Work Product, Tax Accrual Workpapers & the IRS

Tax documents such as tax accrual work papers or tax memorandums often become case preparation materials when the taxpayer later presents himself in court to contest a deficiency assessed by the Internal Revenue Service (IRS). Case preparation materials are usually afforded protection under the “work product doctrine.” Because the language of Fed. R. Civ. P. 26(b)(3) indicates that “work product” consists of “documents and tangible things that are prepared in anticipation of litigation,” tax documents from which business decisions are made or from which financial statements are developed potentially results in their exclusion from work product despite their ultimate use in litigation.

In U.S. v. Deloitte, 610 F.3d 129 (D.C. Cir. 2010), the D.C. Circuit permitted work product protections to extend to a memorandum that was generated as part of a routine audit process. In Textron v. U.S., 577 F.3d 21, 30 (1st Cir. 2009), however, the First Circuit refused to consider tax accrual workpapers that were to be used to establish and support the tax reserve figures for the audited financial statements as work product.

The different results can be attributed to what each Circuit considered to be “in anticipation of litigation.”

The court in Textron viewed the workpapers in question as documents created in the ordinary course of business for a nonlitigation purpose, specifically for the purpose of preparing financial statements. Specifically, the court described work product as follows:

It is only work done in anticipation of or for trial that is protected. Even if prepared by lawyers and reflecting legal thinking, materials assembled in the ordinary course of business, or pursuant to public requirements unrelated to litigation, or for other nonlitigation purposes are not under the qualified immunity provided by this subdivision. . . [t]he work product protection does not extend to documents that would have been created in essentially similar form irrespective of the litigation.

Textron, 577 F.3d at 30.

The government argued that even if litigation were “remote,” the company would still have to prepare work papers to support its judgment. Id. at 28. Conversely, Textron argued that “without the possibility of litigation, no tax reserves or audit papers would have been necessary.” Id. at 27.

Ultimately, the court “balanced policy concerns instead of applying abstract logic” and found that “the underlying prudential considerations supported the IRSs position” to deny work product protection, stressing that “tax collection was not a game” and that “underpaying taxes threatens the essential public interest in revenue collection.” Id. at 31. The court found that the workpapers did not reflect work done for litigation but was merely work done to prepare financial statements. Id. at 31

Conversely, the DC Circuit in Deloitte applied the majority approach of the “because of” test to determine whether the document was prepared in anticipation of litigation. Id. at 137. The “because of” test asks whether, in light of the nature of the document an factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation. Id.

Like Textron, the government in Deloitte asserted that the document was not prepared because of the prospect of litigation, but was prepared as part of a routine audit process. Id. The DC Circuit differentiated between relying on a documents function instead of its content to determine whether it was work product. Id. “A document can contain protected work-product material even though it serves multiple purposes, so long as the protected material was prepared because of the prospect of litigation.” Id. at 138.

Additionally, the DC Circuit, in its interpretation of the holding of United States v. Adlman, 134 F.3d 1194 (2d Cir. 1998), found that “material developed in anticipation of litigation can be incorporated into a document produced during an audit without ceasing to be work product.”

The language from Adlman, relied upon by the DC Circuit, coincides with the taxpayers argument in Textron.

[a] document created because of anticipated litigation, which tends to reveal mental impressions, conclusions, opinion or theories concerning the litigation, does not lose work-product protection merely because it is intended to assist in the making of a business decision influenced by the likely outcome of the anticipated litigation. Where a document was created because of anticipated litigation, and would not have been prepared in substantially similar form but for the prospect of that litigation, it falls within Rule 26(b)(3).

Adlman, 134 F.3d at 1195.

The Textron court did not want to extend the protections of work product to documents created proactively by a business where litigation, especially with the IRS, was a definite future possibility but not yet a definite future occurrence. The Deloitte court, however, seems to reflect a more flexible approach for the proactive decisions made by these businesses.

If you have any questions regarding the protections afforded by work product, litigation with the IRS, or any other tax provision, please contact Fuerst Ittleman, PL at contact@fidjlaw.com.

Latest developments in the Pharma lawyer obstruction of justice case

We had earlier blogged on the indictment of Lauren Stevens, the former Vice-President and Associate General Counsel for GlaxoSmithKline for allegedly making false statements and obstruction of justice in regard to a FDA investigation. That earlier blog is here. Now, in a recent development, it turns out that the government is seeking to prevent Stevens from relying on an “advice of counsel” defense at trial.

In a press account, it was suggested by her counsel that Stevens may raise an “advice of counsel” defense as it stated that Stevens did everything “consistent with ethical lawyering and the advice provided her by a nationally prominent law firm retained by her employer”. Soon afterward, the government filed a motion with the court to forbid Stevens from raising an “advice of counsel” defense at trial.

In that motion, which can be found here, the government states that “advice of counsel” cannot be a defense to the obstruction of justice charge against Stevens pursuant to 18 U.S.C. Sec. 1519 because it is not a “specific intent” crime. A “specific intent” crime is one in which the government must prove the defendant acted willfully, i.e., knew that the conduct charged violated the law. The government maintains in its motion that Sec. 1519 is a “general” intent crime, in that ignorance of the law is not an excuse; all that is required is proof that the defendant acted knowingly, i.e., not by mistake, when she allegedly covered up off label uses of a drug, with the intent to impede, obstruct or influence the FDAs investigation. According to the government, since Sec. 1519 does not require willful conduct, i.e., conduct committed with knowledge that it violated the law, advice of counsel that the conduct is lawful is irrelevant.

However, Stevens was also charged with other certain “specific intent” crimes that do require proof of willful conduct. 18 U.S.C. Sec. 1512, another obstruction of justice statute, requires proof that a defendant acted “corruptly”. 18 U.S.C. Sec. 1001, making false statements to the government, requires proof that the defendant knew he/she was acting unlawfully. In regard to these charges, the government argues in its motion that the “advice of counsel” defense should not be available until Stevens can satisfy that she fully disclosed all facts to the companys attorneys before seeking advice, and that she relied on the advice in a good faith belief that the conduct was legal. In another twist, the government takes the position that even if advice was given by lawyers to Stevens that her conduct was legal, those lawyers represented GlaxoSmithKline, not Stevens personally. Since she was not the lawyers client, according to the government, the defense should not be available.

What can so far be gleaned from the events in the Stevens case is how important it is to adequately document, in writing, the information provided to regulatory counsel and the advice received from regulatory counsel. In addition, in house counsel and compliance personnel must exercise heightened diligence to ensure that information provided to the FDA is accurate and complete. Given the governments hard nosed enforcement efforts, adequate documentation of this diligence and information and advice shared may make all the difference.

As of the date of this blog, Stevens had not yet responded to the governments motion. A hearing will most likely be held prior to a decision.

Alcatel-Lucent to pay $137 million to settle Justice Department Foreign Corrupt Practices Act lawsuit

The federal government has yet again successfully enforced the Foreign Corrupt Practices Act (“FCPA”) as Alcatel-Lucent, the large Paris-based telecommunications company, has agreed to pay more than $137 million to settle charges brought against it by the Securities and Exchange Commission (“SEC”) and Department of Justice (“DOJ”). The SECs complaint can be read here.

The company was accused of violating the FCPA by paying bribes to foreign government officials in various Latin American and Asian countries to win business. $45 million will go to the SEC, while $92 million will go to settle criminal FCPA charges brought by the DOJ.

Alcatel-Lucent subsidiaries had used third-party agents and consultants to obtain business in foreign countries. These agents and consultants were conduits for bribe payments to foreign officials to obtain or retain business. The bribes went to government officials in Costa Rica, Honduras, Malaysia and Taiwan between 2001 and 2006. The Company had listed the payments in its books and records as “consulting fees”. According to the government, leaders of Alcatel-Lucent subsidiaries either knew, or were reckless in not knowing, about the misconduct. Two executives with the company have been prosecuted, and one was sentenced to 30 months in prison.

As stated by Robert Khuzami , director of the SECs division of enforcement, “Alcatel and its subsidiaries failed to detect or investigate numerous red flags suggesting their employees were directing sham consultants to provide gifts and payments to foreign government officials to illegally win business.”

The settlement with the government is still subject to court approval. However, the case emphasizes that in todays charged enforcement environment, companies must do adequate due diligence to ensure that their overseas agents, consultants and distributors are not engaging in corrupt payments on their behalf to gain business. Red flags must be investigated and resolved to managements satisfaction. Our firm is experienced in conducting such due diligence investigations.

Civil Suit Seeks to Hold Bank Liable for Haitian Ponzi Scheme

Recently, the court appointed receiver of Creative Capital Consortium, LLC, the organization at the center of a massive Haitian ponzi scheme, filed a civil suit in the United States District Court for the Southern District of Florida against Wells Fargo Bank, N.A. for its predecessors role in furthering the ponzi scheme. This case highlights the potential culpability of financial institutions for their lack of effective anti-money laundering programs and errors in compliance with the Bank Secrecy Act.

The Bank Secrecy Act (“BSA”), and its applicable federal regulations, require financial institutions to verify the sources of money coming into its customers accounts. Financial institutions are required to file Suspicious Activity Reports (“SAR”) for transactions which appear suspicious and are given the authority to shut down accounts should money laundering be suspected. Financial institutions generally accomplish the goals of the BSA through the use of an anti-money laundering compliance program that allows a financial institution to effectively monitor transactions and determine if they are suspicious.

According to the complaint filed by the receiver, George Theodule, founder and director of Creative Capital Consortium, LLC (“CCC”), operated a massive ponzi scheme that was directed at Haitian Americans. The complaint alleges that from 2007 to the end of 2008, Theodule targeted thousands of investors from Florida, Georgia, and New Jersey by promising quick and large profits from their initial investments. Theodule allegedly formed numerous, in excess of 100, “investment clubs” and used CCC to oversee the scheme. The clubs would then structure transactions between themselves through their separate accounts to appear as investments. In total, the complaint alleges that Theodule made $68 million from the scheme.

Having already settled with Theodule in a separate suit for $5.5 million, the receiver has now turned its attention to Wells Fargo Bank, N.A. for the remainder based upon the actions of its predecessor Wachovia Bank, N.A. According to the complaint, Wachovia failed to provide adequate safeguards to prevent the scheme from occurring. The complaint alleges that Wachovia provided special privileges to Theodule, CCC, and the 36 investment clubs that had accounts at the bank and often ignored “red flags” of suspicious activity. Examples of Wachovias alleged failures include a failure to investigate and inquire into the nature of CCC and Theodules business and failing to file SARs for numerous structured transactions.

This is not the first time Wachovia has been accused of failing to comply with its duties under the BSA. Prior to its merger with Wells Fargo, in 2009, Wachovia was criminally charged with violations of the BSA for willfully failing to establish an anti-money laundering compliance program and for failing to file SARs. As a result, Wachovia and Wells Fargo entered into a deferred prosecution agreement, forfeited $110 million and paid $50 million in fines.

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.

Produce Recalled After Testing Positive for Salmonella

An outbreak of salmonella has led to a second recall of produce this week. Yesterday, representatives from J&D Produce, Inc. announced that it was recalling its cilantro and parsley after samples of the products tested positive for salmonella. Although there have been no reported illnesses associated with the consumption of these products, the Texas-based distributor announced its efforts were a “precautionary, voluntary recall.”

Although J&Ds recall is a voluntary measure, there is currently no federal authority to issue a mandatory recall of contaminated food products. Under the current regulatory scheme, the U.S. Food and Drug Administration (FDA) cannot force companies to recall contaminated products. Rather, most of the Agencys power in this area is in the form of publicizing news of possible contamination to the public. For instance, in the other recall situation that happened this week, the FDA issued a press release warning consumers not to eat Tiny Greens alfalfa sprouts because they may contain salmonella.

While exposing potential food hazards to the public is currently the FDAs main recourse in the area of recalls, this will soon change. As previously reported, the Food Safety Modernization Act, which is expected to be signed into law by President Obama within the week, will give the FDA more power in the area of food safety. Specifically, the Act provides the FDA with mandatory recall authority, enabling the Agency to issue a recall after a company fails to voluntarily recall a potentially hazardous product.

For more information about FDAs recall authority, please contact us at contact@fidjlaw.com.

Former executives of Latin Node, Inc. charged with FCPA violations for bribing Honduran government officials

In its continuing ramp up of enforcement of the Foreign Corrupt Practices Act, (“FCPA”), the government recently announced the indictments of two former senior executives of Latin Node, Inc., a provider of wholesale telecommunications services using Internet protocol technology. The two executives, the former chief executive officer and the vice-president of business development, are charged with violating the anti-bribery provisions of the FCPA and anti-money laundering laws. The indictment may be viewed here.

The FCPA forbids American businesses or persons from paying bribes to officials of a foreign government in order to obtain or retain business. It also requires public companies to make and keep accurate books and records and to devise and maintain accounting controls to detect and prevent the paying of bribes to foreign officials.

The alleged scheme to bribe Honduran officials centered on an “interconnection agreement” Latin Node, Inc. had with Hondutel, the Honduran state owned telecommunications authority. This agreement allowed Latin Node, Inc. to use Hondutels lines to establish a network between Honduras and the United States and provide long distance services. Latin Node, Inc. was required to pay Hondutel a set rate per minute for calls to Honduras.

The charged executives sought a rate reduction from Hondutel. In order to effectuate this rate reduction, they agreed to a secret deal to pay bribes to a Hondutel manager, as well as to a senior attorney for Hondutel who acted as the managers “straw man” and a minister of the Honduran government. More than $500,000 in bribes was paid to the officials, concealing the payments by laundering the money through Latin Node subsidiaries in Guatemala and to accounts in Honduras controlled by Honduran government officials.

Latin Node, Inc. had previously pled guilty to violating the FCPA regarding the same conduct for which the executives were charged. By indicting the executives, who now face prison time if convicted, the Department of Justice is showing it is “committed to holding accountable individuals and companies alike for alleged foreign bribery schemes” according to Assistant Attorney General Lanny Breuer. According to Anthony Mangione, the Special Agent in Charge of ICE Homeland Security Investigations in Miami, “anyone who believes paying bribes in foreign countries is just the cost of doing business should think about the repercussions-whether it is worth going to prison”.

According to John Gillies, Special Agent in Charge of the FBI in Miami, “this new indictment represents the FBIs commitment to investigating not just the corrupt acts of a corporate entity, but the individuals who are behind it.”

Violations of the FCPA are punishable by a maximum of 5 years in prison. Money Laundering is punishable by a maximum of 20 years in prison. The defendants may also be liable for substantial monetary fines if convicted.

It is important for companies and their executives who conduct international business to be familiar with the prohibitions contained in the FCPA and to ensure that their companies and employees are trained on how to comply with its provisions. Lawyers at Fuerst Ittleman PL are experienced in conducting internal investigations of companies and executives in order to prevent violations, and in the event of violations, to defend against regulatory or criminal proceedings brought pursuant to the FCPA.

Justice Department Announces Plea Agreement in UBS Case

On December 22, 2010, the United States Attorney’s Office for the Southern District of New York issued a press release, found here, regarding a former UBS client who entered a guilty plea to conspiring to defrauding the United States and for filing false income tax returns by hiding $4.9 million in UBS bank accounts.  As part of his plea agreement, Ernest Vogliano agreed to a civil penalty of approximately $940K, or 50% of the value as of December 31, 2004.  Mr. Vogliano was one of seven individuals indicted in April, and is the fourth to enter a guilty plea admitting is culpability.

In 2000 and 2002 Mr. Vogliano opened accounts at UBS using shell corporations in order to avoid the Bank Secrecy Act reporting requirement. In order to repatriate funds to the United States Mr. Vogliano traveled to Switzerland to obtain travelers checks that he both personally brought to the United States and mailed to the United States in order to evade detection by federal authorities.

As we previously reported, Mr. Gadola’s prosecution and plea demonstrates that the Department of Justice is targeting both participants of tax avoidance schemes and those individuals that assist in evading tax by United States citizens and resident aliens. Further prosecutions are anticipated in the months and years to come.

Consumers Skeptical of “Natural” Products

A recent poll found that consumers are skeptical of products that claim to be “natural.”  The survey, performed by Mango Sprouts Marketing, shows that consumers are dissatisfied with the unregulated use of the term “natural.”  Rather, as the study suggests, consumers would like to see a certification process much like the one required of products dubbed “organic.”

Currently, under the National Organic Program, which is overseen by the U.S. Department of Agriculture (USDA), there are several requirements for the use of the term “organic.”  This designation not only applies to conventional foods, but to cosmetics and dietary supplements as well.  In order for a product to be deemed “organic,” it must comply with federal regulations, including mandatory inspections, the implementation of an organic production and handling plan, as well as the payment of filing fees.

Unlike organic products, there is little certainty surrounding products deemed “natural,” as there is currently no certification process in place.  Although products must comply with the USDAs National Organic Program in order to be deemed organic, there is no such program for natural foods.  Rather, under the FDA policy, a natural food is simply one that does not contain synthetic or artificial ingredients.

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

Former UBS Banker Pleads Guilty to Defrauding the United States by Helping Conceal Assets Offshore

On December 22, 2010, Renzo Gadola pleaded guilty in the United States District Court for the Southern District of Floria, to conspiring to defraud the United States, under 18 USC section 371. Gadola, a former UBS banker, was arrested in Miami by federal agents after meeting with an American client in Miami  after he tried to persuade that client to not disclose to the  United States Department of Justice and the IRS that his American client owned a bank account at small Swiss Bank (Basler Kantonalbank).

Gadola is scheduled to be sentenced on March 10, 2011, by U.S. District Judge James L. King.  He faces a maximum of five years in prison and restitution for the loss that he cause the United States.  The Gadola plea agreement is available by clicking here. According to the statement of facts filed with the court, available here, Gadola helped American avoid their legal obligation under the Bank Secrecy Act to disclosure foreign bank accounts to the U.S. Department of the Treasury.  The Form that must be filed by June 30 of the following year is Form TD 90.22-1, available  here. 

The ramifications of this case for those U.S. citizens and resident aliens that have undisclosed foreign bank accounts is far-reaching.  The U.S. Department of Justice continues to target and prosecute those individuals (regardless of citizenship) that help facilitate the avoidance of the Bank Secrecy Act and the evasion of income taxes.  It is anticipated that some of those U.S. citizens and resident aliens that did not take advantage of the IRS voluntary disclosure program may view the Gadola prosecution of sign of things to come and confirmation that the Department of Justice investigation and deferred prosecution agreement with UBS was not an isolated event.

House Turns its Attention to Drug Safety

Now that food safety reform is underway, Congress has turned its focus to drug safety. House Democrats have recently introduced a Bill (H.R. 6543) that is expected to increase the FDAs enforcement power over both foreign and domestic drugs.

The Drug Safety Enhancement Act, like the recently-passed Food Safety Modernization Act, contains various provisions aimed at minimizing risks to consumers and increasing FDA oversight. Some of these provisions include: creating an updated registration process for both domestic and foreign facilities, prohibiting the entry of drugs coming from facilities that are noncompliant with FDA inspections or that otherwise lack safety documentation, and heightened enforcement powers, such as mandatory recall authority.

The sponsors of the Bill, Representatives John Dingell (Mich.), Henry Waxman (Cali.), Frank Pallone (N.J.) and Bart Stupak (Mich.), are all major players in FDA legislation. Together, they have been able to secure the passage of many proposals that they have initiated, and in doing so, have been able to expand the FDAs powers. Although the drug safety proposal comes at a time when House Democrats will soon lose majority status in the House, it is likely that the influential proponents of the Bill introduced the Act as a signal of things to come in 2011.

For more information regarding FDA regulatory compliance, please contact us at contact@fidjlaw.com.