven months after the inspections uncovered these deficiencies, Mylan was unable to demonstrate to the Agency that it was otherwise compliance with applicable requirements under the law.

FDAs Current Good Manufacturing Practice (CGMP) regulations for Finished Pharmaceuticals are set forth in 21 C.F.R. part 211. These regulations provide the minimum standards for which manufacturers must follow and cover a range of manufacturing activities, including required personnel, standards for sanitation of buildings and equipment, as well as recordkeeping requirements and laboratory controls. In the present case, Mylan was cited for various CGMP violations, including failure to establish required laboratory controls. In particular, FDA cited the company for failing to test each patch of its drug product to ensure that it conforms to final specifications for the drug product, as provided by 21 C.F.R. § 211.165(a).

While the violations cited in the Warning Letter were observed upon FDA inspections of Mylans plant earlier this year, the Letter was issued only recently after the company failed to demonstrate to the FDA that it has taken all necessary corrective actions. In addition to notifying the particular firm, FDA Warning Letters notify the public that a particular firm has allegedly violated federal law. Thus, given the bad publicity that these letters generate, it is advantageous for firms to correct possible violations even before the FDA issues Warning Letters.

For more information about CGMP requirements or FDA enforcement action please contact us at contact@fidjlaw.com.

Two Attorneys Arrested and Charged with Structuring Transactions to Avoid Bank Secrecy Act Reporting Requirements

On November 4, 2011, two New Jersey attorneys, Goldie Sommer and Edward Engelhart, were charged with conspiring to violate and violating the Bank Secrecy Acts (“BSA”) by “structuring” attorney trust account deposits in order to evade BSA reporting requirements. A copy of the criminal complaint can be read here.

Generally speaking, the BSA, 31 U.S.C. 5311-5330, and its implementing regulations, found at 31 C.F.R. Chapter X, require financial institutions to keep records of certain financial transactions and report these transactions to the federal government. The BSA was designed to prevent financial institutions from being used as part of illicit activity such as money laundering, drug trafficking, tax evasion, and terrorist financing.

In particular, 31 U.S.C. § 5313 (a) requires domestic financial institutions, including banks, which are involved in a transaction for the payment, receipt, or transfer of United States currency in an amount greater than $10,000.00, to file a currency transaction report (“CTR”) for each cash transaction with the IRS. Additionally, pursuant to 31 C.F.R. § 1010.313, “multiple currency transactions shall be treated as a single transaction if the financial institution has knowledge that they are by or on behalf of any person and result in either cash in or cash out totaling more than $10,000 during any one business day.”

Occasionally, depositors will “structure” their transactions so that multiple cash deposits are made each under $10,000, sometimes over the course of several days or at multiple braches of a bank, in an effort to avoid the reporting requirements of the BSA. Such activity is known as “structuring” and is prohibited by federal law. 31 U.S.C. § 5324 makes it a crime for an individual to: a) “cause or attempt to cause a domestic financial institution to fail to file a report under § 5313(a);” b) “cause or attempt to cause a domestic financial institution to file a report required under § 5313(a) that contains a material omission or misstatement of fact;” or c) “structure or assist in structuring, any transaction with one or more domestic financial institutions” for the purpose of evading the reporting requirements of § 5313(a). More information on the BSA can be found on FinCENs website.

According to the complaint, between August 13, 2010 and September 22, 2010, Sommer and Engelhart structured a series of deposits into their attorney trust account totaling $118,000. The government alleged that most of these deposits included even dollar amounts each under $10,000 and occurred on the same day or within a short period of time. However, when taken in the aggregate, the deposits should each have exceeded the $10,000 threshold, thus requiring the filing of a report. Additionally, the government alleged that during the same period of time similarly structured deposits were placed into the personal accounts of Sommer, Engelhart and “other individuals associated with [them].” Checks were then drawn from the personal accounts and placed in the defendants trust account. In total, authorities allege that $354,000 was structured into the trust account.

The complaint further alleged that during a June 16, 2011 meeting with the IRS both Sommer and Engelhart admitted that they had agreed to structure the deposits into the trust account. Additionally, the complaint alleges that Sommer and Engelhart admitted to receiving the currency from a client of their firm for the purchase of real estate and “inferred that the client wished that the funds would be deposited into a bank without the filing of any forms with the [IRS].” If convicted of structuring, Sommer and Engelhart can face up to five years in prison, a $250,000 fine and forfeiture of the structured funds.

If you have questions pertaining to the BSA, anti-money laundering compliance or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fidjlaw.com