S. Hrg. 109–797

TAX HAVEN ABUSES: THE ENABLERS, THE TOOLS

AND SECRECY—VOL. 1 OF 4

HEARING

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

AUGUST 1, 2006

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs

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TAX HAVEN ABUSES: THE ENABLERS, THE TOOLS AND SECRECY

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29–760 PDF 2006

S. Hrg. 109–797

TAX HAVEN ABUSES: THE ENABLERS, THE TOOLS

AND SECRECY—VOL. 1 OF 4

HEARING

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

AUGUST 1, 2006

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs

(

(II)

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

SUSAN M. COLLINS, Maine, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

JOSEPH I. LIEBERMAN, Connecticut 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

MICHAEL D. BOPP, Staff Director and Chief Counsel 

MICHAEL L. ALEXANDER, Minority Staff Director 

TRINA DRIESSNACK TYRER, Chief Clerk 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

NORM COLEMAN, Minnesota, Chairman 

TED STEVENS, Alaska 

TOM COBURN, Oklahoma 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

RAYMOND V. SHEPHERD, III, Staff Director and Chief Counsel 

LELAND B. ERICKSON, Senior Counsel 

MARK D. NELSON, Senior Counsel 

ELISE J. BEAN, Staff Director and Chief Counsel to the Minority 

ROBERT L. ROACH, Counsel and Chief Investigator to the Minority 

LAURA E. STUBER, Counsel to the Minority 

ZACHARY I. SCHRAM, Professional Staff Member to the Minority 

JULIE DAVIS, Counsel to Senator Carl Levin 

MARY D. ROBERTSON, Chief Clerk 

(III)

C O N T E N T S 

Opening statements: Page 

Senator Coleman .............................................................................................. 1

Senator Levin .................................................................................................... 5

Senator Collins ................................................................................................. 12

Senator Lautenberg .......................................................................................... 13

Senator Stevens ................................................................................................ 15

Senator Dayton ................................................................................................. 15

Senator Carper ................................................................................................. 76

WITNESSES 

TUESDAY, AUGUST 1, 2006

Hon. Mark Everson, Commissioner, Internal Revenue Service, Washington, 

DC .......................................................................................................................... 15

Reuven S. Avi-Yonah, Irwin I. Cohn Professor of Law, University of Michigan 

School of Law, Ann Arbor, Michigan .................................................................. 27

Gary M. Brown, Chairman, Corporate Department, Baker, Donelson, Bearman, Caldwell and Berkowitz, Nashville, Tennessee ....................................... 28

Haim Saban, Saban Capital Group, Inc., Los Angeles, California ...................... 37

Robert Wood Johnson IV, New York, New York ................................................... 38

Michael C. French, Former Wyly Trust Protector, Dallas, Texas ....................... 39

Louis J. Schaufele III, Securities Broker, Dallas, Texas ...................................... 54

Jeffrey Greenstein, Chief Executive Officer, Quellos Group, LLC, Seattle, 

Washington ........................................................................................................... 55

Michael G. Conn, Private Bank Northwest Region President, Bank of America, San Francisco, California ............................................................................. 56

George T. Wendler, Senior Executive Vice President and Chief Credit Officer, 

HSBC Bank USA, Marlboro, New Jersey .......................................................... 58

Michael G. Chatzky, Chatzky and Associates, San Diego, California ................. 79

John P. Barrie, Bryan Cave LLP, Washington, DC .............................................. 82

Lewis R. Steinberg, Former Partner, Cravath, Swaine and Moore, LLP, New 

York, New York .................................................................................................... 82

Charles W. Blau, Meadows, Owens, Collier, Reed, Cousins and Blau, Dallas, 

Texas ..................................................................................................................... 83

ALPHABETICAL LIST OF WITNESSES

Avi-Yonah, Reuven S.: 

Testimony .......................................................................................................... 27

Prepared statement .......................................................................................... 111

Barrie, John P.: 

Testimony .......................................................................................................... 82

Blau, Charles W.: 

Testimony .......................................................................................................... 83

Prepared statement .......................................................................................... 158

Brown, Gary M.: 

Testimony .......................................................................................................... 28

Prepared statement .......................................................................................... 120

Chatzky, Michael G.: 

Testimony .......................................................................................................... 79

Conn, Michael G.: 

Testimony .......................................................................................................... 56

Prepared statement .......................................................................................... 147

Everson, Hon. Mark: 

Testimony .......................................................................................................... 15

Page

IV

Everson, Hon. Mark—Continued

Prepared statement with an attachment ....................................................... 99

French, Michael C.: 

Testimony .......................................................................................................... 39

Prepared statement .......................................................................................... 140

Greenstein, Jeffrey: 

Testimony .......................................................................................................... 55

Prepared statement .......................................................................................... 142

Johnson, Robert Wood IV: 

Testimony .......................................................................................................... 38

Saban, Haim: 

Testimony .......................................................................................................... 37

Prepared statement .......................................................................................... 139

Schaufele, Louis J. III: 

Testimony .......................................................................................................... 54

Steinberg, Lewis R.: 

Testimony .......................................................................................................... 82

Wendler, George T.: 

Testimony .......................................................................................................... 58

Prepared statement .......................................................................................... 155

APPENDIX 

Minority and Majority Staff Report entitled ‘‘Tax Haven Abuses: The 

Enablers, the Tools and Secrecy’’ ........................................................................ 161

EXHIBITS 

1. Wyly Offshore Structure, chart prepared by the Permanent Subcommittee 

on Investigations, Minority Staff ..................................................................... 622

2. Pass-Through Loans, chart prepared by the Permanent Subcommittee 

on Investigations, Minority Staff ..................................................................... 623

3. Transferring Assets Offshore, chart prepared by the Permanent Subcommittee on Investigations, Minority Staff .................................................. 624

4. Some Directions By The Wyly Trust Protectors, chart prepared by the 

Permanent Subcommittee on Investigations, Minority Staff ........................ 629

5. Some Directions By The Wylys, chart prepared by the Permanent Subcommittee on Investigations, Minority Staff .................................................. 677

6. POINT Strategy, chart prepared by the Permanent Subcommittee on 

Investigations, Minority Staff .......................................................................... 722

7. The Truth Behind POINT, chart prepared by the Permanent Subcommittee on Investigations, Minority Staff .................................................. 723

8. Bulldog Trust quote, chart prepared by the Permanent Subcommittee 

on Investigations, Minority Staff ..................................................................... 724

9. a.–g. Charts related to POINT Strategy prepared by the Permanent Subcommittee on Investigations, Minority Staff ........................................ 725

10. Sharyl Robertson/Michael French communications with Lorne House 

Trust, dated April 1992, re: Pitkin Non-Grantor Trust and Bulldog NonGrantor Trust (. . . reporting/volume selling requirements of these securities. . . . the securities in no way need to be aggregated with the Settlors 

of the Trusts . . .) ................................................................................................ 732

11. a. Sharyl Robertson (Maverick) Correspondence to Ronald Buchanan 

(Lorne House Trust), dated October 1992, re: Photomatrix Corporation 

(Mike French and I would like to recommend to the Trustee to purchase 

the following security from Sam Wyly: . . . shares of Photomatrix Corporation . . .) .................................................................................................. 741

b. Ronald Buchanan (Lorne House Trust) Correspondence to Michael 

French, dated October 1992, re: Photomatrix Corporation ...................... 743

12. Charles Lubar (Morgan, Lewis & Bockius) Memorandum to Michael 

French, dated February 1994, re: Tax Consequences of Grantor Trust ....... 744

13. Ronald Buchanan (Lorne House Trust) Fax to Michael French (Maverick), 

dated March 1995, re: The Scottish Annuity Company (Cayman) Ltd ........ 749

Page

V

14. Michael French (Maverick) Fax to Shaun Cairns (Wychwood Trust Limited), dated October 1995, re: The Red Mountain Trust and The Lafourche 

Trust .................................................................................................................. 751

15. Shaun Cairns (Wychwood Trust Limited) Fax to Michael French (Maverick Capital), dated October 1995, re: Lafourche and Red Mountain 

(We have made additional changes to the 4th Schedule of Lafourche. 

. . . The genders were a bit mixed up. Could you please let me have 

your views before I have them signed up and dated. (Back dated).) ............. 763

16. Shari Robertson (Maverick) Fax to David Bester (Trident Trust), dated 

August 1997, re: LaFourche Trust (Sam Wyly has executed a Letter of 

Wishes on behalf of LaFourche Trust.) ............................................................ 764

17. a. Ronald Buchanan (Lorne House Trust) Fax to Michael French (Maverick), dated March 1995, re: Bulldog & Plaquemines Trusts (Since 

the purpose of the exercise, as I understand it, is to divide the ownership of Sterling Software we need to split ownership of the underlying 

companies which own SS between the two trusts.) .................................... 765

b. Barbara Rhodes (Lorne House Trust Limited) Fax to Michael French 

(Maverick), dated March 1995, re: Sterling Software (We intend to 

transfer East Carroll Limited and East Baton Rouge Limited from 

Bulldog to Plaquemines, this would mean that Plaquemines would 

hold 350,000 shares and Bulldog would hold 644,725 shares of Sterling Software.) .............................................................................................. 766

c. RB [Ronald Buchanan] Memorandum to AJB, JKB, Shaun Cairns, 

RJC, FKVC, DJ, JEP, BAR, dated August 1995, re: Plaquemines, 

Delhi, Assumption & Pueblo Trusts (Wychwood must not be trustee 

of two sets of trusts which are buying options simultaneously since 

the amount involved would trigger a reporting requirement.) .................. 767

d. Ronald Buchanan (Lorne House Trust) Correspondence to A.J. Buchanan (The Wylys, who are officers of and shareholders in SS, have 

been advised that, in consequence, there is no reporting requirement 

under SEC regulations, . . .) ........................................................................ 768

18. Michael French (Maverick) Fax to Ronald Buchanan (Lorne House Trust), 

dated July 1995, re: Wychwood (Please dispose of this fax after reading, 

as there will be ample documentation as needed. . . . Wychwood would, 

in either case, be limited to approximately 600,000 to 700,000 calls, in 

order to stay under 5% of the outstanding shares and avoid SEC reporting.) .................................................................................................................... 769

19. Shari Robertson Memorandum to Sam, Charles, Evan & Donnie, dated 

November 1997, re: Compensation and year-end bonus reviews .................. 770

20. Michelle Boucher (Irish Trust Group) emails, dated August 2001, re: 

URGENT email for Sam, we need a quick reply on this—thanks! (. . . 

foreign trust system:) ........................................................................................ 771

21. a. Louis Schaufele email, dated February 2002, re: accts. (Should the 

offshore accounts come here they would come as independent new entities, which I would work to maintain.) ...................................................... 777

b. Louis Schaufele email, dated February 2002, re: changes (I wanted 

to let you know that our entire team has left Lehman Brothers and 

joined Banc of America Securities.) ............................................................ 778

c. Keeley Hennington/Michelle Boucher emails, dated February 2002, re: 

Lehmans (Lou’s move to BofA was final last week. Sam & Charles 

have consented to moving all their stuff with him.) .................................. 779

d. Louis Schaufele email, dated March 2002, re: IOM (I am very aware 

of the know your customer rule and I know these customers very 

well . . .) ......................................................................................................... 781

e. Zachary Pinard (Fidelity Investments) email, dated January 2004, re: 

URGENT REQUEST FOR INFORMATION FOR: [Acct. Redacted by 

Subcommittee] Devotion LTD—Bank of America Correspondent (Who 

is the beneficial owner of this account?) ..................................................... 782

Page

VI

21. a. Louis Schaufele email, dated February 2002, re—Continued

f. Michele Crittenden/Margo Hursh emails, dated January 2004, re: URGENT REQUEST FOR INFORMATION FOR: [Acct. Redacted by Subcommittee] Devotion LTD—Bank of America Correspondent (Devotion 

Ltd. is an offshore corporation (Incorporated in the Isle of Man), which 

serves as an investment entity. The beneficial owner of the entity is 

an offshore grantor trust . . . the beneficiaries of which are U.S. individuals.) .............................................................................................................. 783

g. Margo Hursh/Denise Wollard emails, dated February 2004, re: Account 

Inquiry—Various (My concern is that I do not believe that this company is reporting the ownership of the shares adequately.) ...................... 785

h. Barry Harris/Louis Schaufele emails, dated March 2004, re: need some 

offshore help (Is it sufficient to say that the beneficiaries of the trust 

are members of the Charles Wyly family and their immediate children 

and grandchildren subject to the discretion of the trustee?) ..................... 789

i. Michelle Boucher/Michele Crittenden emails, dated April 2004, re: bofa 

(Last week you mentioned that an acceptable financial institution for 

purposes of providing certification that BofA/NFS requires would be 

a US regulated insurance company. Please confirm back to me that 

Scottish Re Group Limited would be an acceptable entity.) ...................... 791

j. Louis Schaufele email, dated April 2004, re: regular (First let me say 

I am sorry for all of this run around on the offshores.) ............................. 792

k. Lori Bensing email, dated April 2004, re: Michaels Account (Here 

is where we are with the Michaels accounts. I understand that Michele 

Boucher has agreed to give Bank of America the beneficial ownership 

information, . . .) ........................................................................................... 793

l. Louis Schaufele email, dated April 2004, re: same old subject (do 

we need to set up a call with Phil, myself and charles pulman?) ............ 794

m. Louis Schaufele emails, dated May 2004, re: AML Issues (What if 

we got a list of the beneficiaries that was somewhat vague: . . .) ............. 795

n. Louis Schaufele email, dated May 2004, (I did talk to David about 

giving a letter that stated names of beneficiaries but did not tie the 

beneficiaries to a specific acct.) ................................................................... 796

o. Louis Schaufele email, dated May 2004, re: help (Also can you get 

Meadows Owens . . .) .................................................................................... 797

p. Daniel Robey/Louis Schaufele emails, dated May 2004, re: Isle of Man 

(IOM) (I am being told that because of the Patriot Act we need to 

know whom the actual beneficiaries are.) .................................................. 798

q. Louis Schaufele email, dated May 2004, re: IOM (Set forth below 

is the relevant text of Section 312 of Patriot Act.) ..................................... 800

r. Timothy Maloney/Barry Harris emails, dated June 2004, re: Wileys

[sic]—Attorney/client Privileged (Participate in the joint retention by 

all Wiley [sic] trust beneficiaries . . . of an outside law firm . . . to 

perform the AML and Patriot checks that BAI and NFS require.) .......... 803

s. Barry Harris emails, dated July 2004, re: A/C Privileged—Wyley [sic] 

Offshore Trust Accounts—Update (We developed the following proposal: 

NFS will prepare written questions which they need answered to continue to support the accounts; BAI will add any questions which it 

believes need to be answered.) ..................................................................... 807

t. Louis Schaufele/Lori Bensing/Margo Hursh emails, dated July 2004, 

re: AML Inquiry—Account(s): Offshore Trident Trusts (Please respond 

to the following questions regarding the accounts listed below. . . . Who 

are the beneficial owners, clients, principals, etc. of each account?) ......... 810

u. Steve Ganis (Anti-Money Laundering Officer, National Financial Services LLC) Memorandum to Barry Harris (Chief Counsel, Bank of 

America Investment Services, Inc.), dated September 2004, re: Requests Concerning Certain Bank of America Accounts (. . . here follows 

a list of questions to be answered and information to be provided 

in order to understand certain activity patterns in certain accounts 

introduced to National Financial Services LLC (‘‘NFS’’) by Bank of 

America Investment Securities, Inc.) .......................................................... 812

Page

VII

21. a. Louis Schaufele email, dated February 2002, re—Continued

v. Jennifer Moran emails, dated October 2004, re: new copy for Barry 

Harris—MIK questions for BofA.doc (While I understand the politics 

we feel that this is your customer and that the list of questions should 

come from you as broker dealer) ................................................................. 817

w. Phil White/Louis Schaufele/Timothy Maloney emails, dated October 

2004, re: Michaels Stores (It seems that 144 and affiliation is a question along with AML issues.) ..................................................................... 819

x. Timothy Maloney (Bank of America) Correspondence to Francis Webb 

(Trident Trust), dated October 22, 2004, (. . . it is necessary for Bank 

of America to obtain the information for each entity, natural person 

or trust that directly or indirectly owns, controls or holds a beneficial 

ownership interest in whole or in part in any of the accounts listed 

below.) ........................................................................................................... 824

y. Francis Webb (Trident Trust) Correspondence to Timothy Maloney 

(Bank of America), dated October 2004, (I confirm receipt of your 

letter dated 22 October 2004. . . . please clarify the following items: 

Why the information is being requested.) ................................................... 826

z. Michelle Boucher/Timothy Maloney Correspondence, dated November 

2004, (Given my vast experience in these matters I would like to say 

that the manner in which your institution has dealt with the due 

diligence collection process on the above accounts appalls and enrages 

me.) ................................................................................................................ 827

22. Sterling Software Trades, Date 12–Dec–95 ..................................................... 831

23. SSW Swap Execution Report, Sarnia, Greenbriar, Quayle, dated October 

13, 1999 ............................................................................................................. 832

24. Shari Robertson Memorandum to Lou Schaufele, dated July 1999, (. . . 

option exercise for some of the offshore entities . . .) ........................................ 833

25. Keeley Hennington emails, dated October 2001, re: Urgent—Charles, 

Quayle (Hey, Charles called and wanted to sell 100,000 shares of MIKE 

at $42.00 or better today and asked me to call Lehman. They were okay 

with my verbal and just need you to follow up and get some instruction 

from the trustees also.) ...................................................................................... 834

26. Rodney Owens email, dated February 2001, re: Sam Wyly Family Foreign 

Trust Planning .................................................................................................. 837

27. a. Rodney Owens (Meadows, Owens, Collier, Reed, Cousins & Blau, 

L.L.P.) Memorandum, dated December 1998, re: Plaquemines, Bulldog 

and Pitkin Trust Matters (Plaquemines Reappointment Matters) ........... 865

b. David Harris/Rodney Owens email, dated December 1998, re: 

Plaquemines etc. (Local counsel’s preference is for beneficiary consent 

to be obtained to the Bulldog and Pitkin applications; . . .) ...................... 867

c. Davis Harris (IFG International Limited)/Meadows Owens Fax, dated 

March 2004, (I attach a copy of the proposed Deed of Declaration 

unwinding Bulldog II, . . .) ........................................................................... 868

28. Michelle Boucher (The Irish Trust Company (Cayman) Ltd) Fax to 

Charles Wyly, dated October 2000, (. . . we have a substantive meeting 

set up in Cayman for November 28th, which we hope will move us well 

forward to establishing the Protector Company.). Attached is List of Candidates for Protector or Directors of the Protector Company:) ....................... 869

29. a. Michelle Boucher/Shari Robertson email, dated November 2000, re: 

split dollar life insurance in foreign trusts (Just a quick outline of 

how it works, and how Rodney thinks we can use it to effectively 

freeze growth in the 1992’s) ......................................................................... 871

b. Michelle Boucher email, dated November 2000, re: sub-funds (At this 

point, we are looking at allocating approximately 20% of the major 

trust assets to sub funds, . . .) ...................................................................... 872

c. Michelle Boucher/Evan Wyly email, dated December 2000, re: subtrust 

(But, this will largely be a US tax issue.) .................................................. 874

d. Michelle Boucher Fax to Sam Wyly, dated May 2001, (I’ve attached 

a schedule of allocations for the 6 sub-funds to the offshore trusts.) ....... 875

e. Michelle Boucher email, dated May 2001, re: update on sub-fund llc 

creation (Also, Keeley and I are also looking at a structure that Rodney 

Owens outlined to us, . . . It is a ‘‘frozen LLC,’’ . . .) .................................... 878

Page

VIII

30. Billing Breakdown related to Irish Trust ....................................................... 879

31. Michelle Boucher/Louis Schaufele email, dated April 2004, re: Charles 

Pulman .............................................................................................................. 880

32. SBC Communications Inc. Correspondence to Sam, Charles and Evan 

Wyly, dated January 2001, re: SBC/Sterling Commerce (. . . SBC is preparing to issue a Form 1099 to you/your trust showing taxable income 

. . .) ...................................................................................................................... 882

33. a. Keeley Hennington/Michelle Boucher email, dated January 2001, re: 

1099’s ............................................................................................................ 885

b. Kelley Hennington/Rodney Owens email, dated January 2001, re: Option info (The option income SBC is concerned with are those that 

were sold in 96 in exchange for private annuities.) ................................... 886

c. Keeley Hennington/Michelle Boucher email, dated January 2001, re: 

1099 (Shari suggests that we ask Rodney to word the letter to SBC 

in an opinion form, . . .) ................................................................................ 887

d. Keeley Hennington/Michelle Boucher email, dated January 2001, (I 

am faxing Rodney’s 1099 memo to you now.) ............................................ 888

e. Correspondence of Rodney J. Owens (Meadows, Owens, Collier, Reed, 

Cousins & Blau, L.L.P.), dated January 26, 2001, re: Purchase of 

Sterling Commerce Option from Elysium Limited. (Elysium Limited 

is a foreign corporation organized and residing in the Isle of Man. 

Accordingly, it is not appropriate for SBC to file a Form 1099, . . .) ........ 889

f. Correspondence of Rodney J. Owens (Meadows, Owens, Collier, Reed, 

Cousins & Blau, L.L.P.), dated January 26, 2001, re: Purchase of 

Sterling Commerce Option from Moberly Limited. (Moberly Limited 

is a foreign corporation organized and residing in the Isle of Man. 

Accordingly, it is not appropriate for SBC to file a Form 1099, . . .) ........ 891

g. Correspondence of Rodney J. Owens (Meadows, Owens, Collier, Reed, 

Cousins & Blau, L.L.P.), dated January 26, 2001, re: Purchase of 

Sterling Commerce Option from Atlantis Limited. (Atlantis Limited 

is a foreign corporation organized and residing in the Isle of Man. 

Accordingly, it is not appropriate for SBC to file a Form 1099, . . .) ........ 893

h. Michelle Boucher/Keeley Hennington email, dated June 2002, re: CA 

Audit (After discussions with Rodney I am planning to make the following response to the guy at CA that is working on the audit.) ............. 895

34. a. Legal Opinion prepared by David Tedder, Pratter, Tedder & Graves, 

dated February and April 1992, re: Sterling Software Warrants and 

Michaels Stores Options to a Nevada Corporation for a Private Annuity .................................................................................................................. 896

b. Michael Chatzky Correspondence to David Tedder/Michael French, 

dated April 1992, attaching April 1992 Tax Opinion prepared by 

Pratter, Tedder & Graves ........................................................................... 922

c. Shari Robertson Memorandum to David Tedder, Mike Chatzky and 

Bob Bere, dated February 1993, re: Tax Compliance (Lorne House 

needs advice on the tax compliance issues that must be met.) .................. 939

d. Legal Opinion prepared by Chatzky and Associates, dated February 

1996, re: The Tallulah International Trust ............................................... 941

e. Legal Opinion prepared by Chatzky and Associates, dated March 1996, 

re: The Woody International Trust ............................................................. 961

35. a. Charles Wyly Memorandum to Michelle Boucher (Irish Trust Group), 

dated March 2000, re: SSW Options (Sam and I recommend to our 

protectors that all the Sterling Software options be converted to CA 

options.) ........................................................................................................ 983

b. Evan Wyly/Sam Wyly/Michelle Boucher emails, dated April 2000, re: 

Michaels Shares (Sam recommends that the trustees exercise and sell 

the remainder of the Michaels options that expire this summer. Sell 

at $40 or better.) ........................................................................................... 984

c. Keeley Hennington/Michelle Boucher (Irish Trust Group) emails, dated 

February 2001, (I was talking to Charles yesterday and he was kind 

of thinking out loud on some stuff. He was talking about use of offshore cash . . .) ............................................................................................... 985

Page

IX

35. a. Charles Wyly Memorandum to Michelle Boucher (Irish Trust Group), 

dated March 2000, re—Continued

d. Evan Wyly/Michelle Boucher (Irish Trust Group) emails, dated November 2000, re: intelecon (Remember that it is critical from a U.S. 

tax standpoint that there is no appearance that the Wyly’s are in 

control of the trusts or the protectors.) ....................................................... 986

36. Michelle Boucher (Irish Trust Group)/CWyly/Shari Robertson email, dated 

March 2000, re: First Dallas International update ........................................ 988

37. Evan Wyly/Michelle Boucher (Irish Trust Group) emails, dated September 

2000, re: michaels sales offshore (I spoke to Sam today, he wants us 

to proceed with selling 200,000 Michaels Stores shares from offshore to 

aid in raising funds for Ranger/Precept projects.) ......................................... 989

38. Document entitled, Bulldog Trust, dated June 2003, prepared by IFG 

International Limited, Douglas, Isle of Man .................................................. 990

39. Shari [Robertson] Memorandum, dated May 2000, re: Recap of the Isle 

of Man Trip ....................................................................................................... 992

40. 2001 foreign and domestic investments in Maverick, Ranger and Precept . 996

41. Two Mile Ranch Management Trust and Rosemary’s Circle R Ranch 

Management Trust, Priced at 12/31/01 and 12/31/04 .................................... 999

42. Keeley Hennington/Michelle Boucher emails, dated June 2001, re: allocations to LLCs ..................................................................................................... 1001

43. a. Richard D. Eiseman Jewels Invoice, dated November 2000, re: 

$667,000 Diamond Ring and $759,000 Diamond Necklace (The invoices 

should be sent to: Soulieana, Ltd., Douglas, Isle of Man.) ....................... 1005

b. Amy Browing Fax, dated February 1997, re: Soulieana Limited purchases (The Wyly name should not be noted on the invoices.) .................. 1010

44. Documents regarding July 1996 acquisition of ‘‘Noon Day Rest’’ painting .. 1011

45. Engagement letters—Haim Saban—2001:

a. Quellos Financial Advisors, LLC; ............................................................... 1027

b. Euram Bank; ................................................................................................ 1038

c. Quellos Custom Strategies LLC ................................................................. 1043

46. Engagement letter—Robert W. Johnson, IV and Quadra Financial Group, 

L.P., 2000 ........................................................................................................... 1052

47. a. Titanium Trading Partners LLC, Final Consolidated Profitability—

11/13/01 ...................................................................................................... 1058

b. Titanium Trading Partners LLC, Portfolio as of 9/24/01 ....................... 1060

c. Titanium Trading Partners LLC, Collar Analysis .................................... 1065

48. a. Robert W. Johnson, IV, Reka Limited Purchase Analysis ........................ 1067

b. Brian Hanson (Quellos) email, dated March 2002, re: Reka ................... 1069

c. POINT—One Year Duration (Warrant Outstanding), One Year Profitability Analysis: Projected P&L .................................................................. 1071

d. Robert W. Johnson, IV—Reka Limited, Summary as of June 5, 2000 .... 1074

49. a. Joel Latman (The Johnson Company, Inc.) Fax to Andy Robbins 

(Quadra), dated April 2000, (The amount of Loss that we use should 

be $145.) ........................................................................................................ 1075

b. Jeff Greenstein/Chuck Wilk emails, dated December 1999, re: JETS 

(. . . until the losses are generated.) ............................................................. 1076

c. Larry Scheinfeld/Chuck Wilk emails, dated August 2000, re: POINT 

(. . . we may be able to generate 2000 loss.) ................................................. 1077

d. Jeff Greenstein email, dated May 2000, re: POINT (We will try to 

add more positions to generate losses . . .) .................................................. 1078

50. a. Jeff Greenstein (Quadra)/Joel Latman (Johnson Company) Fax, dated 

February 2000, (. . . upfront cash requirements to be 6–7% of the anticipated losses . . .) ............................................................................................ 1080

b. John Baier email, dated April 2000, re: Woody docs (The total PV 

fee of 2.7mm is 2% of the 135mm notional amount of the trade.) ............ 1081

c. Chuck Wilk/Rajan Puri/Christopher Hirata emails, dated June 2000, 

re: Triskelion Wires (We understand you were extracting fees representing 1% of the initial losses generated . . .) ......................................... 1082

Page

X

50. a. Jeff Greenstein (Quadra)/Joel Latman (Johnson Company) Fax, dated 

February 2000, (. . . upfront cash requirements to be 6–7% of the anticipated losses . . .) —Continued

d. Larry Scheinfeld email, dated November 2000, re: POINT PRICING 

(. . . fees (they are based on the loss amount).) ........................................... 1084

51. a.–k. Stock purchase and lending agreements ................................... 1085–1128

52. a. John Staddon/Chuck Wilk emails, dated April 2000, re: Point (. . . 

there is a commercial risk . . . that the client turns round under a 

certain scenario and claims to have been misled as to the nature 

of the share trading between the two IoM companies.) ............................. 1129

b. John Staddon/Jeff Greenstein/Chuck Wilk emails, dated April 2000, 

re: [Name redacted by the Subcommittee] trade (. . . I also need confirmation from you that [name redacted by the Subcommittee] and/

or his advisers is aware of the book entry features of the structure.) ....... 1131

53. a. Woodglen I LLC Correspondence to Jeff Greenstein (Quellos), dated 

October 2004, re: Reka Limited (We understand from our representatives, that Quellos has indicated that no actual shares may have been 

transferred.) .................................................................................................. 1133

b. Charles Wilk (Quellos) Correspondence to Woodglen I, LLC, dated 

November 2004, (What was stated was that we believe from the documents we have reviewed that the referenced transactions were OTC 

contracts, and, therefore, there were probably no exchange traded transactions of the shares.) .................................................................................. 1135

c. Charles Wilk (Quellos) Correspondence to Woodglen I, LLC, dated 

November 2004, re: Reka Limited (. . . it appears that the transactions 

involved over-the-counter (‘‘OTC’’) sales of rights to an underlying portfolio of stock (the ‘‘Portfolio’’) by Jackstones to Barnville.) ........................ 1136

54. Correspondence between John Staddon (European American Investment 

Group) and the Senate Permanent Subcommittee on Investigations, dated 

July 2006, re: Barnville and Jackstones (. . . the portfolio of securities 

traded by and between Barnville and Jackstones was of a purely contractual book-entry nature. . . . no physical transfer of shares were made. 

No transactions took place over any exchange and no cash transfers 

passed between bank accounts of the two companies.) ................................... 1138

55. John Staddon email, dated July 2000, re: Promissory note (I had assumed 

that we would be having a circular funding pattern . . . such that no 

cash would need to actually pass i.e. purely book entry.) .............................. 1152 

56. a. Chuck Wilk/Jeff Greenstein email, dated August 1999, re: POINT 

STRATEGY .................................................................................................. 1153

b. Rajan Puri (Euram)/Chuck Wilk (Quellos) emails, dated April 2000, 

re: Further Revisions to POINT (. . . given the ‘‘virtual’’ nature of the 

warrant issue . . .) ......................................................................................... 1156

c. Reka Limited, US Call Warrants due 2005, Subscription Agreement, 

dated May 2000 ............................................................................................ 1158

d. EA Investment Services Limited Correspondence to Reka Limited, 

dated June 2000, (. . . 1000 covered call warrants issued by Reka Limited on 5 May 2000 . . .) ............................................................................... 1166

e. EA Investment Services Limited Correspondence to Titanium Trading 

Partners LLC, dated November 2001, (. . . 1000 covered call warrants 

issued by Titanium Trading Partners LLC on September 11, 2001 

. . .) ................................................................................................................. 1168

57. a. Annual Return of Barnville Limited .......................................................... 1171

b. Financial Supervision Commission, Isle of Man, Barnville Limited ....... 1175

c. Annual Return of Jackstones Limited ........................................................ 1176

d. Financial Supervision Commission, Isle of Man, Jackstones Limited .... 1179

58. Chuck Wilk emails, dated August 2001, re: Ownership (Barnville is 

owned jointly by Claycroft Limited and Dalecroft Limited, both Isle of 

Man companies. . . . I am not at all keen on revealing the ultimate beneficial owner.) ...................................................................................................... 1180

59. a. HSBC Account Application for Barnville Limited .................................... 1181

b. Mary Pan/Russell Schreiber (HSBC) email, dated August 2001, re: 

Barnville and Jackstone .............................................................................. 1183

Page

XI

59. a. HSBC Account Application for Barnville Limited —Continued

c. HSBC Know Your Customer Information for Barnville Limited ............. 1184

d. HSBC INDIVIDUAL INFORMATION—KNOW YOUR CLIENT for 

Barnville Limited ........................................................................................ 1186

60. a. HSBC Memorandum, dated August 2001, re: NON-CIB GROUP: 

HAIM SABAN FAMILY GROUP ............................................................... 1187

b. Document regarding Quellos/HSBC transaction (The deferral of ∼$700–

750 million for 5 to 10 years is the economic benefit that provides 

Quellos with its fee.) .................................................................................... 1190

c. Russell Schreiber/Mary Pan email, dated September 2001, re: Silverlight Enterprises, L.P. .................................................................................. 1192

61. a. Chuck Wilk/John Barrie emails, dated August 2001, re: timing issues 

Revised Checklist (. . . from a tax standpoint, I think Silverlight ought 

to hold newco with Titanium at least a day or two to establish factually 

its ownership interest (important for basis shift) to better avoid argument that ownership is transitory and could be ignored on a step 

transaction argument . . .) ............................................................................ 1193

b. Chuck Wilk/John Barrie emails, dated August 2001, re: Purchase 

Agreement ..................................................................................................... 1195

c. John Barrie email, dated August 2001, re: Titanium Trading Partners 

LLC (Returns are calculated based on the sum of the costs of the 

collar, financing, loan fee and structuring fees as a percentage of the 

net gain/(loss) for each profitability scenario.) .......................................... 1196

d. Lana Phillips email, dated September 2001, re: Revised Consents (I’d 

rather not indicate the sequence of these documents in their titles 

because the creation and ownership of the LLC by Barnville and 

EAICS must be completely independent. . . . Showing a clear sequence 

seems to betray that independence.) ........................................................... 1197

e. Elizabeth Smith/Chuck Wilk email, dated June 2002, (. . . would it 

be reasonable to assume . . . that the opinion should be done by the 

end of June?) ................................................................................................ 1198

62. a. Chuck Wilk email, dated December 1999, re: POINT trade (I had 

a meeting this week with Lew Steinberg of Cravath Swaine & Moore 

to finalize the draft of the opinion and to review the economics of 

the trade.) ..................................................................................................... 1199

b. Christopher Hirata email, dated April 2000, re: POINT (During our 

phone conference with Lew Steinberg, we concluded that on 12/31/

00 we would have a portion of the loan balance outstanding, . . .) ........... 1200

c. Jeff Greenstein/Andrew Robbins emails, dated September 2000, (Do 

we need to speak with Cravath to be certain as to where to strike 

the call in order to provide enough economics or do we already know 

this?) .............................................................................................................. 1201

d. Legal Opinion prepared by Cravath, Swaine & Moore, dated August 

2000, re: POINT Strategy ........................................................................... 1202

63. a. Legal Opinion prepared by Bryan Cave LLP, dated October 2002, 

re: POINT Strategy ...................................................................................... 1226

b. Representation Certificate of Haim Saban for Legal Opinion prepared 

by Bryan Cave LLP ..................................................................................... 1287

c. Representation Certificate of Chuck Wilk for Legal Opinion prepared 

by Bryan Cave LLP ..................................................................................... 1292

d. Representation Certificate of Titanium Acquisition Corporation for 

Legal Opinion prepared by Bryan Cave LLP ............................................ 1302

e. Representation Certificate of Titanium Trading Partners LLC for 

Legal Opinion prepared by Bryan Cave LLP ............................................ 1308

64. Correspondence from William A. Brewer III, Bickel & Brewer, legal counsel to Charles and Sam Wyly, to the Permanent Subcommittee on Investigations, dated July 2006, re: assertion of rights under the Fifth Amendment ................................................................................................................... 1310

65. Responses to supplemental questions for the record submitted to:

a. The Honorable Mark Everson, Commissioner, Internal Revenue Service; ................................................................................................................. 1312

Page

XII

65. Responses to supplemental questions for the record submitted to—Continued

b. Michael Conn, Private Bank Northwest Region President, Bank of 

America; ....................................................................................................... 1317

c. George T. Wendler, Senior Executive Vice President and Chief Credit 

Officer, HSBC Bank USA, N.S.; ................................................................. 1320

d. Jeffrey Greenstein, Chief Executive Officer, Quellos Group, LLC; ......... 1329

e. Louis J. Schaufele III; ................................................................................. 1679

f. Michael Chatzky, Chatzky & Associates .................................................... 1700

VOLUME 2 

66. Materials relating to Footnotes and Additional Documents cited in Tax 

Haven Abuses: The Enablers, The Tools, And Offshore Secrecy, a Report 

prepared by the Minority and Majority Staff of the Permanent Subcommittee on Investigations in conjunction with the Subcommittee hearing held August 1, 2006: .................................................................................. 1743

[Note: Footnotes not listed are explanative, reference Subcommittee interviews for which records are not available to the public, or reference a 

widely available public document.]

[*] Retained in the files of the Subcommittee.

Footnote No. 29, See Attachment ............................................................................ 1743

Footnote No. 33, See Attachment ............................................................................ 1749

Footnote No. 34, See Attachment ............................................................................ 1752

Footnote No. 38, See Attachment ............................................................................ 1753

Footnote No. 39, See Footnote No. 38 (above) ........................................................ 1753

Footnote No. 44, See Attachments (3) .................................................................... 1776

Footnote No. 48, See Attachment ............................................................................ 1779

Footnote No. 50, See Attachment ............................................................................ 1780

Footnote No. 51, See Attachment ............................................................................ 1781

Footnote No. 53, See Attachment ............................................................................ 1782

Footnote No. 54, See Attachment ............................................................................ 1783

Footnote No. 55, See Footnote No. 54 (above) ........................................................ 1783

Footnote No. 56, See Attachment ............................................................................ 1804

Footnote No. 61, See Attachment ............................................................................ 1832

Footnote No. 63, See Footnote No. 48 (above) ........................................................ 1779

Footnote No. 64, See Attachment ............................................................................ 1834

Footnote No. 65, See Footnote No. 64 (above) ........................................................ 1834

Footnote No. 70, See Attachment ............................................................................ 1839

Footnote No. 71, See Attachment ............................................................................ 1841

Footnote No. 77, See Attachment ............................................................................ 1843

Footnote No. 78, See Attachment ............................................................................ 1846

Footnote No. 79, See Attachment ............................................................................ 1847

Footnote No. 81, See Attachment ............................................................................ 1851

Footnote No. 82, See Attachment ............................................................................ 1852

Footnote No. 83, See Attachment ............................................................................ 1854

Footnote No. 84, See Attachment ............................................................................ 1862

Footnote No. 86, See Footnote No. 83 (above) ........................................................ 1854

Footnote No. 91, See Attachment ............................................................................ 1869

Footnote Nos. 92–94, See Footnote No. 91 (above) ................................................ 1869

Footnote No. 96, See Attachment ............................................................................ 1907

Footnote No. 97, See Attachment ............................................................................ 1908

Footnote No. 98, See Attachment ............................................................................ 1909

Footnote No. 113, See Attachment .......................................................................... 1910

Footnote No. 115, See Attachment .......................................................................... 1911

Footnote No. 116, See Attachment .......................................................................... 1912

Footnote No. 118, See Attachments (2) .................................................................. 1918

Page

XIII

Footnote No. 119, See Attachments (2) .................................................................. 1920

Footnote No. 120, See Attachment .......................................................................... 1930

Footnote No. 121, See Attachment .......................................................................... 1932

Footnote No. 122, See Attachment .......................................................................... 1933

Footnote No. 123, See Footnote No. 122 (above) .................................................... 1933

Footnote No. 124, See Attachment .......................................................................... 1945

Footnote No. 126, See Attachment .......................................................................... 1951

Footnote No. 129, See Attachments (2) .................................................................. 1952

Footnote No. 130, See Footnote No. 129 (above) .................................................... 1952

Footnote No. 131 and 134, See Attachment ........................................................... 1985

Footnote Nos. 135–137 and 139, See Footnote No. 129 (above) ........................... 1952

Footnote No. 140, See Footnote No. 131 (above) .................................................... 1985

Footnote No. 142, See Footnote No. 129 (above) .................................................... 1952

Footnote No. 143, See Attachment and Footnote No. 129 (above) .......................... 1993

Footnote Nos. 144, 146–147, and 149, See Footnote No. 143 (above)..................... 1993

Footnote Nos. 155–158, See Footnote No. 129 (above) .......................................... 1952

Footnote Nos. 159–163, See Footnote No. 131 (above) .......................................... 1985

Footnote No. 164, See Footnote No. 129 (above) .................................................... 1952

Footnote No. 165, See Attachment .......................................................................... 2006

Footnote No. 174, See Attachment .......................................................................... 2025

Footnote Nos. 175–176, See Footnote No. 174 (above) .......................................... 2025

Footnote No. 179, See Attachments (3) .................................................................. 2030

Footnote No. 180, See Attachments (2) .................................................................. 2039

Footnote No. 181, See Footnote No. 179 (above) .................................................... 2030

Footnote No. 183, See Attachment .......................................................................... 2043

Footnote No. 185, See Attachment .......................................................................... 2044

Footnote No. 186, See Attachment .......................................................................... 2045

Footnote No. 187, See Attachment .......................................................................... 2047

Footnote No. 188, See Attachment .......................................................................... 2048

Footnote No. 189, See Attachment .......................................................................... 2049

Footnote No. 195, See Attachments (2) (1 of 2 is a SEALED EXHIBIT) * .......... 2050

Footnote No. 197, See Attachment .......................................................................... 2053

Footnote No. 199, See Attachment .......................................................................... 2056

Footnote No. 201, See Attachment .......................................................................... 2065

Footnote No. 202, See Attachment .......................................................................... 2069

Footnote No. 203, See Attachment .......................................................................... 2071

Footnote No. 204, See Attachment .......................................................................... 2074

Footnote No. 205, See Attachment .......................................................................... 2078

Footnote No. 206, See Footnote No. 201 (above) .................................................... 2065

Footnote No. 207, See Attachments (6) .................................................................. 2082

Footnote No. 208, See Footnote No. 201 (above) .................................................... 2065

Footnote No. 209, See Attachment .......................................................................... 2108

Footnote No. 211, See Attachment .......................................................................... 2111

Footnote No. 212, See Attachment .......................................................................... 2113

Footnote Nos. 214–215, See Footnote No. 211 (above) .......................................... 2111

Footnote No. 216, See Attachments (3) .................................................................. 2115

Footnote No. 218, See Attachments (2) .................................................................. 2122

Footnote No. 219, See Attachment .......................................................................... 2124

Footnote No. 220, See Attachment .......................................................................... 2127

Footnote No. 221, See Attachments (2) .................................................................. 2131

Footnote No. 222, See Attachments (2) .................................................................. 2133

Footnote No. 223, See Attachments (2) .................................................................. 2147

Footnote No. 224, See Attachments (2) .................................................................. 2149

Footnote No. 226, See Attachments (2) .................................................................. 2157

Page

XIV

Footnote No. 227, See Attachments (2) .................................................................. 2165

Footnote No. 228, See Footnote No. 226 (above) .................................................... 2157

Footnote No. 229, See Attachments (2) .................................................................. 2179

Footnote No. 230, See Footnote No. 229 (above) .................................................... 2179

Footnote No. 234, See Footnote Nos. 212 and 216 (above)............................ 2113, 2115

Footnote No. 235, See Footnote No. 209 (above) .................................................... 2108

Footnote No. 236, See Footnote No. 195 (above) .................................................... 2050

Footnote No. 237, See Attachment .......................................................................... 2186

Footnote No. 238, See Footnote No. 212 (above) .................................................... 2113

Footnote No. 239, See Footnote No. 237 (above) .................................................... 2186

Footnote No. 240, See Attachment .......................................................................... 2187

Footnote No. 242, See Attachments (3) .................................................................. 2192

Footnote No. 243, See Footnote No. 220 (above) .................................................... 2127

Footnote No. 244, See Attachment .......................................................................... 2197

Footnote No. 245, See Attachment .......................................................................... 2199

Footnote No. 247, See Attachment .......................................................................... 2205

Footnote No. 248, See Attachments (2) .................................................................. 2207

Footnote No. 249, See Attachment .......................................................................... 2209

Footnote Nos. 250–251, See Footnote No. 249 (above) .......................................... 2209

Footnote No. 252, See Attachment .......................................................................... 2210

Footnote No. 253, See Attachment .......................................................................... 2211

Footnote No. 254, See Attachment .......................................................................... 2212

Footnote No. 258, See Attachment .......................................................................... 2213

Footnote No. 260, See Attachment .......................................................................... 2214

Footnote No. 261, See Attachment .......................................................................... 2215

Footnote No. 262, See Attachment .......................................................................... 2216

Footnote No. 263, See Attachment .......................................................................... 2217

Footnote No. 264, See Footnote No. 180 (above) .................................................... 2039

Footnote No. 267, See Attachments (3) .................................................................. 2218

Footnote No. 268, See Footnote No. 180 (above) .................................................... 2039

Footnote No. 269, See Footnote No. 179 (above) .................................................... 2030

Footnote No. 270, See Attachment .......................................................................... 2221

Footnote No. 271, See Attachments (2) .................................................................. 2228

Footnote No. 272, See Footnote No. 270 (above) .................................................... 2221

Footnote No. 273, See Attachment .......................................................................... 2231

Footnote No. 274, See Attachment .......................................................................... 2234

Footnote No. 275, See Attachment .......................................................................... 2239

Footnote No. 276, See Attachment .......................................................................... 2256

Footnote No. 277, See Attachment .......................................................................... 2258

Footnote No. 278, See Attachment .......................................................................... 2259

Footnote No. 279, See Attachment .......................................................................... 2260

Footnote No. 280, See Attachment .......................................................................... 2261

Footnote No. 281, See Attachment .......................................................................... 2262

Footnote No. 282, See Attachment .......................................................................... 2264

Footnote No. 283, See Attachment .......................................................................... 2268

Footnote No. 284, See Attachments (3) .................................................................. 2269

Footnote No. 285, See Footnote No. 283 (above) .................................................... 2268

Footnote No. 286, See Attachments (3) .................................................................. 2284

Footnote No. 287, See Attachment .......................................................................... 2299

Footnote No. 289, See Attachments (3) .................................................................. 2304

Footnote No. 291, See Attachments (2) .................................................................. 2307

Footnote No. 292, See Attachments (2) .................................................................. 2316

Footnote No. 296, See Attachment .......................................................................... 2336

Footnote No. 297, See Attachments (2) .................................................................. 2337

Page

XV

Footnote No. 298, See Attachment .......................................................................... 2341

Footnote No. 299, See Attachment .......................................................................... 2343

Footnote Nos. 300–301, See Footnote No. 299 (above) .......................................... 2343

Footnote No. 302, See Attachment .......................................................................... 2346

Footnote No. 303, See Attachment .......................................................................... 2350

Footnote No. 304, See Attachment .......................................................................... 2352

Footnote No. 305, See Attachment .......................................................................... 2354

Footnote No. 306, See Attachments (2) .................................................................. 2355

Footnote No. 307, See Attachments (2) .................................................................. 2357

Footnote No. 309, See Attachment .......................................................................... 2359

Footnote No. 310, See Footnote Nos. 284 and 286 (above)............................ 2269, 2284

Footnote No. 311, See Attachment .......................................................................... 2360

Footnote No. 312, See Attachment .......................................................................... 2361

Footnote No. 313, See Attachments (3) .................................................................. 2362

Footnote No. 315, See Attachments (5) .................................................................. 2365

Footnote No. 318, See Attachment .......................................................................... 2382

Footnote No. 319, See Footnote No. 318 (above) .................................................... 2382

Footnote No. 320, See Attachment .......................................................................... 2383

Footnote No. 321, See Attachment .......................................................................... 2384

Footnote No. 322, See Attachment .......................................................................... 2385

Footnote No. 323, See Attachment .......................................................................... 2386

Footnote No. 324, See Attachment .......................................................................... 2387

Footnote No. 325, See Attachment .......................................................................... 2388

Footnote No. 326, See Attachments (3) .................................................................. 2389

Footnote No. 327, See Attachments (2) .................................................................. 2392

Footnote No. 329, See Attachment .......................................................................... 2394

Footnote No. 330, See Attachments (2) .................................................................. 2400

Footnote No. 331, See Attachment .......................................................................... 2404

Footnote No. 332, See Attachment .......................................................................... 2409

Footnote No. 333, See Attachment .......................................................................... 2411

Footnote No. 335, See Attachment .......................................................................... 2413

Footnote No. 336, See Attachment .......................................................................... 2414

Footnote No. 337, See Attachments (2) .................................................................. 2415

Footnote No. 338, See Attachment .......................................................................... 2422

Footnote No. 339, See Attachment .......................................................................... 2424

Footnote Nos. 340–341, See Footnote No. 339 (above) .......................................... 2424

Footnote No. 344, See Attachment .......................................................................... 2448

Footnote No. 347, See Attachment .......................................................................... 2450

Footnote Nos. 348–350, See Footnote No. 347 (above) .......................................... 2450

Footnote No. 351, See Attachment .......................................................................... 2451

Footnote No. 352, See Footnote No. 351 (above) .................................................... 2451

Footnote No. 353, See Attachment .......................................................................... 2452

Footnote No. 354, See Footnote No. 353 (above) .................................................... 2452

Footnote No. 355, See Attachment .......................................................................... 2453

Footnote No. 356, See Attachment .......................................................................... 2455

Footnote No. 360, See Attachment .......................................................................... 2457

Footnote No. 367, See Footnote No. 195 (above) .................................................... 2050

Footnote No. 368, See Attachment .......................................................................... 2458

Footnote No. 369, See Attachment .......................................................................... 2460

Footnote No. 370, See Attachment .......................................................................... 2461

Footnote No. 371, See Attachment and 

Footnote No. 195 (SEALED EXHIBIT) * (above).................................................. 2465

Footnote No. 372, (SEALED EXHIBIT) ................................................................. *

Footnote No. 373, See Attachment .......................................................................... 2466

Page

XVI

Footnote No. 375, See Attachment .......................................................................... 2480

Footnote No. 376, See Attachments (2) .................................................................. 2483

Footnote No. 377, See Attachments (2) .................................................................. 2487

Footnote No. 378, See Attachment .......................................................................... 2489

Footnote No. 379, See Attachment .......................................................................... 2491

Footnote No. 380, See Attachment .......................................................................... 2504

Footnote No. 381, See Attachment .......................................................................... 2511

Footnote No. 382, See Attachment .......................................................................... 2532

Footnote No. 383, See Footnote No. 380 (above) .................................................... 2504

Footnote No. 384, See Attachment .......................................................................... 2534

Footnote No. 385, See Attachment .......................................................................... 2572

Footnote No. 386, See Footnote No. 378 (above) .................................................... 2489

Footnote No. 388, See Footnote No. 385 (above) .................................................... 2572

Footnote No. 389, See Footnote Nos. 270 and 373 (above)............................ 2221, 2466

Footnote No. 390, See Attachment .......................................................................... 2590

Footnote No. 391, See Attachment .......................................................................... 2605

Footnote No. 393, See Attachments (2) .................................................................. 2616

Footnote No. 394, See Attachment .......................................................................... 2618

Footnote No. 396, See Footnote No. 393 (above) .................................................... 2616

Footnote No. 397, See Attachment .......................................................................... 2623

Footnote No. 398, See Footnote No. 381 (above) .................................................... 2511

Footnote No. 399, See Attachments (2) .................................................................. 2632

Footnote No. 401, See Footnote No. 380 (above) .................................................... 2504

Footnote No. 402, See Attachment .......................................................................... 2633

Footnote No. 403, See Attachments (2) .................................................................. 2634

Footnote No. 404, See Attachment .......................................................................... 2636

Footnote No. 405, See Attachment .......................................................................... 2637

Footnote No. 406, See Attachments (2) .................................................................. 2638

Footnote No. 407, See Attachment .......................................................................... 2641

Footnote No. 408, See Attachment .......................................................................... 2643

Footnote No. 409, See Attachments (6) and Footnote No. 380 (above)......... 2644, 2504

Footnote No. 410, See Footnote No. 380 (above) .................................................... 2504

Footnote No. 412, See Attachment .......................................................................... 2650

Footnote No. 413, See Attachment .......................................................................... 2651

Footnote No. 414, See Attachment .......................................................................... 2652

Footnote No. 415, 

See Attachment and Hearing Exhibit No. 63a (above) .............................. 2655, 1226

Footnote No. 420, See Attachments (2) .................................................................. 2742

Footnote No. 421, See Attachment .......................................................................... 2744

Footnote Nos. 422–426, 429, 431–432, 

See Footnote No. 415, and Hearing Exhibit No. 63a (above) .................... 2655, 1226

Footnote No. 435, See Attachment .......................................................................... 2745

Footnote No. 438, See Attachment .......................................................................... 2751

Footnote No. 439, 441, See Footnote No. 380 (above) ............................................ 2504

Footnote No. 442, See Attachment .......................................................................... 2761

Footnote No. 443, See Attachment .......................................................................... 2762

Footnote No. 444, See Attachment .......................................................................... 2763

Footnote No. 445, See Attachments (2) .................................................................. 2772

Footnote No. 446, See Footnote Nos. 380 and 443 (above)............................ 2504, 2762

Footnote No. 447, See Footnote No. 438 (above) .................................................... 2751

Footnote No. 454, See Attachments (2) .................................................................. 2774

Footnote No. 458, See Attachment .......................................................................... 2783

Footnote No. 459, See Footnote No. 458 (above) .................................................... 2784

Footnote No. 465, 468, 471, See Attachment ......................................................... 2819

Page

XVII

Footnote No. 472, 474, See Attachment ................................................................. 2833

Footnote No. 475, 476, 478 (SEALED EXHIBITS) ............................................... *

Footnote No. 479, See Attachment .......................................................................... 2841

Footnote No. 482, See Attachment .......................................................................... 2842

Footnote No. 483, See Attachment .......................................................................... 2849

Footnote No. 487, See Attachment .......................................................................... 2851

Footnote No. 489, See Footnote No. 454 (above) .................................................... 2774

Footnote Nos. 490–493, See Footnote No. 483 (above) .......................................... 2849

Footnote No. 494, See Attachments (2) (Only reprinting 1 of 2) * ........................ 2852

Footnote No. 495, See Attachment and Footnote No. 454 (above) ................ 2853, 2774

Footnote No. 496, See Attachment .......................................................................... 2856

Footnote No. 497, See Attachment .......................................................................... 2862

Footnote No. 498, See Footnote No. 454 (above) .................................................... 2774

Footnote No. 499, See Attachments (3) and Footnote No. 497 (above)......... 2863, 2862

Footnote No. 501, See Attachment and Footnote No. 454 (above) ................ 2866, 2774

Footnote No. 503, See Attachments (8) (7 public and 1 SEALED EXHIBIT) * 

and Footnote No. 454 (above)....................................................................... 2867, 2774

Footnote No. 504, See Attachment .......................................................................... 2892

Footnote No. 506, See Attachments (2) .................................................................. 2894

Footnote No. 507, See Footnote No. 475 (above) (SEALED EXHIBIT) ................ *

Footnote No. 509, See Attachment and Footnote No. 454 (above) ................ 2896, 2774

Footnote No. 511, (SEALED EXHIBIT) ................................................................. *

Footnote No. 512, See Attachments (2) .................................................................. 2904

Footnote No. 513, See Attachments (2) .................................................................. 2940

Footnote No. 519, See Attachment .......................................................................... 2972

Footnote No. 528, See Attachments (3) .................................................................. 2974

Footnote No. 530, See Attachments (2) .................................................................. 2977

Footnote No. 531, See Attachments (5) .................................................................. 2985

Footnote No. 532, See Attachments (2) .................................................................. 2997

Footnote No. 534, See Attachments (3) .................................................................. 3001

Footnote No. 535, See Attachments (9) .................................................................. 3004

Footnote No. 536, See Attachments (2) .................................................................. 3022

Footnote No. 537, See Attachments (7) .................................................................. 2031

Footnote No. 538, See Attachments (19) ................................................................ 3041

Footnote No. 540, See Attachment .......................................................................... 3065

Footnote No. 541, See Attachments (2) .................................................................. 3067

Footnote No. 542, See Attachments (19) 

(1 public and 18 SEALED EXHIBITS) * and Footnote No. 536 ............... 3070, 3022

Footnote No. 543, See Attachments (21) 

(2 public and 19 SEALED EHXIBITS) * and Footnote No. 536 ............... 3073, 3022

Footnote No. 544, See Attachments (23) ................................................................ 3075

Footnote No. 545, See Attachments (7) .................................................................. 3129

Footnote No. 546, See Attachments (5) and Footnote No. 544 (above)......... 3137, 3075

Footnote No. 548, See Attachments (2) .................................................................. 3130

Footnote No. 549, See Attachment .......................................................................... 3160

Footnote No. 550, See Attachment .......................................................................... 3162

Footnote No. 551, See Attachment .......................................................................... 3165

Footnote No. 552, See Attachment .......................................................................... 3166

Footnote No. 554, See Attachment .......................................................................... 3167

Footnote No. 555, See Attachment .......................................................................... 3169

Footnote No. 556, See Attachment .......................................................................... 3170

Footnote No. 557, See Attachment .......................................................................... 3171

Footnote No. 558, See Attachment .......................................................................... 3172

Footnote No. 559, See Attachment .......................................................................... 3173

Page

XVIII

Footnote No. 560, See Attachments (3) .................................................................. 3174

Footnote No. 561, See Attachment .......................................................................... 3193

Footnote No. 562, See Attachment .......................................................................... 3194

Footnote No. 563, See Attachments (2) .................................................................. 3196

Footnote No. 564, See Attachment .......................................................................... 3198

Footnote No. 570, See Attachments (2) .................................................................. 3199

Footnote No. 571, See Attachment .......................................................................... 3201

Footnote No. 572, See Attachment .......................................................................... 3204

Footnote No. 573, See Attachment .......................................................................... 3206

Footnote No. 574, (2 SEALED EXHIBITS) ........................................................... *

Footnote No. 582, See Attachment .......................................................................... 3207

Footnote No. 584, See Attachment .......................................................................... 3208

Footnote No. 586, See Attachments (2) .................................................................. 3209

Footnote No. 588, See Attachment .......................................................................... 3212

Footnote No. 589, See Attachment .......................................................................... 3213

Footnote No. 591, See Attachment .......................................................................... 3215

Footnote No. 592, See Attachment .......................................................................... 3216

Footnote No. 593, See Attachments (2) (Only reprinting 1 of 2) * ........................ 3217

Footnote No. 595, See Attachments (2) .................................................................. 3218

Footnote No. 596, See Attachment .......................................................................... 3232

Footnote No. 597, See Attachments (2) .................................................................. 3233

Footnote No. 598, See Attachment .......................................................................... 3235

Footnote No. 600, See Attachment .......................................................................... 3239

Footnote No. 601, See Attachment .......................................................................... 3245

Footnote No. 602, See Attachment .......................................................................... 3247

Footnote No. 603, See Attachments (2) .................................................................. 3250

Footnote No. 604, See Attachment .......................................................................... 3253

Footnote No. 607, See Attachments (4) .................................................................. 3256

Footnote No. 608, See Attachments (5) .................................................................. 3261

Footnote No. 609, See Attachments (2) .................................................................. 3266

Footnote No. 611, See Attachment .......................................................................... 3268

Footnote No. 614, See Attachment .......................................................................... 3273

Additional Document Cited in Text of the Report ................................................ 3274

Footnote No. 619, See Footnote No. 546 ................................................................... 3137

Footnote No. 620, See Attachment .......................................................................... 3285

Footnote No. 625, See Footnote No. 546 ................................................................... 3137

Footnote No. 646, See Attachments (3) .................................................................. 3287

Footnote No. 647, See Attachments (2) .................................................................. 3294

Footnote No. 650, See Attachments (Only reprinting 1 of 10) * ............................ 3297

Footnote No. 651, See Attachments (5) .................................................................. 3308

Footnote No. 652, See Attachments (3) .................................................................. 3327

VOLUME 3

Footnote No. 653, See Attachments (3) .................................................................. 3333

Footnote No. 654, See Attachments (5) .................................................................. 3346

Footnote No. 656, See Attachments (5) .................................................................. 3359

Footnote No. 659, See Attachments (2) .................................................................. 3369

Footnote No. 660, See Attachment .......................................................................... 3375

Footnote No. 662, See Attachment .......................................................................... 3379

Footnote No. 663, See Attachments (2) (1 is a SEALED EXHIBIT) * ................. 3476

Footnote No. 664, See Footnote No. 662 (above) .................................................... 3379

Footnote No. 665, See Attachment .......................................................................... 3492

Footnote No. 666, See Attachments (2) .................................................................. 3498

Footnote No. 667, See Attachments (2) .................................................................. 3507

Page

XIX

Footnote No. 668 ...................................................................................................... *

Footnote No. 669, See Attachment .......................................................................... 3527

Footnote No. 670, See Attachments (2) .................................................................. 3529

Footnote No. 671, See Attachments (10) * (Only reprinting 1 of 10) .................... 3532

Footnote No. 672, See Attachments (10) ................................................................ 3547

Footnote No. 674, See Attachment .......................................................................... 3573

Footnote No. 676, See Attachment .......................................................................... 3574

Footnote Nos. 677–682, See Footnote No. 671 (above) .......................................... 3532

Footnote No. 683, See Attachments (4) (Only reprinting 1 of 4) * ........................ 3580

Footnote Nos. 684–686, See Footnote No. 683 (above) .......................................... 3580

Footnote No. 687, See Attachments (2) (Only reprinting 1 of 2) * ........................ 3600

Footnote No. 688, See Attachments (7) (Only reprinting 3 of 7) * ........................ 3635

Footnote No. 689 ...................................................................................................... *

Footnote No. 690, See Footnote No. 689 (above) .................................................... *

Footnote No. 691, See Attachments (3) and Footnote No. 666 (above)......... 3641, 3498

Footnote No. 692, See Attachments (6) .................................................................. 3649

Footnote Nos. 695–699, See Footnote No. 689 (above) .......................................... *

Footnote No. 700, See Attachment .......................................................................... 3655

Footnote No. 701, See Footnote No. 700 (above) .................................................... 3655

Footnote No. 702, 

See Attachment and Footnote Nos. 666 and 689 (above)....................... 3656, 3498, *

Footnote No. 705, See Footnote No. 702 (above) ...................................................... 3656

Footnote No. 707, See Attachments (2) .................................................................. 3666

Footnote No. 709, See Attachment .......................................................................... 3671

Footnote No. 710, See Attachment .......................................................................... 3675

Footnote No. 711, See Attachments (2) .................................................................. 3684

Footnote No. 712, See Attachment and Footnote No. 711 (above) ................ 3686, 3684

Footnote No. 713, See Footnote No. 711 (above) .................................................... 3684

Footnote No. 714, See Attachment .......................................................................... 3687

Footnote No. 715, See Attachments (2) .................................................................. 3688

Footnote No. 716, See Attachments (2) .................................................................. 3690

Footnote No. 717, See Attachments (2) (Only reprinting 1 of 2) * ........................ 3694

Footnote No. 718, See Attachment .......................................................................... 3696

Footnote No. 720, See Attachments (2) .................................................................. 3697

Footnote No. 721, See Attachments (2) .................................................................. 3703

Footnote No. 723, See Attachments (3) .................................................................. 3705

Footnote No. 724, See Attachments (2) .................................................................. 3710

Footnote No. 725, See Attachment .......................................................................... 3719

Footnote No. 726, See Attachments (2) .................................................................. 3720

Footnote No. 727, See Attachment .......................................................................... 3722

Footnote No. 728, See Footnote No. 727 (above) .................................................... 3722

Footnote Nos. 729–730, See Footnote No. 724 (above) .......................................... 3710

Footnote No. 731, See Attachment .......................................................................... 3727

Footnote No. 732, See Attachment .......................................................................... 3729

Footnote No. 733, 

See Attachment and Footnote No. 543 (above) (SEALED EXHIBIT) *..... 3731, 3073

Footnote No. 734, See Attachment .......................................................................... 3733

Footnote No. 735, See Attachment .......................................................................... 3734

Footnote No. 739, See Attachment .......................................................................... 3738

Footnote No. 740, See Attachments (2) .................................................................. 3740

Footnote No. 741, See Attachment .......................................................................... 3743

Footnote No. 749, See Attachment .......................................................................... 3744

Footnote No. 750, See Attachments (4) .................................................................. 3746

Footnote No. 751, See Attachments (10) ................................................................ 3765

Page

XX

Footnote No. 752, See Attachments (16) and Footnote No. 751 (above)....... 3777, 3765

Footnote No. 753, See Attachments (5) .................................................................. 3803

Footnote No. 754, See Attachments (8) .................................................................. 3810

Footnote No. 755, See Attachments (10) ................................................................ 3822

Footnote No. 757, See Attachments (2) .................................................................. 3845

Footnote No. 758, See Attachment .......................................................................... 3850

Footnote No. 761, See Attachments (5) .................................................................. 3851

Footnote No. 762, See Attachment .......................................................................... 3861

Footnote No. 763, See Attachment .......................................................................... 3862

Footnote No. 764, See Attachment .......................................................................... 3864

Footnote No. 765, See Attachment .......................................................................... 3865

Footnote No. 766, See Attachment .......................................................................... 3866

Footnote No. 767, See Attachments (4) .................................................................. 3868

Footnote No. 768, See Attachments (11) ................................................................ 3875

Footnote No. 769, See Attachments (2) and 

Footnote Nos. 763, 766 and 767 (above) ................................. 3888, 3862, 3866, 3868

Footnote No. 770, See Attachment .......................................................................... 3890

Footnote No. 772, See Attachment .......................................................................... 3900

Footnote No. 773, See Footnote Nos. 762 and 763 (above)............................ 3861, 3862

Footnote No. 776, See Attachments (3) and 

Footnote Nos. 755 and 768 (above).................................................... 3901, 3822, 3875

Footnote No. 778, See Attachments (3) .................................................................. 3904

Footnote No. 801, See Attachments (2) .................................................................. 3908

Footnote No. 806, See Attachment .......................................................................... 3928

Footnote No. 807, See Attachment .......................................................................... 3939

Footnote No. 808, See Attachment .......................................................................... 3945

Footnote No. 810, See Footnote No. 593 (above) .................................................... 3217

Footnote No. 811, See Attachment .......................................................................... 3947

Footnote No. 812, See Attachment .......................................................................... 3948

Footnote No. 814, See Attachment .......................................................................... 3949

Footnote No. 815, See Attachment .......................................................................... 3951

Footnote No. 816, See Attachment .......................................................................... 3954

Footnote No. 817, See Attachment .......................................................................... 3955

Footnote No. 819, See Attachment .......................................................................... 3956

Footnote No. 820, See Attachment .......................................................................... 3957

Footnote No. 821, See Attachment .......................................................................... 3958

Footnote No. 827, See Attachments (2) .................................................................. 3959

Footnote No. 828, See Attachment .......................................................................... 3961

Footnote No. 833, See Attachment .......................................................................... 3962

Footnote No. 835, See Attachment .......................................................................... 3963

Footnote No. 836, See Attachment .......................................................................... 3964

Footnote No. 837, See Attachments (3) .................................................................. 3965

Footnote No. 840, See Footnote No. 836 (above) .................................................... 3964

Footnote No. 842, See Attachments (3) .................................................................. 3972

Footnote No. 843, See Attachments (2) .................................................................. 3978

Footnote No. 844, See Attachment .......................................................................... 3980

Footnote No. 845, See Footnote No. 844 (above) .................................................... 3980

Footnote No. 846, See Attachment .......................................................................... 3986

Footnote No. 847, See Attachment .......................................................................... 3987

Footnote No. 848, See Attachment .......................................................................... 3988

Footnote No. 849, See Attachment .......................................................................... 3989

Footnote No. 850, See Attachment .......................................................................... 3990

Footnote No. 851, See Attachment .......................................................................... 3991

Footnote No. 852, See Attachment .......................................................................... 3992

Page

XXI

Footnote No. 853, See Attachment .......................................................................... 3993

Footnote No. 854, See Attachment .......................................................................... 3995

Footnote No. 855 ...................................................................................................... *

Footnote No. 856, See Attachments (2) .................................................................. 3996

Footnote No. 857, See Attachment .......................................................................... 3999

Footnote No. 858, See Footnote No. 856 (above) .................................................... 3996

Footnote No. 859, See Footnote No. 854 (above) .................................................... 3995

Footnote No. 862, See Attachment .......................................................................... 4000

Footnote No. 866, See Attachments (13) ................................................................ 4004

Footnote No. 869, See Footnote No. 755 and 776 (above) ............................. 3822, 3901

Footnote No. 870, See Attachments (2) .................................................................. 4032

Footnote No. 871, See Attachment and Footnote No. 755 (above) ................ 4034, 3822

Footnote No. 872, See Attachment .......................................................................... 4035

Footnote Nos. 873–875, See Footnote No. 872 (above) .......................................... 4035

Footnote No. 876, See Attachment and Footnote No. 872 (above) ................ 4055, 4035

Footnote No. 877, See Attachment and Footnote No. 872 (above) ................ 4056, 4035

Footnote No. 878, See Footnote No. 872 (above) .................................................... 4035

Footnote No. 880, See Attachments (2) .................................................................. 4058

Footnote No. 883, See Attachment and Footnote No. 872 (above) ................ 4063, 4035

Footnote Nos. 884, 886, See Footnote No. 872 (above) .......................................... 4035

Footnote No. 887, See Attachment and Footnote No. 872 (above) ................ 4065, 4035

Footnote Nos. 888–889, See Footnote No. 872 (above) .......................................... 4035

Footnote No. 890, See Attachments (3) .................................................................. 4069

Footnote No. 891, See Attachments (5) and Footnote No. 890 (above)......... 4072, 4069

Footnote No. 892, See Attachment and Footnote No. 872 (above) ................ 4080, 4035

Footnote No. 893, See Attachments (2) and Footnote No. 872 (above)......... 4081, 4035

Footnote Nos. 894–895, See Footnote No. 872 (above) .......................................... 4035

Footnote No. 896, See Attachments (11) ................................................................ 4089

Footnote No. 897, See Attachments (6) .................................................................. 4103

Footnote No. 898, See Footnote No. 872 (above) .................................................... 4035

Footnote No. 899, See Attachment .......................................................................... 4113

Footnote No. 900, See Attachment and Footnote No. 899 (above) ................ 4116, 4113

Footnote No. 902, See Footnote No. 872 (above) .................................................... 4035

Footnote No. 904, See Attachments (2) .................................................................. 4117

Footnote No. 905, See Attachment .......................................................................... 4119

Footnote No. 906, See Footnote No. 872 (above) .................................................... 4035

Footnote No. 907, See Attachment .......................................................................... 4125

Footnote No. 908, See Footnote No. 872 (above) .................................................... 4035

Footnote No. 922, See Attachment .......................................................................... 4131

Footnote No. 923, See Footnote No. 922 (above) .................................................... 4131

Footnote No. 924, See Attachment .......................................................................... 4137

Footnote No. 925, See Footnote No. 922 (above) .................................................... 4131

Footnote No. 926, See Attachments (2) and Footnote No. 922 (above)......... 4139, 4131

Footnote No. 928, See Attachment .......................................................................... 4161

Footnote No. 929, See Attachments (3) .................................................................. 4162

Footnote No. 930, See Attachments (2) .................................................................. 4165

Footnote No. 931, See Attachment .......................................................................... 4169

Footnote Nos. 932–934, See Footnote No. 931 (above) .......................................... 4169

Footnote No. 935, See Attachment .......................................................................... 4172

Footnote No. 936, See Attachment and Footnote No. 931 (above) ................ 4173, 4169

Footnote No. 937, See Footnote No. 543 (above) (SEALED EXHIBIT) ................ *

Footnote No. 939, 941, See Footnote No. 936 (above) .............................................. 4173

Footnote No. 942, See Attachment .......................................................................... 4180

Footnote No. 944, See Attachments (2) .................................................................. 4182

Page

XXII

Footnote No. 947, See Footnote No. 936 (above) ...................................................... 4173

Footnote No. 948, See Footnote No. 922 (above) .................................................... 4131

Footnote No. 949, See Attachment .......................................................................... 4197

Footnote No. 951, 953, See Footnote No. 936 (above) .............................................. 4173

Footnote No. 954 ...................................................................................................... *

Footnote No. 956, See Attachment .......................................................................... 4199

Footnote Nos. 957–959, See Footnote No. 931 (above) .......................................... 4169

Footnote No. 961, See Attachment, Footnote No. 543 (SEALED EXHIBIT) * 

and Footnote No. 944 (above)....................................................................... 4201, 4182

Footnote No. 962, See Footnote No. 543 (above) (SEALED EXHIBIT) ................ *

Footnote No. 963, See Attachments (2) .................................................................. 4203

Footnote No. 964, See Footnote No. 931 (above) .................................................... 4169

Footnote No. 967, See Attachment .......................................................................... 4205

Footnote No. 968, See Attachments (2) .................................................................. 4206

Footnote No. 969, See Attachments (2) .................................................................. 4209

Footnote No. 970, See Attachment .......................................................................... 4211

Footnote No. 971, See Attachment .......................................................................... 4212

Footnote No. 972, See Attachment and Footnote No. 504 (above) ................ 4214, 2892

Footnote No. 973, See Attachment .......................................................................... 4216

Footnote No. 974, See Attachments (10) and 

Footnote Nos. 968 and 972 (above).................................................... 4217, 4206, 4214

Footnote No. 975, See Footnote Nos. 969 and 974 (above)............................ 4209, 4217

Footnote No. 976, (2 SEALED EXHIBITS) ........................................................... *

Footnote No. 977, See Attachment and Footnote No. 972 (above) ................ 4236, 4214

Footnote No. 978, See Attachment .......................................................................... 4238

Footnote No. 979, See Attachment .......................................................................... 4239

Footnote No. 980, See Attachment and Footnote No. 979 (above) ................ 4240, 4239

Footnote No. 981, See Attachment .......................................................................... 4251

Footnote No. 982, See Attachment .......................................................................... 4253

Footnote No. 983, See Attachment .......................................................................... 4254

Footnote No. 984, See Attachment and Footnote No. 983 (above) ................ 4264, 4254

Footnote No. 985, See Attachment .......................................................................... 4268

Footnote No. 986, See Attachment and Footnote No. 983 (above) ................ 4278, 4254

Footnote No. 987, See Attachments (6) and Footnote No. 968 (above)......... 4280, 4206

Footnote No. 988, See Footnote No. 981 (above) .................................................... 4251

Footnote No. 989, 

See Attachment and Footnote Nos. 986 and 987 (above)................. 4294, 4278, 4280

Footnote No. 990, See Attachment and Footnote No. 944 (above) ................ 4295, 4182

Footnote No. 992, See Attachments (2) and Footnote No. 944 (above)......... 4296, 4182

Footnote No. 993, See Attachment .......................................................................... 4301

Footnote No. 994, See Attachment .......................................................................... 4303

Footnote No. 995, See Attachment .......................................................................... 4305

Footnote No. 996, See Footnote No. 995 (above) .................................................... 4305

Footnote No. 997, See Attachments (2) .................................................................. 4309

Footnote No. 998, See Attachments (2) .................................................................. 4311

Footnote No. 999, See Footnote No. 990 (above) ...................................................... 4295

Footnote No. 1000, 

See Attachment and Footnote Nos. 942 and 997 (above)................. 4313, 4180, 4309

Footnote No. 1001, See Footnote No. 942 (above) .................................................. 4180

Footnote No. 1002, See Footnote Nos. 942 and 990 (above).......................... 4180, 4295

Footnote No. 1003, See Footnote No. 942 (above) .................................................. 4180

Footnote No. 1004, See Attachments (2) ................................................................. 4315

Footnote No. 1006, See Footnote No. 942 (above) .................................................. 4180

Footnote No. 1007, See Footnote No. 1004 (above) ................................................ 4315

Footnote No. 1008, See Attachments (2) and Footnote No. 944 (above)....... 4318, 4182

Page

XXIII

Footnote No. 1010, See Attachments (2) ................................................................. 4320

Footnote No. 1011, See Attachments (2) ................................................................. 4322

Footnote No. 1012, See Attachment ........................................................................ 4324

Footnote No. 1013, See Footnote Nos. 1010 and 1011 (above)...................... 4320, 4322

Footnote No. 1014, See Attachment and Footnote No. 935 (above) .............. 4330, 4172

Footnote No. 1015, 

See Attachments (2) and Footnote No. 1012 (above) .................................. 4332, 4324

Footnote No. 1017, See Footnote No. 543 (SEALED EXHIBIT) * and 

Footnote No. 1012 (above) ............................................................................ 3073, 4324

Footnote Nos. 1018–1022, See Footnote No. 1012 (above) .................................... 4324

Footnote No. 1023, See Attachments (4) and Footnote No. 543 (above) 

(SEALED EXHIBIT) *.................................................................................. 4336, 3073

Footnote No. 1024, See Attachments (2) ................................................................. 4342

Footnote No. 1025, See Footnote Nos. 1023 and 1024 (above)...................... 4336, 4342

Footnote No. 1026, See Attachment and Footnote No. 944 (above) .............. 4344, 4182

Footnote No. 1027, See Footnote Nos. 944 and 1026 (above)........................ 4182, 4344

Footnote No. 1029, See Attachment ........................................................................ 4347

Footnote No. 1031, See Footnote Nos. 936 and 944 (above).......................... 4173, 4182

Footnote No. 1033, See Attachment ........................................................................ 4348

Footnote No. 1034, See Attachment ........................................................................ 4356

Footnote No. 1035, See Footnote No. 1024 (above) ................................................ 4342

Footnote No. 1037, See Attachments (4) ................................................................. 4357

Footnote No. 1038, See Attachments (3) ................................................................. 4361

Footnote No. 1039, See Attachment ........................................................................ 4364

Footnote No. 1040, See Attachment ........................................................................ 4365

Footnote No. 1043, See Attachment ........................................................................ 4366

Footnote No. 1044, See Attachment ........................................................................ 4370

Footnote No. 1047, See Attachments (3) ................................................................. 4391

Footnote No. 1048, See Attachment ........................................................................ 4403

Footnote Nos. 1049–1050, See Footnote No. 1043 (above) .................................... 4366

Footnote No. 1052, See Attachment and 

Footnote Nos. 1037 and 1038 (above)................................................ 4404, 4357, 4361

Footnote No. 1053, See Attachments (3) ................................................................. 4405

Footnote No. 1054, See Attachments (16) .............................................................. 4408

Footnote No. 1055, See Attachments (2) ................................................................. 4426

Footnote No. 1057, See Attachment ........................................................................ 4429

Footnote No. 1058, See Footnote No. 1057 (above) ................................................ 4429

Footnote No. 1059, See Attachment ........................................................................ 4437

Footnote No. 1060, See Attachments (2) and 

Footnote No. 1040 (above) ............................................................................ 4441, 4365

Footnote No. 1062, See Attachments (3) and 

Footnote No. 1039 (above) ............................................................................ 4444, 4364

Footnote No. 1064, See Attachment * (reprinting only portion of document) ...... 4447

Footnote No. 1065, See Attachment * (reprinting only portion of document) ...... 4467

Footnote No. 1066, See Attachment ........................................................................ 4495

Footnote No. 1067, See Attachments (3) ................................................................. 4497

Footnote No. 1068, See Attachment ........................................................................ 4506

Footnote Nos. 1069–1070, See Footnote No. 936 (above)......................................... 4173

Footnote No. 1076, See Attachment ........................................................................ 4507

Footnote No. 1078, See Attachment ........................................................................ 4508

Footnote No. 1079, See Attachments (2) and Footnote No. 936 (above)....... 4511, 4173

Footnote No. 1081, See Attachment ........................................................................ 4513

Footnote No. 1082, See Attachments (3) ................................................................. 4515

Footnote No. 1088, See Attachments (6) ................................................................. 4518

Footnote No. 1089, See Attachments (2) ................................................................. 4526

Page

XXIV

Footnote No. 1090, See Footnote No. 1089 (above) ................................................ 4526

Footnote No. 1092, See Attachments (2) ................................................................. 4583

Footnote No. 1093, See Attachments (2) ................................................................. 4585

Footnote No. 1094, See Attachment ........................................................................ 4587

Footnote No. 1095, See Attachments (2) ................................................................. 4589

Footnote No. 1096, See Attachments (15) .............................................................. 4591

Footnote No. 1097, See Attachments (7) and 

Footnote No. 1096 (above) .................................................................................... 4616

Footnote No. 1098, See Attachment and 

Footnote No. 1097 (above).................................................................. 4631, 4616, 4591

Footnote No. 1099, See Attachments (5) and 

Footnote No. 1089 (above) ............................................................................ 4636, 4526

Footnote No. 1100, See Attachment and 

Footnote Nos. 1089 and 1099 (above)................................................ 4648, 4526, 4636

Footnote No. 1101, See Attachment and Footnote No. 1089 (above) ............ 4654, 4526

Footnote No. 1102, See Attachments (4) ................................................................. 4655

Footnote No. 1103, See Attachment ........................................................................ 4665

Footnote No. 1104, See Attachments (5) and 

Footnote No. 542 (above) (SEALED EXHIBIT) *........................................ 4670, 3070

Footnote No. 1105, See Attachments (3) 

and Footnote No. 1104 (above)..................................................................... 4683, 4670

Footnote No. 1106, See Attachments (5) and 

Footnote No. 1104 (above) ............................................................................ 4688, 4670

Footnote No. 1107, See Attachment and 

Footnote No. 542 (above) (SEALED EXHIBIT) *........................................ 4693, 3070

Footnote No. 1108, See Attachments (3) ................................................................. 4697

Footnote No. 1109, See Attachments (3) ................................................................. 4707

Footnote No. 1110, See Attachments (11) .............................................................. 4710

Footnote No. 1111, See Attachments (3) ................................................................. 4723

Footnote No. 1112, See Attachments (2) ................................................................. 4726

Footnote No. 1113, See Attachments (2) ................................................................. 4729

Footnote No. 1114, See Attachments (3) ................................................................. 4731

Footnote No. 1115, See Attachments (2) ................................................................. 4734

Footnote No. 1116, See Attachments (2) ................................................................. 4736

Footnote No. 1117, See Attachments (3) ................................................................. 4738

Footnote No. 1119, See Attachments (2) ................................................................. 4741

Footnote No. 1120, See Attachments (24) .............................................................. 4744

Footnote No. 1121, See Attachments (4) ................................................................. 4781

Footnote No. 1123, See Attachment and Footnote No. 1105 (above) ............ 4788, 4683

Footnote No. 1124, See Attachments (9) and 

Footnote No. 1123 (above) ............................................................................ 4789, 4788

Footnote No. 1125, See Attachment ........................................................................ 4805

Footnote No. 1126, See Attachment ........................................................................ 4806

Footnote No. 1128, See Attachment ........................................................................ 4812

Footnote No. 1129, See Attachment ........................................................................ 4814

Footnote No. 1130, See Attachments (3) ................................................................. 4816

Footnote No. 1131, See Attachment and Footnote No. 1129 (above) ............ 4819, 4814

Footnote No. 1132, See Footnote Nos. 1124 and 1131 (above)...................... 4789, 4819

Footnote No. 1133, See Footnote No. 1131 (above) .................................................. 4819

Footnote No. 1134, See Attachments (3) ................................................................. 4847

Footnote No. 1135, See Attachment ........................................................................ 4850

Footnote No. 1136, See Attachment and Footnote No. 1120 (above) ............ 4851, 4744

Footnote No. 1137, See Attachments (4) ................................................................. 4864

Footnote No. 1138, See Attachments (3) and 

Footnote No. 1137 (above) ............................................................................ 4868, 4864

Page

XXV

Footnote No. 1139, See Attachments (2) and 

Footnote Nos. 1120 and 1138 (above)................................................ 4872, 4744, 4868

Footnote No. 1140, See Attachments (8) ................................................................. 4874

Footnote No. 1142, 

See Footnote No. 543 (above) (SEALED EXHIBIT) * ........................................... 3073

Footnote No. 1143, See Attachments (4) ................................................................. 4884

Footnote No. 1144, See Attachment ........................................................................ 4888

Footnote No. 1145, See Attachment ........................................................................ 4889

Footnote No. 1146, See Attachments (3) ................................................................. 4890

Footnote No. 1147, See Attachment ........................................................................ 4894

Footnote No. 1148, See Attachment ........................................................................ 4908

Footnote No. 1149 .................................................................................................... *

Footnote No. 1150, See Attachments (3) ................................................................. 4909

Footnote No. 1151, See Attachments (3) ................................................................. 4917

VOLUME 4

Footnote No. 1152, See Attachments (6) ................................................................. 4923

Footnote No. 1153 See Attachment ......................................................................... 4952

Additional Documents (12) Cited in Text of the Report ....................................... 4954

Footnote No. 1154, See Attachment ........................................................................ 4967

Footnote No. 1155, See Attachment ........................................................................ 4969

Additional Documents (4) Cited in Text of the Report ......................................... 4972

Footnote No. 1156, See Attachments (2) and 

Footnote No. 1151 (above) ............................................................................ 4977, 4917

Footnote No. 1157, See Attachment ........................................................................ 4979

Additional Documents (5) Cited in Text of the Report ......................................... 4980

Footnote No. 1158, See Attachment ........................................................................ 4985

Additional Documents (2) Cited in Text of the Report ......................................... 4986

Footnote No. 1160, See Attachment ........................................................................ 4988

Additional Documents (3) Cited in Text of the Report, 

and Footnote No. 1147 (above)..................................................................... 4989, 4894

Footnote No. 1162, See Attachments (5) ................................................................. 4995

Footnote No. 1163, See Attachments (5) ................................................................. 5004

Footnote Nos. 1164–1165, See Attachments (2) and 

Footnote No. 1163 (above) ............................................................................ 5010, 5004

Footnote No. 1166, See Attachments (4) ................................................................. 5012

Additional Documents (8) Cited in Text of the Report ......................................... 5016

Footnote No. 1167, See Attachments (4) ................................................................. 5025

Footnote No. 1168, See Footnote No. 1152 (above) ................................................ 4923

Footnote Nos. 1196–1198, See Footnote No. 476 and 478 (above) 

(SEALED EXHIBIT) ............................................................................................ *

Footnote No. 1200, See Attachment ........................................................................ 5031

Footnote No. 1201, See Attachment ........................................................................ *

Additional Documents (2) Cited in Text of the Report ......................................... 5033

Footnote No. 1202, See Attachment ........................................................................ 5036

Footnote No. 1203, See Attachment ........................................................................ 5037

Footnote No. 1205, See Attachment ........................................................................ 5038

Footnote No. 1206, See Attachment ........................................................................ 5039

Footnote No. 1207, See Attachment ........................................................................ 5041

Footnote No. 1208, See Attachments (4) ................................................................. 5042

Footnote No. 1209, See Attachment ........................................................................ 5048

Footnote No. 1210, See Attachment ........................................................................ 5051

Footnote No. 1211, See Footnote No. 1206 (above) ................................................ 5039

Footnote No. 1212, See Attachment ........................................................................ 5053

Footnote No. 1213, See Attachment ........................................................................ 5054

Page

XXVI

Footnote No. 1214, See Attachment ........................................................................ 5055

Footnote No. 1215, See Attachment ........................................................................ 5056

Footnote No. 1216, See Attachment ........................................................................ 5057

Footnote No. 1217, See Attachment ........................................................................ 5058

Footnote No. 1218, See Attachment ........................................................................ 5059

Footnote No. 1219, See Attachment ........................................................................ 5060

Footnote No. 1220, See Attachment ........................................................................ 5062

Footnote No. 1221, See Attachment ........................................................................ 5063

Footnote No. 1223, See Footnote No. 1207 (above) ................................................ 5041

Footnote No. 1225, See Attachment ........................................................................ 5064

Footnote No. 1226, See Attachment ........................................................................ 5068

Footnote No. 1227, See Attachment and Footnote No. 483 (above) .............. 5069, 2849

Footnote No. 1228, See Attachment ........................................................................ 5071

Footnote No. 1229, See Attachment ........................................................................ 5072

Footnote No. 1230, See Attachment ........................................................................ 5073

Footnote No. 1231, See Attachment ........................................................................ 5074

Footnote No. 1232, See Attachment ........................................................................ 5075

Footnote No. 1233, See Footnote No. 1232 (above) ................................................ 5075

Additional Document Cited in Text of the Report ................................................ 5078

Footnote No. 1234, See Attachment ........................................................................ 5079

Footnote No. 1235, See Attachment ........................................................................ 5080

Footnote No. 1236, See Attachment ........................................................................ 5081

Footnote No. 1238, See Footnote No. 1236 (above) ................................................ 5081

Footnote No. 1239, See Attachment ........................................................................ 5083

Footnote No. 1240, See Attachment ........................................................................ 5084

Footnote No. 1241, See Attachment ........................................................................ 5085

Footnote No. 1242, See Attachment ........................................................................ 5087

Footnote No. 1243, See Attachment ........................................................................ 5088

Footnote No. 1244, See Attachment ........................................................................ 5091

Additional Documents (3) (1 of 3 not reprinted) Cited in Text of the Report ..... 5092

Footnote No. 1245, See Attachment ........................................................................ 5094

Footnote No. 1246, See Attachment ........................................................................ 5095

Footnote Nos. 1247–1248, See Footnote No. 1245 (above) .................................... 5094

Additional Document Cited in Text of the Report ................................................ 5096

Footnote No. 1249, See Attachments (3) ................................................................. 5097

Footnote No. 1250, See Attachment ........................................................................ 5100

Footnote No. 1251, See Attachment ........................................................................ 5101

Footnote No. 1252, See Footnote No. 1251 (above) ................................................ 5101

Footnote No. 1253, See Attachment ........................................................................ 5103

Footnote No. 1254, See Attachment ........................................................................ 5104

Footnote Nos. 1255–1256, See Footnote No. 1254 (above) .................................... 5104

Additional Document Cited in Text of the Report ................................................ 5108

Footnote No. 1257, See Attachment ........................................................................ 5109

Footnote No. 1258, See Attachment ........................................................................ 5110

Footnote No. 1259, See Attachment ........................................................................ 5111

Footnote No. 1260, See Attachment ........................................................................ 5112

Footnote No. 1261, See Attachment ........................................................................ 5113

Footnote Nos. 1262–1263, See Footnote No. 1261 (above) .................................... 5113

Footnote No. 1264, See Attachments (2) ................................................................. 5114

Footnote No. 1265, See Attachment ........................................................................ 5116

Footnote No. 1267, See Attachment ........................................................................ 5117

Footnote No. 1268, See Attachment ........................................................................ 5118

Footnote Nos. 1269–1270, See Footnote No. 1268 (above) .................................... 5118

Footnote No. 1271, See Attachment ........................................................................ 5120

Page

XXVII

Footnote No. 1272, See Attachment ........................................................................ 5121

Footnote No. 1273, See Attachment ........................................................................ 5122

Footnote No. 1274, See Attachment ........................................................................ 5123

Footnote No. 1275, See Attachment ........................................................................ 5124

Footnote No. 1276, See Footnote No. 1275 (above) ................................................ 5124

Additional Document Cited in Text of the Report ................................................ 5127

Footnote No. 1277, See Attachment ........................................................................ 5128

Footnote No. 1278, See Footnote No. 1277 (above) ................................................ 5128

Footnote No. 1279, See Attachment ........................................................................ 5131

Footnote No. 1280, See Attachment ........................................................................ 5132

Footnote No. 1281, See Attachment ........................................................................ 5133

Footnote No. 1282, See Attachment ........................................................................ 5134

Footnote No. 1283, See Attachment ........................................................................ 5135

Footnote No. 1284, See Attachment ........................................................................ 5139

Footnote No. 1285, See Attachment ........................................................................ 5141

Footnote No. 1286, See Footnote No. 1285 (above) ................................................ 5141

Additional Document Cited in Text of the Report ................................................ 5143

Footnote No. 1287, See Attachment ........................................................................ 5146

Footnote No. 1289, See Attachments (5) ................................................................. 5151

Footnote No. 1290, See Attachments (5) ................................................................. 5161

Footnote No. 1291, See Attachments (9) ................................................................. 5167

Additional Document Cited in Text of the Report (SEALED EXHIBIT) ............ *

Footnote No. 1294, See Attachment and Footnote No. 872 (above) .............. 5183, 4035

Footnote No. 1295, See Attachments (2) and Footnote No. 872 (above)....... 5186, 4035

Footnote No. 1296, See Footnote No. 872 (above) .................................................. 4035

Footnote No. 1297, See Attachments (4) and Footnote No. 872 (above)....... 5188, 4035

Footnote No. 1298, See Attachments (3) and 

Footnote No. 1038 (above) ............................................................................ 5193, 4361

Footnote Nos. 1299–1300, See Footnote No. 872 (above) ...................................... 4035

Footnote No. 1301, See Attachments (5) and Footnote No. 872 (above)....... 5200, 4035

Footnote No. 1302, See Attachments (5) ................................................................. 5211

Footnote No. 1303, See Footnote No. 872 (above) .................................................. 4035

Footnote No. 1304, See Attachments (5) and 

Footnote Nos. 872 and 1055 (above).................................................. 5223, 4035, 4426

Footnote No. 1305, See Attachments (4) and Footnote No. 872 (above)....... 5228, 4035

Footnote No. 1306, See Attachment ........................................................................ 5240

Footnote No. 1307, See Attachments (2) and Footnote No. 872 (above)....... 5247, 4035

Footnote No. 1308, See Footnote No. 872 (above) .................................................. 4035

Footnote No. 1309, See Attachments (2) ................................................................. 5249

Footnote No. 1310, See Attachments (2) ................................................................. 5253

Footnote No. 1311, See Attachments (29) .............................................................. 5255

Footnote No. 1312, See Attachments (5) ................................................................. 5373

Footnote No. 1314, See Footnote No. 543 (SEALED EXHIBIT) * 

and Footnote No. 872 (above) .............................................................................. 4035

Footnote No. 1315, See Attachments (2) and Footnote No. 872 (above)....... 5390, 4035

Footnote No. 1316, See Attachments (15) and 

Footnote No. 872 (above) .............................................................................. 5395, 4035

Footnote No. 1317, See Footnote No. 543 (SEALED EXHIBIT) * 

and Footnote No. 872 (above) .............................................................................. 4035

Footnote No. 1318, See Footnote No. 872 (above) .................................................. 4035

Footnote No. 1319, See Attachments (4) and Footnote No. 872 (above)....... 5419, 4035

Footnote No. 1320, See Attachments (5) and Footnote No. 872 (above)....... 5424, 4035

Footnote No. 1321, See Attachments (2) ................................................................. 5435

Footnote No. 1322, See Attachments (2) and 

Footnote Nos. 872 and 1230 (above).................................................. 5441, 4035, 5073

Page

XXVIII

Footnote No. 1323, See Footnote Nos. 872 and 1230 (above)........................ 4035, 5073

Footnote No. 1324, See Attachments (2) ................................................................. 5446

Footnote No. 1325, See Attachments (11) 

and Footnote No. 872 (above)....................................................................... 5448, 4035

Footnote No. 1326, See Attachments (4) and Footnote No. 872 (above)....... 5464, 4035

Footnote No. 1327, See Attachments (5) and 

Footnote Nos. 872 and 1326 (above).................................................. 5471, 4035, 5464

Footnote No. 1328, See Footnote No. 872 (above) .................................................. 4035

Footnote No. 1329, See Attachments (6) and Footnote No. 872 (above)....... 5479, 4035

Footnote No. 1331, See Attachment ........................................................................ 5493

Footnote No. 1332, See Attachments (2) 

and Footnote No. 1331 (above)..................................................................... 5494, 5493

Footnote No. 1333, See Attachments (3) and 

Footnote No. 1331 (above) ............................................................................ 5496, 5493

Footnote No. 1334, See Attachment ........................................................................ 5499

Footnote No. 1335, See Footnote No. 1333 (above) ................................................ 5493

Footnote No. 1336, See Attachment ........................................................................ 5501

Footnote No. 1337, See Attachments (6) ................................................................. 5503

Footnote No. 1338, See Attachments (5) ................................................................. 5509

Footnote No. 1339, See Attachments (5) ................................................................. 5514

Footnote No. 1340, See Attachments (2) ................................................................. 5520

Footnote No. 1341, See Attachments (4) and 

Footnote No. 1340 (above) ............................................................................ 5550, 5520

Footnote No. 1342, See Footnote No. 1340 (above) ................................................ 5520

Footnote No. 1343, See Attachments (2) and 

Footnote No. 1332 (above) ............................................................................ 5564, 5494

Footnote No. 1344, See Attachments (4) ................................................................. 5566

Footnote No. 1345, See Attachments (7) and 

Footnote No. 1344 (above) ............................................................................ 5572, 5566

Footnote No. 1346, See Attachments (4) ................................................................. 5579

Footnote No. 1347, See Attachments (3) ................................................................. 5583

Footnote No. 1348, See Attachment and Footnote No. 1346 (above) ............ 5587, 5579

Footnote No. 1349, See Attachments (2) ................................................................. 5588

Footnote No. 1350, See Attachments (4) ................................................................. 5590

Footnote No. 1351, See Attachments (3) ................................................................. 5594

Footnote No. 1352, See Attachments (2) ................................................................. 5597

Footnote No. 1354, See Attachments (2) ................................................................. 5599

Footnote No. 1355, See Attachments (2) ................................................................. 5617

Footnote No. 1356, See Attachments (7) ................................................................. 5621

Footnote No. 1357, See Attachment ........................................................................ 5628

Footnote No. 1359, See Attachment ........................................................................ 5630

Footnote No. 1360, See Attachments (3) ................................................................. 5633

Footnote No. 1361, See Attachment ........................................................................ 5637

Footnote No. 1362, See Attachments (7) ................................................................. 5838

Footnote No. 1364, See Attachments (3) * (1 of 3 not reprinted) 

and Footnote No. 1359 (above)..................................................................... 5650, 5630

Footnote No. 1365, See Attachment and Footnote No. 1364 (above) ............ 5652, 5650

Footnote No. 1366, See Attachments (2) * (1 of 2 not reprinted) 

and Footnote No. 1365 (above)..................................................................... 5654, 5652

Footnote No. 1367, See Attachments (3) * (1 of 3 not reprinted) 

and Footnote No. 1365 (above)..................................................................... 5657, 5652

Footnote No. 1368, See Attachments (5) ................................................................. 5660

Footnote No. 1369, See Footnote No. 1364 (above) ................................................ 5630

Footnote No. 1370, See Attachments (8) ................................................................. 5665

Footnote No. 1372, See Attachments (6) ................................................................. 5673

Footnote No. 1373, See Attachments (7) ................................................................. 5680

Page

XXIX

Footnote No. 1374, See Attachments (6) ................................................................. 5688

Footnote No. 1375, See Attachments (3) ................................................................. 5694

Footnote No. 1376, See Attachments (5) ................................................................. 5697

Footnote No. 1377, See Footnote No. 1362 (above) ................................................ 5638

Footnote No. 1378, See Attachment ........................................................................ 5702

Footnote No. 1379, See Attachment ........................................................................ 5703

Footnote No. 1380, See Footnote No. 1362 (above) ................................................ 5638

Footnote No. 1382, See Attachments (4) ................................................................. 5704

Footnote No. 1383, See Attachment and Footnote No. 1306 (above) ............ 5711, 5240

Footnote No. 1384, See Attachment ........................................................................ 5716

Footnote No. 1385, See Attachment ........................................................................ 5727

Footnote No. 1386, See Attachments (10) .............................................................. 5744

Footnote No. 1387, See Attachments (6) 

and Footnote No. 1382 (above)..................................................................... 5757, 5704

Footnote No. 1388, See Attachments (2) 

and Footnote No. 1306 (above)..................................................................... 5785, 5240

Footnote No. 1389, See Footnote No. 872 (above) .................................................. 4035

Footnote No. 1391, See Attachments (2) ................................................................. 5793

Footnote No. 1392, See Footnote No. 1305 (above) ................................................ 5228

Footnote No. 1393, See Attachments (2) ................................................................. 5795

Footnote No. 1394, See Attachments (2) ................................................................. 5799

Footnote No. 1395, See Attachments (4) * (2 of 4 not reprinted) 

and Footnote No. 1394 (above)..................................................................... 5801, 5799

Footnote No. 1396, See Footnote Nos. 1311 and 1388 (above)...................... 5255, 5785

Footnote No. 1397, See Attachments (2) and 

Footnote No. 1395 (above) ............................................................................ 5804, 5801

Footnote No. 1398, See Attachments (3) ................................................................. 5806

Footnote No. 1399, See Attachments (3) and Footnote No. 872 (above)....... 5810, 4035

Footnote No. 1400, See Footnote No. 465 (above) .................................................. 2819

Footnote No. 1401, See Footnote No. 458 (above) .................................................. 2783

Footnote No. 1402, See Attachment ........................................................................ 5814

Footnote No. 1403, See Footnote Nos. 662 and 663 (above).......................... 3379, 3476

Footnote No. 1404, See Attachment ........................................................................ 5815

Footnote No. 1405, See Attachment ........................................................................ 5818

Footnote No. 1406, See Attachment ........................................................................ 5820

Footnote No. 1407, See Attachment ........................................................................ 5821

Footnote No. 1408, See Attachment ........................................................................ 5822

Footnote No. 1409, See Attachments (2) ................................................................. 5827

Footnote No. 1410, See Attachment and Footnote No. 683 (above) .............. 5829, 3580

Footnote No. 1411, See Footnote No. 687 (above) .................................................. 3600

Footnote No. 1412, See Attachment ........................................................................ 5830

Footnote No. 1413, See Attachment ........................................................................ 5831

Footnote No. 1414, See Attachment ........................................................................ 5832

Footnote No. 1415, See Footnote No. 848 (above) .................................................. 3988

Footnote No. 1416, See Attachments (2) ................................................................. 5833

Footnote No. 1417, See Attachment ........................................................................ 5835

Footnote No. 1418, See Attachment ........................................................................ 5837

Footnote No. 1419, See Attachment ........................................................................ 5839

Footnote No. 1421, See Attachment ........................................................................ 5840

Footnote No. 1422, See Footnote No. 848 (above) .................................................. 3988

Footnote No. 1423, See Attachment ........................................................................ 5841

Footnote No. 1424, See Footnote No. 716 (above) .................................................. 3690

Footnote No. 1425, See Attachment ........................................................................ 5842

Footnote No. 1427, See Attachment ........................................................................ 5844

Footnote No. 1428, See Attachments (2) ................................................................. 5845

Page

XXX

Footnote No. 1431, See Footnote No. 872 (above) .................................................. 4035

Footnote No. 1432, See Footnote No. 189 (above) .................................................. 2049

Footnote No. 1433, See Footnote No. 188 (above) .................................................. 2048

Footnote No. 1436, See Footnote No. 211 (above) .................................................. 2111

Footnote Nos. 1438–1439, See Footnote No. 415 (above) ...................................... 2655

Footnote No. 1441, See Attachment ........................................................................ 5871

Footnote No. 1442, See Footnote No. 415 (above) .................................................... 2655

67. a. Additional documents regarding POINT ................................................... 5872

b. Additional documents regarding offshore trusts ........................................ 6100

[*] Retained in the files of the Subcommittee. 

(1)

TAX HAVEN ABUSES: THE ENABLERS, THE 

TOOLS AND SECRECY—VOL. 1 of 4

TUESDAY, AUGUST 1, 2006

U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:03 a.m., in room 

SD–106, Dirksen Senate Office Building, Hon. Norm Coleman, 

Chairman of the Subcommittee, presiding. 

Present: Senators Coleman, Levin, Collins, Stevens, Carper, Dayton, and Lautenberg. 

Staff Present: Raymond V. Shepherd III, Staff Director and Chief 

Counsel; Mary D. Robertson, Chief Clerk; Leland B. Erickson, Senior Counsel; Mark D. Nelson, Senior Counsel; Elise J. Bean, Staff 

Director/Chief Counsel to the Minority; Robert L. Roach, Counsel 

and Chief Investigator to the Minority; Dan Berkovitz, Counsel to 

the Minority; Laura Stuber, Counsel to the Minority; Zachary 

Schram, Professional Staff Member to the Minority; Julie Davis, 

Counsel to Senator Levin; Eric J. Diamant, Detailee, GAO; John 

McDougal, Detailee, IRS; Ben Schweiger, Law Clerk; Amanda 

Wahlig, Law Clerk; Mark L. Greenblatt, Deputy Chief Counsel; 

Steven A. Groves, Senior Counsel; Jay Jennings, Senior Investigator; James McKay, Homeland Security and Governmental Affairs 

Committee/Senator Collins; Cindy Barnes, Detailee, GAO; Cathryn 

Sitteding, Intern; and Ryan Myers, Intern. 

OPENING STATEMENT OF SENATOR COLEMAN 

Senator COLEMAN. This hearing of the Senate Permanent Subcommittee on Investigations is called to order. I want to thank you 

all for attending today’s hearing. 

I want to first thank the Subcommittee’s Ranking Member, Senator Levin, for initiating this investigation, and I want to commend 

his tenacity in identifying tax shelter abuse by those willing to exploit loopholes in the system and engage in questionable conduct 

for the sole purpose of avoiding legitimate taxes. This has been a 

very extensive investigation, and the Ranking Member has been a 

champion of taxpayers across the board. We have done a number 

of investigations in this area, and we have joined in this, and I 

want to thank him and his staff for his extraordinary efforts. 

Senator LEVIN. Thank you, Mr. Chairman, very much. 

Senator COLEMAN. Today’s hearing continues this effort by examining the extent to which U.S. individuals are abusing offshore 

2

jurisdictions to circumvent compliance with U.S. tax securities and 

anti-money-laundering laws. The offshore problem has become one 

of staggering proportions. Offshore tax havens and financial secrecy jurisdictions hold an estimated $1.5 trillion in U.S. assets, resulting in a projected annual drain on the U.S. Treasury of $50 to 

$70 billion in lost taxes. 

While these jurisdictions claim to offer limited financial disclosures, light regulations, enhanced asset protection, and financial 

privacy, in reality they have become the Wild West of the financial 

world, havens for fraud and evasion. U.S. citizens have found ways 

to utilize these offshore tax and secrecy havens to conceal ownership of assets and obscure the economic reality underlying financial 

transactions, while staying one step ahead of U.S. law enforcement. 

All taxpayers are victimized by this behavior. Not only do these 

actions shift the burden to taxpayers who are in full compliance 

with our laws, but they also create a revenue shortfall depriving 

the Treasury of funds that could be used to finance education for 

our children, additional funding for health care, investment in alternative fuels and renewable energy, and our fight against terrorism—all the things that government does or tries to do are 

shortchanged by these actions. Our tax and securities laws must be 

strengthened to provide greater transparency in this secretive offshore world and bring those who seek to avoid our laws offshore 

into full compliance. 

Equally important, offshore jurisdictions that have tailored their 

laws to become havens for tax evasion and financial fraud must be 

prevented from receiving U.S. tax benefits afforded other countries 

that provide adequate disclosures of financial information. 

The nature of offshore abuse today ranges from the clearly criminal to the questionable. Most U.S. taxpayers do not go offshore 

alone. They are supported by an industry of domestic and offshore 

service professionals and asset protection specialists who encourage 

and assist them in moving their assets offshore. These professionals claim to offer their clients asset protection and financial 

privacy, but in reality they are offering asset protection with a 

wink and a nod. The real objective quite often is to shelter assets 

from U.S. law enforcement, especially the IRS. This objective is accomplished through the establishment of offshore trusts and corporations that in reality are often owned and controlled by the U.S. 

client, but on paper are owned by nominee officers and directors in 

the offshore jurisdictions. 

I am concerned about the conduct of these professionals and 

question whether an entire industry that purports to use creative 

legal solutions to help their clients has in too many cases become 

architects of strategies designed to avoid and abuse U.S. law. We 

need the professional community to be pillars of commerce rather 

than pillars for circumvention. 

Over the course of the year-long investigation, the Subcommittee 

explored many of the various ways U.S. citizens hide assets, avoid 

taxes, and use offshore structures to avoid or circumvent U.S. laws. 

A number of these cases involved fraud and criminal conspiracy 

and resulted in indictments and convictions. 

For example, the Subcommittee examined how promoter Lawrence Turpen provided Robert Holliday various shell corporations 

3

and offshore trusts. Mr. Turpen selected numerous offshore service 

providers to provide nominee directors and trustees for the newly 

created entities. 

According to Mr. Holliday, he was the ‘‘puppet master’’ to a team 

of offshore service providers to shelter and hide assets, allowing 

him to use the assets to pay his expenses onshore. Mr. Holliday 

and Mr. Turpen pled guilty to tax-related conspiracy charges. 

The story of Mr. Greaves is another example of a U.S. citizen 

who moved hundreds of thousands of dollars offshore and retained 

the ability to control and use the assets. Under the guidance of offshore promoter Terry Neal, Mr. Greaves became a ‘‘business consultant’’ for an offshore structure he set up, and he was able to 

communicate instructions to his companies offshore. He created 

fake mortgages and insurance policies, and then took deductions 

for payments never made. In 2004, both men pled guilty to related 

Federal tax evasion. 

While these cases present clear cases of criminal tax evasion and 

fraud, others are more complex and not as clear. 

The complex cases that the Subcommittee reviewed are eye-opening in revealing the extent to which an entire industry of onshore 

and offshore professionals, including attorneys, accountants, bankers, brokers, and corporate and trust service providers, are helping 

U.S. individuals undermine our tax, securities, and anti-moneylaundering laws. While complicated, these strategies still raise the 

same issues. All work on the same theme, obscuring the economic 

reality behind the transactions and hiding U.S. ownership of offshore assets. Should U.S. citizens be allowed to use offshore secrecy 

laws to produce too good to be true tax results by hiding their activities from U.S. law enforcement? I also question at what point 

reliance on counsel simply becomes a convenient excuse, a way to 

cover one’s tracks. The issue is simply one of where the line should 

be drawn. 

For more than a year, the Subcommittee examined the activities 

of Sam and Charles Wyly, high-net-worth individuals from Texas, 

who sheltered at least $190 million in stock option compensation 

in a complex network of 58 offshore trusts and shell corporations 

established to benefit their families. To shield these assets from the 

IRS SEC, and potential creditors, the Wylys disavowed ownership 

and control. The evidence reviewed by the Subcommittee tells a different story. The evidence shows that the Wylys and their representatives initiated and planned virtually every transaction that 

the offshore entities entered, and used quirks in offshore trust law 

and financial secrecy to direct the investment and use of the offshore assets for their own benefit and enjoyment. Indeed, during 

the 13-year period from 1992 to 2004 reviewed by the Subcommittee, the offshore entities transferred approximately $600 

million in untaxed, offshore assets to support the Wylys in their 

business and personal interests. In many cases, offshore funds that 

the Wylys claimed not to control were used to purchase real estate 

and personal property, including art and jewelry used by the Wylys 

and their families, and even to loan offshore funds to the Wylys 

personally, on favorable, unsecured terms. 

For example, more than $140 million in loans were authorized by 

offshore trusts set up by the Wylys to advance Sam and Charles 

4

Wyly’s personal and business interests; $85 million was authorized 

by an offshore trust set up by the Wylys to purchase real estate 

in the United States that the Wylys were able to use, live in, and 

enjoy; and nearly $30 million was authorized by an offshore trust 

to purchase artwork, furnishings, and jewelry that members of the 

Wyly family were able to use and enjoy as their own. 

The Wyly facts are illustrative of the scope, breadth, and complexity of the efforts undertaken by U.S. individuals to utilize offshore jurisdictions to circumvent U.S. regulation and to hide their 

assets, but they are also indicative of the extent to which U.S. taxpayers are assisted in their efforts by attorneys and other professional advisors. 

At some point, however, the line is crossed, and reliance on counsel just becomes a convenient excuse. With respect to the Wylys, 

it strains credulity to believe that the Wylys did not have reason 

to know that their ability to direct and use these offshore assets 

contradicted their representation that they did not own or control 

these assets for U.S. tax and securities purposes. 

Another strategy investigated by the Subcommittee was designed 

and marketed by the Quellos Group, a Seattle-based investment 

firm, to a handful of its extremely high-net-worth U.S. clients. 

Known as POINT, this complex strategy was designed to delay and 

eliminate taxes on capital gains and relied in part on offshore secrecy in the Isle of Man to obscure the true nature of the transaction from U.S. law enforcement. Quellos sold this strategy to five 

high-net-worth taxpayers, who together sheltered $2 billion in investment gains, depriving the Treasury of an estimated $300 million in tax revenue. 

Quellos was assisted in its activities by prominent U.S. law 

firms, who provided advice on structuring the transactions and 

opinion letters validating them, U.S. financial institutions, who 

provided financing and technical assistance, and offshore investment advisors, who through the use of two Isle of Man shell corporations claim to have created a paper portfolio of over $9.6 billion 

in securities, including more than $1 billion in paper losses available for purchase by U.S. taxpayers who needed to offset their capital gains. 

Whether clearly criminal or complex and less clear, all of the 

cases examined by the Subcommittee demonstrate the need for 

greater transparency in this secretive offshore world. The bipartisan report issued in connection with today’s hearing makes several recommendations to provide light behind the dark shroud of 

offshore secrecy. Our recommendations would accomplish this by: 

Tightening SEC and IRS disclosure requirements on offshore trusts 

and shell corporations in tax and secrecy havens; creating a presumption in U.S. tax, securities, and anti-money-laundering laws 

that these entities are controlled by any U.S. individuals who have 

contributed or direct the offshore assets; extending anti-moneylaundering laws and the requirements to report suspicious transactions to law enforcement to foreign-based hedge funds that are 

affiliated with U.S. hedge funds and invest in the United States; 

and perhaps most important, by sanctioning tax and secrecy havens that do not cooperate with U.S. tax enforcement. 

5

I know this is a long opening statement, but it is a pretty thick 

report. I look forward to the testimony we will hear at today’s hearing. It is imperative that Congress continue to ensure the efficiency 

and operation of the government and to ensure that honest taxpayers are not asked to carry an unfair and disproportionate burden. 

After today’s hearing and assessing the testimony, I intend to 

work with Senator Levin to see what follow-up action we need to 

take in order to address the problems exposed by this investigation. 

stated simply, the abuse of offshore tax havens by U.S. individuals 

is shifting the tax burden to all of us. I intend to fix this problem. 

Last, I want to thank both the Majority and Minority Subcommittee staffs for all their hard work and collaboration over the 

course of this investigation. 

Senator Levin. 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Mr. Chairman, thank you for the hearing that 

you have scheduled for this morning. Thank you for the great support that you and your staff have given to this investigation, which 

includes the issuance of more than 70 subpoenas, scheduling of 

more than 80 interviews, a bipartisan 370-page report, and the review of more than 2 million pages of documents. 

I believe the findings in this report are explosive. The report 

blows the lid off tax haven abuses that make use of sham trusts, 

shell corporations, and fake economic transactions to help some 

people who have huge assets and income dodge the taxes that they 

owe to the U.S. Treasury. 

Experts estimate that tax haven abuses by individuals cost the U.S. Treasury somewhere between $40 and $70 billion every year 

in taxes that are owed but not collected. There is a large number 

that applies to the corporations which use tax havens. 

Ultimately, as you have said, Mr. Chairman, that tax gap must 

be made up by average, honest taxpayers whose faith in the fairness of our tax system is eroding when they realize that so many 

people are dodging their obligations through the use of these kind 

of tax haven gimmicks. 

Our report lays out six case studies illustrating the scope and seriousness of the problem. I will be focusing in my questioning, at 

least, on two of these particular issues. 

The key features of the offshore tax havens are low or no taxes, 

and a legal system that favors secrecy over transparency. Tax havens sell secrecy to attract business, and they are very successful. 

About 50 tax havens operate in the world today. These tax havens, 

in effect, have declared economic war on U.S. taxpayers by giving 

tax dodgers the means to avoid their tax bills and leave them for 

others to pay. 

These schemes are shrouded in the secrecy of tax havens because 

they cannot stand the light of day. Trusts and shell corporations 

established in offshore secrecy jurisdictions operate in a legal black 

box that allows them to hide assets, mask who controls them, and 

obscure how their assets are used. 

An armada of offshore service providers, lawyers, bankers, brokers, and others then join forces to exploit the black-box secrecy 

6

1See Exhibit 1 which appears in the Appendix on page 622. 

and help clients skirt U.S. tax, securities, and anti-money-laundering laws. Many of the firms concocting or facilitating these 

schemes are respected names here in the United States. 

Our focus today, again, will be on two different schemes. The 

first scheme was used to avoid paying taxes on stock option compensation and investment income flowing from it. The second hid 

income that was earned from capital gains. At its core, each 

scheme relied on a key deception made possible by tax haven secrecy. 

The first case study looks at the tax haven schemes of Sam and 

Charles Wyly. For 13 years, the Wylys used the black box and its 

facilitators to direct and enjoy the benefits of hundreds of millions 

of dollars in stock option income that they sent offshore to supposedly independent entities. 

Between 1992 and 2005, Sam and Charles Wyly transferred over 17 million stock options and warrants worth about $190 million to 

a complex array of 19 offshore trusts and 39 shell corporations. The 

19 offshore trusts were either established by the Wylys or named 

them and their families as beneficiaries. These trusts owned the 39 

shell corporations in the Isle of Man or the Cayman Islands. In return for most of the stock options, the offshore corporations gave 

the Wylys private annuities designed to make payments starting 

many years later. The Wylys took the position, on the advice of 

legal counsel, that because they exchanged their stock options for 

annuities of equivalent value, they did not have to pay any taxes 

on the compensation until the annuities were paid out. 

In the meantime, the offshore entities began cashing in the stock 

options. The proceeds were invested in securities, Wyly hedge 

funds, Wyly businesses, and real estate, as directed by the Wylys. 

The Subcommittee traced about $500 million in offshore dollars invested in Wyly business investments, about $85 million used to acquire or improve real estate used by Wyly family members, and 

about $30 million spent on art, furnishings, and jewelry for the 

personal use of the Wyly family members. In addition, about $140 

million of the offshore dollars went back to the Wylys in the form 

of loans funneled through a Cayman shell corporation called Security Capital. 

This chart sums up the Wyly offshore empire.1 On the left, it 

starts with untaxed stock option compensation, most of which—

$124 million—remains untaxed today. It grew with untaxed investment gains. And it provided a source of untaxed, offshore cash for 

loans or other uses that the Wylys wanted. 

The key deception in this scheme is the Wyly claim that the 58 

offshore trusts and corporations were independent. Under U.S. tax 

law, the tax on the income of a truly independent trust is paid by 

the trustees. But if a U.S. person is the effective owner and controls the trust, then that trust’s income is generally taxable to that 

person. 

The claim that the offshore trusts were independent of the Wylys 

is contradicted by overwhelming evidence. This is not a case where 

the Wylys handed over their stock options to independent trustees 

who operated the trusts and then awaited their annuity payments 

7

1See Exhibit 6 which appears in the Appendix on page 722. 

later on. Instead, for 13 years, the Wylys and their representatives 

continually told the trusts what to do—when to exercise the stock 

options, when to sell the shares, and what to do with the money. 

The Wylys conveyed their directions through so-called trust protectors, individuals selected by the Wylys, who worked for the Wylys, 

and who were empowered to fire any offshore trustee. The protectors transmitted the Wyly directions to the offshore trustees who 

consistently carried them out. 

The offshore entities exercised options and traded shares from 

three companies—Michaels Stores, Sterling Software, and Sterling 

Commerce—where the Wylys were founders and directors. The 

Wylys, on the advice of counsel, generally did not include the stock 

holdings of the offshore entities in their SEC filings, claiming again 

that the offshore entities were independent. When the offshore entities opened securities accounts at Bank of America and were 

asked to name their beneficial owners as required by new antimoney-laundering laws, they refused to do so, claiming again they 

were independent. Bank of America allowed the accounts to operate without getting the information required by law. 

By promoting the fiction that the trusts were independent, the 

Wylys participated in a 13-year scam and scheme to circumvent 

U.S. tax, securities, and anti-money-laundering requirements. 

Now, the next case study is called the POINT case, and by contrast, this focuses on one-time abusive tax shelter transactions. 

This scheme used the tax haven black box to facilitate the creation of a fake stock portfolio with phantom securities used to generate billions of dollars of fake losses. Once again, the armada was 

hard at work, generating hefty fees for themselves by designing 

complex partnership structures, executing transactions, and circulating impenetrable legal opinions to justify the deferral or elimination of taxes owed on $2 billion in real capital gains. 

A Seattle-based securities firm called Quellos designed, promoted, and implemented the tax shelter known as POINT—Personally Optimized Investment Transaction—which it sold to six 

wealthy clients. 

The POINT strategy was designed to be impossible to pierce. 

Just take a quick glance at that chart.1 It is a bowl of spaghetti. 

It may look comical, but the sobering fact is that those six transactions cost the Treasury about $300 million in lost revenue, which, 

if these transactions are not reversed, will have to be made up by 

honest taxpayers. 

POINT worked like this. Quellos put together a list of high-tech stocks, together worth about $9.5 billion, many of which had stock 

prices that they expected would drop. 

The list went to a shell corporation in the Isle of Man called 

Jackstones. Although Jackstones did not actually own any of the 

stocks, it conducted a fake stock sale to another shell corporation 

in the Isle of Man called Barnville. On paper, Barnville paid $9.5 

billion which, of course, it did not have. Barnville then immediately 

lent the stock back to Jackstones in exchange for the same enormous sum, and the money which did not exist then became the security for the loan of the non-existent stock. Because the two comVerDate 0ct 09 2002 07:08 Mar 29, 2007 Jkt 029760 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 C:\DOCS\29760.TXT SAFFAIRS PsN: PAT
8

panies did these deals simultaneously, the amounts of stock and 

cash they owed each other cancelled out. And in a sleight of hand 

worthy of Houdini, Barnville claimed to be left with a huge paper 

portfolio. Barnville then picked from its paper portfolio a selection 

of stocks with the amount of capital losses needed by a client to 

offset their capital gains and transferred those losses to a trading 

company owned by the client. 

So, to review, a phony Isle of Man corporation sold stock it did 

not own to another phony Isle of Man corporation for money it did 

not have. The fake stock was lent back with fake cash as security 

for repayment of the loan, and the fake loss on the stock price was 

transferred out to offset real gains. No real economic activity took 

place, but one critical thing happened: A $9 billion paper portfolio 

was created. This paper portfolio originated with Jackstones and 

Barnville, shell corporations with no employees, no offices, and—

listen to this, folks—paid-in capital in each of those two shell corporations of about $5. They transferred $9.5 billion in paper stock, 

paying for it with $9.5 billion in cash. Two corporations that each 

had paid in two pounds, about $5 in capital. 

The final step in the POINT scheme was for Barnville to sell the 

paper losses to wealthy individuals, including Haim Saban and 

Robert Wood Johnson IV, who are with us this morning. These clients used the paper losses to offset real capital gains. Mr. Saban 

used POINT to offset about $1.5 billion in capital gains. Mr. Johnson offset about $143 million. Together, the fees that they paid to 

Quellos, the lawyers, the bankers, and others totaled about $75 

million. One more proof that this sordid tale was used to concoct 

tax losses is the fact that the greater the loss generated for a client, the greater the fees charged by Quellos. 

The POINT tax shelter included transactions to create the appearance of a complex investment with real economic substance. In 

reality, the transactions were expertly designed to remove all risk, 

using circular transactions that cancelled out or were unwound. A 

5-year warrant, for example, which was included in the transactions to produce the illusion of a profit potential, was always terminated before any profits were realized. In a transaction involving 

Mr. Saban, an $800 million loan and stock purchase were added to 

provide a patina of economic substance, but the way the transaction was structured, it could not realize a profit in comparison to 

or anywhere near the transaction’s fees and other costs. 

Mr. Saban told the Subcommittee staff that POINT was not sold 

to him as an investment strategy. He was very straightforward 

with us. He said it was sold to him as a way to avoid taxes that 

he otherwise would have had to pay on a big capital gain. In his 

words, he was promised ‘‘tax deferral ad infinitum’’ on a $1.5 billion capital gain, and that is the fees that he paid for that tax deferral, ad infinitum. 

The key deception in POINT was the fake offshore portfolio that 

generated fake stock losses sold to partnerships with a false business purpose. The end result was $2 billion in real and taxable capital gains that were supposedly erased. 

This has gone on a long time, I know, Mr. Chairman, and I want 

to just apologize to you and other Members of the Subcommittee 

for its length. I will, of course, put the rest of it into the record in 

9

terms of the role of professionals that I believe had blinders on so 

that they would not see these transactions for what they were. And 

also, in addition to what you have said about remedies and the actions that we should take, I would agree with you that we must 

make some major reforms here. We will go into those later on, perhaps at the end of the hearing. 

One of the reforms, in addition to the one that you mentioned, 

which I believe is already the basis of a bill which you and I have 

introduced, would create a presumption regarding who controls an 

offshore entity and what purpose it is serving if that entity is located in a jurisdiction deemed to be a tax haven by the U.S. Secretary of the Treasury. Today, the burden is on the government to 

prove that an individual controls and directs a tax haven trust, or 

shell corporation. It is time to reverse that presumption when a 

U.S. taxpayer opens up or controls an offshore entity in a tax 

haven. 

Again, I want to thank you and join you, Mr. Chairman, in 

thanking our staffs, who have done really the most extraordinary 

job that I think have ever seen a staff do in addressing the challenge of over 2 million pieces of paper, documents that have come 

into this Subcommittee and that needed to be reviewed in order 

that we could get to the point where we are at. 

Thank you. 

Senator COLEMAN. Thank you, Senator Levin, and your full 

statement will be entered into the record. 

[The prepared statement of Senator Levin follows:]

PREPARED STATEMENT OF SENATOR LEVIN 

This morning, this Subcommittee is releasing the results of a year-long, bipartisan 

investigation into tax haven abuses. I want to thank our Chairman Norm Coleman 

and his staff for the support they have given to this investigation, which included 

the issuance of more than 70 subpoenas, the scheduling of more than 80 interviews, 

and the review of more than 2 million pages of documents. I believe the findings 

are explosive: The report blows the lid off tax haven abuses that make use of sham 

trusts, shell corporations, and fake economic transactions to help some people dodge 

taxes owed to the U.S. Treasury. 

Experts estimate that tax haven abuses by individuals cost the U.S. Treasury between $40 billion and $70 billion every year in taxes that are owed but not collected. 

Ultimately, that tax gap must be made up by average, honest taxpayers whose faith 

in the fairness of our tax system is eroding. 

Our report lays out six case studies illustrating the scope and seriousness of the 

problem. Today’s hearing focuses on two of them. 

INSIDE THE BLACK BOX

The key features of offshore tax havens are low or no taxes and a legal system 

that favors secrecy over transparency. Tax havens sell secrecy to attack business. 

And they are very successful. About 50 tax havens operate in the world today. Those 

tax havens have, in effect, declared war on honest U.S. taxpayers, by giving tax 

dodgers the means to avoid their tax bills and leave them for others to pay. 

These schemes are shrouded in the secrecy of tax havens because they can’t stand 

the light of day. Trusts and shell corporations established in offshore secrecy jurisdictions operate in a legal black box that allows them to hide assets, mask who controls them, and obscure how their assets are used. 

An armada of ‘‘offshore service providers,’’ lawyers, bankers, brokers, and others 

then joins forces to exploit the black box secrecy and help clients skirt U.S. tax, securities, and anti-money laundering laws. Many of the firms concocting or facilitating these schemes are respected names here in the United States. 

Our focus today is on two different schemes. The first scheme was used to avoid 

paying taxes on stock option compensation and investment income flowing from it. 

10

The second bid income from capital gains. At its core, each scheme relied on a key 

deception made possible by tax haven secrecy. 

WYLY CASE STUDY

The first case study looks at the tax haven schemes of Sam and Charles Wyly. 

For thirteen years, the Wylys used the black box and its facilitators to direct and 

enjoy the benefits of hundreds of millions of dollars in stock option income that they 

sent offshore to supposedly independent entities. 

Between 1992 and 2005, Sam and Charles Wyly transferred over 17 million stock options and warrants worth about $190 million to a complex array of 19 offshore 

trusts and 39 shell corporations. The 19 offshore trusts were either established by 

the Wylys or named them as beneficiaries. These trusts owned the 39 shell corporations in the Isle of Man or the Cayman Islands. In return for most of the stock options, the offshore corporations gave the Wylys private annuities designed to make 

payments starting many years later. The Wylys took the position, on the advice of 

legal counsel, that because they exchanged their stock options for annuities of equivalent value, they didn’t have to pay any taxes on the compensation until the annuities paid out. 

In the meantime, the offshore entities began cashing in the stock options. The 

proceeds were invested in securities. Wyly hedge funds, Wyly businesses, and real 

estate. The Subcommittee traced about $500 million in offshore dollars invested in 

Wyly business investments, about $85 million used to acquire or improve real estate 

used by Wyly family members, and about $30 million spent on art, furnishings, and 

jewelry for the personal use of Wyly family members. In addition, about $140 million of the offshore dollars went back to the Wylys in the form of loans funneled 

through a Cayman shell corporation called Security Capital. 

This chart sums up the Wyly offshore empire. It started with untaxed stock option compensation, most of which—$124 million—remains untaxed today. It grew with 

untaxed investment gains. And it provided a ready source of untaxed, offshore cash 

for loans or other uses the Wylys wanted. 

The key deception in this scheme is the Wyly claim that the 58 offshore trusts 

and corporations were independent. Under U.S. law, the tax on the income of a 

truly independent trust is paid by the trustees. But if a U.S. person controls the 

trust’s assets and investments, then the trust’s income is generally taxable to that 

person. 

The claim that the offshore trusts were independent of the Wylys is contradicted 

by overwhelming evidence. This is not a case where the Wylys handed over their 

stock options and awaited the annuity payments, while independent trustees operated the trusts. Instead, for thirteen years, the Wylys and their representatives continually told the trusts what to do—when to exercise the stock options, when to sell 

the shares, and what to do with the money. The Wylys conveyed their directions 

through so-called ‘‘trust protectors,’’ individuals selected by the Wylys, who worked 

for the Wylys, and who were empowered to fire any offshore trustee. The protectors 

transmitted the Wyly directions to the offshore trustees who consistently carried 

them out. 

The offshore entities exercised options and traded shares from three companies, 

Michaels Stores Inc., Sterling Software Inc. and Sterling Commerce Inc., where the 

Wylys were founders and directors. The Wylys, on the advice of counsel, generally 

did not include the stock holdings of the offshore entities in their SEC filings, claiming, again, that the offshore entities were independent. When the offshore entities 

opened securities accounts at Bank of America and were asked to name their beneficial owners as required by new U.S. anti-money laundering laws, they refused to 

do so, claiming again they were independent. Bank of America allowed the accounts 

to operate without getting the information required by law. 

By promoting the fiction that the trusts were independent, the Wylys participated 

in a 13-year sham to circumvent U.S. tax, securities, and anti-money laundering requirements. 

POINT CASE STUDY

The Wyly case study traces the building of an offshore empire over 13 years. The 

next case study, by contrast, focuses on one-time, abusive tax shelter transactions. 

This scheme used the tax haven black box to facilitate the creation of a fake stock 

portfolio with phantom securities used to generate billions of dollars of fake losses. 

Once again, the armada was hard at work, generating hefty fees for themselves by 

designing complex partnership structures, circular transactions, and impenetrable 

legal opinions to justify the deferral or elimination of taxes owed on $2 billion in 

real capital gains. 

11

A Seattle-based securities firm called Quellos designed, promoted, and implemented the tax shelter known as POINT—Personally Optimized Investment Transaction—which it sold to five wealthy clients in six separate transactions. 

The POINT strategy was designed to be impossible to pierce. Take a look at this 

chart. It’s a bowl of spaghetti and may look comical, but the sobering fact is that 

these six transactions cost the Treasury about $300 million in lost revenue—revenue 

which, if these transactions aren’t reversed, will have to be made up by honest taxpayers. 

POINT worked like this. Quellos put together a list of high tech stocks, together 

worth about $9.5 billion, many of which had stock prices that were expected to drop. 

The list went to a shell corporation in the Isle of Man called Jackstones. Although 

Jackstones did not actually own any of the stocks, it conducted a fake stock sale 

to another shell corporation called Barnville. On paper, Barnville paid $9.5 billion 

which, of course, it didn’t have. Barnville then immediately lent the stock back to 

Jackstones in exchange for the same enormous sum, and the money which didn’t 

exist then became security for the loan of the non-existent stock. Because the two 

companies did these deals simultaneously, the amounts of stock and cash they owed 

each other cancelled out. In a sleight of hand worthy of Houdini, Barnville was left 

with a huge paper portfolio. Barnville then picked from its paper portfolio a selection of stocks with the amount of capital losses needed by a client to offset their 

capital gains, and transferred those losses to a trading partnership owned by the 

client. 

So, to review, a phony Isle of Man corporation sold stock it didn’t own to another 

phony Isle of Man corporation for money it didn’t have. The fake stock was lent back 

with fake cash as security for repayment of the loan, and the fake loss on the stock 

price was transferred out to offset real gains. No real economic activity took place, 

but one critical thing happened—a $9 billion paper portfolio was created. This paper 

portfolio originated with Jackstones and Barnville, shell operations with no employees, no offices, and paid-in capital of ÷2—that’s about $5 each. 

The final step in the POINT scheme was for Barnville to sell the paper losses to 

wealthy individuals, including Haim Saban and Robert Wood Johnson IV. These clients used the paper losses to offset real capital gains. Mr. Saban used POINT to 

offset about $1.5 billion in capital gains; Mr. Johnson offset about $143 million. Together, the fees they paid to Quellos, the lawyers, the bankers, and others totaled 

about $75 million. One more proof that this sordid tale was used to concoct tax 

losses is the fact that the greater the paper loss generated for a client, the greater 

the fees charged by Quellos. 

The POINT tax shelter included transactions to create the appearance of a complex investment with real economic substance. In reality, the transactions were 

expertly designed to remove all risk, using circular transactions that cancelled out 

or were unwound. A 5-year warrant, for example, which was included in the transactions to produce the illusion of a profit potential, was always terminated before 

any profits were realized. In a transaction involving Mr. Saban, an $800 million 

loan and stock purchase were added to provide a patina of economic substance, but 

the way the transaction was structured, it could not realize a profit in comparison 

to the transaction’s fees and other costs.μ For example, the cost of a collar that 

capped possible profits at 8% of the total investment reduced a $130 million profit 

to $13 million, which was then dwarfed by fees totaling $53 million. 

Mr. Saban told the Subcommittee staff that POINT was not sold to him as an 

investment strategy; it was sold to him as a way to avoid taxes that he otherwise 

would have had to pay on a big capital gain. In his words, he was promised ‘‘tax 

deferral ad infinitum’’ on a $1.5 billion capital gain, and that’s what he paid for. 

The key deception in POINT was the fake offshore portfolio that generated fake 

stock losses sold to partnerships with a false business purpose. The end result was 

$2 billion in real and taxable capital gains that were supposedly erased. 

PROFESSIONAL BLINDERS

One of the most disturbing aspects of the POINT scheme was the degree to which 

reputable professionals aided and abetted this abusive tax shelter. Each of the 

facilitators—the lawyers, bankers, and brokers— played critical roles, pulled in 

hefty fees, but then acted surprised at what the Subcommittee found when it lifted 

the lid off the black box. Most claimed they had been unaware that no securities 

had actually been bought or sold, and no real losses generated. No one knew who 

was behind the tax haven corporations with the $9 billion portfolio, Jackstones and 

Barnville. The professionals hid behind shaky legal opinions to justify their roles 

and donned blinders to block out indicators of the sordid business they were inVerDate 0ct 09 2002 07:08 Mar 29, 2007 Jkt 029760 PO 00000 Frm 00043 Fmt 6633 Sfmt 6621 C:\DOCS\29760.TXT SAFFAIRS PsN: PAT
12

volved in. Each participant essentially told the Subcommittee: ‘‘I was only responsible for my little piece of this. I didn’t know the other parts. It’s not my fault.’’

• Quellos, the architect of the sham, says it doesn’t know who owns Barnville 

and Jackstones. 

• EURAM, the UK company that served as the agent in all the deals between 

Barnville and Jackstones and was paid millions in fees, says it doesn’t know 

who is behind the shell corporations. 

• HSBC, the global bank that loaned hundreds of millions of dollars to fuel 

some of these transactions and knew it was financing deals set up to avoid 

taxes, says it didn’t know who Barnville and Jackstones were, didn’t know 

about key steps in the transactions, and relied on the tax opinions provided 

by legal counsel. 

• The Cravath Swaine partner who put the law firm’s seal of approval on 

POINT and made $125,000 in fees, says he didn’t know about the fake trades 

or the role of Barnville and Jackstones. 

• Bryan Cave, another law firm that put its seal of approval on POINT and 

made over $1 million in fees, disavows knowledge of how the paper portfolio 

was formed and of the corporations that formed it.

Could it be true that the banks and brokers and lawyers who participated in 

POINT didn’t know what they were involved with? Or is it that they didn’t want 

to know? 

CONCLUSION

The Wyly chart and the POINT chart say it all. They show how broken the system is, and how serious the tax haven abuses have become. 

These tax haven abuses are eating away at the fabric of the U.S. tax system, and 

undermining U.S. laws intended to safeguard our capital markets and financial systems from financial crime. It is long, long past time for our country to shut down 

their use by U.S. citizens. 

One of the reforms recommended in our report would address the key deceptions 

in the two case studies examined here: the fake economic activity offshore and the 

fake independence of the offshore trusts and corporations. 

This reform would create a presumption regarding who controls an offshore entity 

and what purpose it is serving, if that entity is located in a jurisdiction deemed to 

be a tax haven by the U.S. Treasury Secretary. Today, the government has the burden of proving that an individual controls a tax haven trust or shell corporation. 

It is time to reverse that presumption. 

In other words, if you create a trust or corporation in a tax haven jurisdiction, 

send it assets, or benefit from its actions, Congress should reform the tax law to 

presume that you control it, that any income is your income, and treat that income 

and that entity accordingly for tax, securities, and money laundering purposes. An 

individual could still establish that an offshore entity was independent, but the burden of proof would be on that individual, not the government. 

Congress should also enact S. 1565, the Tax Shelter and Tax Haven Reform Act 

that Senator Coleman and I introduced last year which, among other provisions, 

would authorize the Treasury Secretary to issue a list of tax havens that don’t cooperate with U.S. tax enforcement and eliminate U.S. tax benefits for income in 

those jurisdictions. The ability to penalize uncooperative tax havens would hand our 

government a mighty club to combat tax haven abuses. 

This hearing and the report we are releasing today shine a needed spotlight into 

the black box of offshore tax havens. It reveals a system that is corrupt and corrupting. Honest Americans are footing the bill for tax haven abuses, and we need 

to shut those abuses down. 

Thank you, Mr. Chairman, for the important role you and your staff have played 

in this matter. Bipartisanship has been the hallmark of this Subcommittee, and you 

are helping to preserve that critically important tradition. I look forward to the testimony of our witnesses.

OPENING STATEMENT OF CHAIRMAN COLLINS 

Chairman COLLINS. Thank you, Mr. Chairman. I can take a hint, 

and I will put my statement in the record. 

Let me just make one comment, and that is, no one enjoys paying taxes, but we understand our obligation to do so. And those 

who fail to pay their fair share of taxes by engaging in sham transVerDate 0ct 09 2002 07:08 Mar 29, 2007 Jkt 029760 PO 00000 Frm 00044 Fmt 6633 Sfmt 6601 C:\DOCS\29760.TXT SAFFAIRS PsN: PAT
13

actions or other abusive practices undermine the fairness of our tax 

system and the willingness of the average taxpayer to comply voluntarily. And that is why I think this exhaustive investigation that 

you and Senator Levin have conducted is so important. It is just 

plain wrong when more of the burden is put on ethical, law-abiding 

taxpayers because of the loss of tens of billions of dollars due to 

these offshore tax scams and schemes. 

So I congratulate you for this exhaustive investigation. Senator 

Levin, you beat the record of the Katrina investigation on the number of pages reviewed, but not on the number of witnesses interviewed. But I do congratulate you. This is very important work. 

Thank you. 

Senator COLEMAN. Thank you, Senator Collins. Your entire statement will be made part of the record. 

[The prepared statement of Chairman Collins follows:]

PREPARED STATEMENT OF SENATOR COLLINS 

Good Morning. Let me begin by thanking Senator Coleman and Senator Levin for 

investigating the use of offshore tax scams to evade compliance with United States 

tax, securities, and money laundering laws. This hearing will explore a problem that 

is costing the federal government billions of dollars in revenue each year. Shutting 

down these overseas tax scams is a matter of fundamental fairness for our tax system. 

There is nothing illegal or unethical about legitimate tax planning. Millions of 

Americans do it every year when they pay their taxes and plan their finances. However, when individuals try to avoid paying taxes by engaging in sham transactions, 

in financial transactions undertaken to conceal their true purpose, or in business 

deals whose only purpose is to hide the expatriation and repatriation of taxable assets, they may be crossing the line between proper tax planning and abusive tax 

sheltering. 

One of the most disturbing aspects of this problem is the fact that legitimate, respected banks, attorneys, and investment advisers appear to have helped facilitate 

or promote these abusive transactions. The fact is, some of these transactions are 

so complicated that they require a small army of highly trained professionals to plan 

and execute. They are often hidden behind a curtain of secrecy in overseas jurisdictions, concealed from the view of the authorities in this country. This studied obfuscation makes exposing these transactions extraordinarily difficult. 

Unfortunately, problems like this are not new. In 2005 the Government Accountability Office placed the federal government’s enforcement of its tax laws on its 

‘‘High Risk List’’ of major challenges. In fact, this area has been included in every 

High Risk List going back to the first list in 1990. 

This February, the Internal Revenue Service listed the use of offshore transactions to illegally hide income on its ‘‘Dirty Dozen’’ list of notorious tax scams. I 

understand that IRS Commissioner Mark Everson will be testifying here today. I 

look forward to hearing what the agency he leads is doing to meet this challenge. 

The bottom line is that the use of these schemes to evade taxes places more of 

a burden on ethical, law-abiding taxpayers. This is just plain wrong. It is one thing 

to hire someone to help you understand your legal options. It is another to hire 

someone to help you conceal your income through sham transactions to avoid paying 

your lawful share of taxes. 

No one likes paying taxes, but we understand our obligation to do so. Those who 

fail to pay their fair share of taxes by engaging in sham transactions or other abusive practices undermine the fairness of our tax system and the willingness of the 

average taxpayer to comply voluntarily.Thank you, Mr. Chairman.

Senator COLEMAN. Senator Lautenberg. 

OPENING STATEMENT OF SENATOR LAUTENBERG 

Senator LAUTENBERG. Mr. Chairman, I commend you and Senator Levin for your thorough work in this area, and to note the 

shock that goes across the country when we look at something like 

this. Every major paper has got a front-page story about this, front 

14

page of the Business Section, front page of the Wall Street Journal,

front page of the Washington Post. And you see it all over. 

I would only ask for a little more time because this report was 

hard to lift, no less to read, and we got it last night, and it was 

hard to keep from dozing off as I got to page 4, I must tell you. 

[Laughter.] 

But on a very serious note, the suggestion that people who made 

this kind of money were naive and did not ask the critical question, 

perhaps there will be no finding of violation of law here, but where 

is the morality that should accompany the kind of successes that 

have been realized in this country. 

I come out of the business world, and I knew the Wylys in the 

start of their days. I think they were failing then. But the fact of 

the matter is that they are not here, Mr. Chairman, and I do not 

understand why they are not here to sit at that table and be a witness and why we haven’t got them here in front of us to swear to 

the honesty of their statements. It is outrageous that we do not 

have those two here as witnesses. 

So it is discouraging when the United States is in the financial 

condition that it is, with millions of people without health care and 

our soldiers in Iraq and families having to make up for the loss not 

only of their lives and their family relationships, but the income 

that we are casually—and I say that intentionally—casually ignoring this opportunity to capture a lot, lot more funding for our 

Treasury. In these cases, the numbers are so high that they stagger the imagination. 

But right now what IRS has decided to do is move people out of 

the estate tax enforcement section to a different section so that 

they can audit casual returns. 

If we had been a little bit better at the awareness factor and 

made these discoveries, I think that we could have increased our 

revenue a lot better. And I ask those who made the money and 

those who participated in this scheme, whether it is as a beneficiary or as a professional consultant, how they feel about their 

lives in America. Are their lives made better because they beat the 

rap, so to speak? I do not think so. 

So, Mr. Chairman, once again I thank you, and I thank Senator 

Levin for the thoroughness and for the exposure of this problem. 

And I hope we carry it to its fullest extent. 

Unfortunately, I would please ask, the next time when we are 

going to get a report like this, which is critical, and understanding 

the problem, give us a little more time, please, maybe two nights. 

Thank you very much. 

Senator COLEMAN. I appreciate your concerns. I think it should 

be noted, because it is a matter of public record, that the Wylys are 

subject to an ongoing investigation. We were asked by the Department of Justice not to compel their attendance here because of the 

impact that compelling their testimony may have had on the active, ongoing investigation. So that is why that decision was made. 

Senator LEVIN. Mr. Chairman. I think also that we did receive 

a letter from them indicating that they would assert their constituVerDate 0ct 09 2002 07:08 Mar 29, 2007 Jkt 029760 PO 00000 Frm 00046 Fmt 6633 Sfmt 6601 C:\DOCS\29760.TXT SAFFAIRS PsN: PAT
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1See Exhibit 64 which appears in the Appendix on page 1310. 

2The prepared statement of Mr. Everson with an attachment appears in the Appendix on 

page 99. 

tional rights. If that is true, I would ask that letter be made part 

of the record.1

Senator LAUTENBERG. Constitutional right for? 

Senator LEVIN. Not to testify under the Fifth Amendment. 

Senator COLEMAN. It shall be made part of the record. Thank 

you, Senator Levin. 

OPENING STATEMENT OF SENATOR STEVENS 

Senator STEVENS. I congratulate both of you, and I am here to 

hear some witnesses, I hope. 

Senator COLEMAN. Thank you, Senator Stevens. 

I think that is a hint, Senator Dayton. 

OPENING STATEMENT OF SENATOR DAYTON 

Senator DAYTON. That is a strong hint. I will just join with my 

colleagues in thanking the Chairman and the Ranking Member for 

their excellent work, and their staffs, and I share the feelings and 

the outrage that Senator Lautenberg so well expressed. So I associate myself with his remarks, and I agree, let’s get on to the witnesses. 

Senator COLEMAN. Thank you, Senator Dayton. 

I would now like to welcome our first witness to this morning’s 

important hearing. It is my pleasure to introduce the Hon. Mark 

Everson, the Commissioner of the Internal Revenue Service. 

Commissioner, I appreciate your attendance at today’s hearing 

and look forward to your testimony and perspective on the use of 

offshore secrecy havens to hide assets from U.S. taxation. 

This is the fifth time you have testified before this Subcommittee 

in the 3 years I have been Chairman, so I think you know the drill. 

Before we begin, pursuant to Rule VI, all witnesses who testify before the Subcommittee are required to be sworn. At this time, I 

would ask you to please stand, raise your right hand. Do you swear 

that the testimony you are about to give before this Subcommittee 

is the truth, the whole truth, and nothing but the truth, so help 

you, God? 

Mr. EVERSON. I do. 

Senator COLEMAN. Thank you. Commissioner Everson, we will be 

using the timing system. Again, you are familiar with it. The 

amber light will come on before the red light. If you can at that 

point conclude your testimony, your written testimony will be 

printed in the record in its entirety, and we ask that you limit your 

oral testimony to no more than 5 minutes. 

You may proceed, Commissioner. 

TESTIMONY OF HON. MARK EVERSON,2 COMMISSIONER, 

INTERNAL REVENUE SERVICE, WASHINGTON, DC 

Mr. EVERSON. Chairman Collins, Chairman Coleman, Senator 

Levin, and Members of the Subcommittee, thank you for inviting 

me to discuss offshore abuses. As always, I appreciate the opportunity to testify before the Subcommittee. In particular, I appreciate your strong support for strengthening the integrity of our tax 

16

1 Chart attached to prepared testimony of Commissioner Mark Everson which appears in the 

Appendix on page 110. 

system and for enhanced enforcement. This Subcommittee has 

shown impressive leadership in combating abusive tax shelters and 

those who play fast and loose with the Tax Code. I know that you 

have a full morning, so I shall be brief. 

U.S. tax administration is complicated by the rapid pace at 

which our overall economy is becoming more global. A growing percentage of large and mid-sized business tax filings are from multinational companies that have a myriad of subsidiaries, affiliates 

and partnerships operating within an enterprise structure where 

the ultimate parent may turn out to be foreign or domestic. In addition, a growing number of U.S. businesses acquire raw materials, 

inventory, financing, products, and services, some unthinkable just 

a few years ago, from foreign businesses. 

These events are natural outcomes of an increasingly global economy, and businesses have the right to optimize their global structures. Nonetheless, the complexities of globalization and cross-border activity continue to challenge U.S. tax administration. With 

multiple domestic and global tiered entities, it is often difficult to 

determine the full scope and resulting tax impact of a single transaction or series of transactions. Complexities of globalization and 

cross-border activity create opportunities for aggressive tax planning, and even outright evasion. 

It is not just large corporations taking advantage of this 

globalization. Wealthy individuals often seek ways to shelter income by moving it offshore or participating in tax shelters, some 

organized by unscrupulous promoters who operate under the veneer of legitimacy in the shadows of the global economy. 

This trend toward ever greater globalization makes our job at the 

IRS more challenging each year and is compounded by the complexity of the Tax Code itself and by the relative lack of transparency in the transactions that businesses and individuals often 

conduct offshore. And not only are the transactions themselves 

often intentionally designed or carried out in a manner to be 

opaque, but the taxpayers engaging in the transaction and their 

roles are often difficult to identify. 

This chart depicts the compliance risk associated with offshore 

activity.1 On the left we have businesses, and on the right we have 

individuals, although there is some overlapping in the vehicles that 

are used. What this indicates is that the compliance risk increases 

as the transparency diminishes. 

I do not want to suggest that all of the activities on this chart 

are bad. In many instances, they can be entirely proper. But they 

run from things where we see technical problems, taking advantage of that complexity in the Code to structure more tax credit 

generated transactions or hybrid instruments that can be set up 

where you are paying taxes neither in this country nor another 

country because of the difference between debt and equity treatment, to what you are talking about today, where there is outright 

hiding of the ball. 

17

This is a particular problem because, as you get down here where 

there is no transparency, we have real difficulties in finding out 

what is going on. 

At the IRS we have a variety of initiatives to address these challenges. In particular, I would note steps we are taking to increase 

our cooperation with other international tax administrations. Just 

this year, we have formed a new grouping of tax commissioners 

from ten countries, including many of the traditional economic powers as well as for the first time, China and India. Our conversations are noticeably enforcement oriented. Further, we are seeing 

positive results from the Washington-based Joint International Tax 

Shelter Information Center, where specialists from Australia, Canada, the United Kingdom, and the United States work side by side 

to track new cross-border schemes. 

Additionally, I would share with the Subcommittee that I have 

just been elected Chair of the OECD Forum on Tax Administration. 

In September, I will be chairing a forum meeting of some 40 tax 

administrators in Seoul, Korea, where the focus of our agenda will 

also be on international enforcement. 

Many of my counterparts in the international tax community 

have expressed the need for greater cooperation to fight the proliferation of abusive tax practices. Still, in this area of our activities, where some businesses and individuals do whatever they can 

to hide within the seams of the Internal Revenue Code or to escape 

IRS notice, our challenges are acute and ever growing. Offshore 

abuses are a real problem, one which merits all of our concern. 

I appreciate your efforts, and I look forward to the results of your 

inquiry. Thank you. 

Senator COLEMAN. Thank you very much, Commissioner. 

Is there any way to give us an estimate on the extent of the problem? The report identifies just two transactions in which there is 

$300 million of potential tax liability that was not collected. One 

of the witnesses—I think Professor Avi-Yonah, who testifies on the 

next panel—has thrown out a figure of approximately $50 billion 

that is lost each year due to offshore tax shelters. Perhaps you can 

verify this. I believe a few years ago the IRS recovered $3.2 billion 

in taxes from one Cayman bank with about 1,100 depositors. 

First of all, could you verify whether that is an accurate statement? 

Mr. EVERSON. Well, I do not want to comment on any particular 

matter because of the confidentiality standards, but I can confirm 

that settlements, when we have pursued entities working on tax 

shelters, abusive shelters, have exceeded $1 billion in some instances. 

Senator COLEMAN. And the overall extent of the problem, in your 

best guess? 

Mr. EVERSON. What I would say, sir, is that it runs into the tens 

of billions of dollars each year. Again, that is through a combination of what I would call technical abuses and then what you really 

are pursuing today, the outright hiding the ball and what reaches 

criminal activity. 

Senator COLEMAN. You used the phrase ‘‘relative lack of transparency’’ in these offshore activities. The bottom line is in some 

18

cases it is difficult, if not impossible, to find out who is actually 

controlling an offshore trust. Is that correct? 

Mr. EVERSON. I think that is correct. As you both indicated in 

your statements, the control is nominal; it is not real. 

Senator COLEMAN. So, in other words, what you have is an individual who can create a trust. They have, of course, the trustees, 

who operate perhaps in the Isle of Man and the Caymans, or somewhere like that, and then trust protectors who are, in effect, often 

the individual’s person. The trust protectors then tell the trusts 

what to do, and the trust protectors are often told by the grantor 

what to do. Is that a fair summary of what you have encountered? 

Mr. EVERSON. I think what you see is you see two things: An 

ever more complex, as the charts indicate, series of transactions 

and also of people and relationships that oversee those transactions. So that unraveling this takes a lot of effort—and a lot of 

time, I might add. 

Senator COLEMAN. What kind of tools do you have today to unravel that? And perhaps the more important question is, What kind 

of tools do you need to do that job? 

Mr. EVERSON. Well, I would suggest to you we have a lot of tools. 

We have many good people who are working on this. We have a 

lot of information that we have in this country. But the degree to 

which the secrecy laws that have been mentioned are in place, that 

presents difficulties. 

Under Secretary O’Neill, agreements were reached with some of 

these countries to share information. Those agreements are just 

now taking effect, so it will be a little bit of time before we see how 

well they work. Oftentimes, however, the agreements, they do not 

run past the provision of information to actually helping us collect 

money. Let’s suppose we make an assessment. There is nothing in 

there that would help us get the money from that tax haven country, even if we got the information and then were able to make the 

case that it should be taxed. 

Senator COLEMAN. But help me on the transparency issue, because it is my sense it kind of goes to the heart of this. 

Mr. EVERSON. Yes. 

Senator COLEMAN. Is there insider trading? You do not know. 

You could have somebody who has a high percentage of shares in 

a particular corporation, but you do not know who is actually controlling these shares. It is not your issue, but the SEC, they have 

no knowledge. How do you cut through the veil of secrecy here? 

Mr. EVERSON. Well, it depends. On the corporate side, we have 

something called the M3, which affords a reconciliation between 

the book income, which would be picking up a lot of the income, 

obviously, and the taxable income, where the company is trying to 

minimize that income. I have testified about this before at Finance. 

One of the real problems, we think, that exists on the corporate 

side is the difference between the system where companies want to 

maximize book earnings to drive shareholder price, and then minimize taxable earnings. To the extent that there is greater transparency of those differences, which I favor, I think that will help 

governance. 

On the individual side, there is a basic issue of honesty. What 

you, Senator Levin, and Senator Lautenberg have talked about is 

19

that these are people, vastly wealthy, who do not need the money, 

who ought to know better and do know better in many instances. 

So they aren’t filling out the forms that indicate the bank accounts—people are supposed to fill out forms when they have foreign bank accounts—but they are not doing that in all instances 

because that starts to unravel the whole scheme. 

Senator COLEMAN. How important a priority is this for the Internal Revenue Service to go after the tax liability of folks involved 

in offshore activities? 

Mr. EVERSON. This is a very important priority for us—the abusive tax area in general. I think you know that the centerpiece of 

our efforts over the 3-plus years of my tenure has been to increase 

our audits of high-income individuals and corporations. We have 

done that. And where we work and focus on the abusive transactions, a big chunk of that is in the offshore area. 

Senator COLEMAN. In terms of the countries, the places that provide a haven for this, what kind of sanctions, what kind of pressure 

can we put on them to be more cooperative so we can pierce this 

shroud that now covers these transactions? 

Mr. EVERSON. Well, I think a lot comes through our international 

relations and trying to increase cooperation of other countries. 

Part of the difficulty here is that it is not all black and white. 

There are countries, low-tax countries, commonly seen as tax havens, where there are a lot of economic and real business activities 

that take place. 

So where you draw this line, you are talking about a presumption that it is a tax avoidance transaction, it is a hard thing to do. 

So we would need to carefully, I think, have a discussion on what 

to do. 

What I would suggest to you is that the most profitable avenue 

of this is greater scrutiny of the professions and standards for the 

professions, and perhaps an opinion should not provide protection 

against penalties for somebody if he or she is operating in a tax 

haven. 

Senator COLEMAN. I appreciate the recommendation, but the 

ability to distinguish between what is legitimate asset protection 

versus efforts to defraud the U.S. Government, to avoid paying 

taxes without a legitimate basis, or to operate through sham transactions, is limited by lack of transparency. We do not know at this 

point who is controlling, or who owns the assets. 

Mr. EVERSON. Yes. 

Senator COLEMAN. If you could cut through that, it would at 

least allow us then to have the discussion that you said we should 

have. 

Mr. EVERSON. Yes, I agree. 

Senator COLEMAN. We will have a lot more to talk about, Commissioner. Let me just ask this very quickly: The IRS went through 

a period of time where there was concern about abusive enforcement, and in many ways the IRS was cut back. And you have been 

before us a number of times, and we have identified areas where 

people are clearly defrauding the Federal Government of resources. 

If you were to get more resources, one of the concerns would be 

to make offshore abuses a priority. Is there a way for you to actually prioritize and say we are going to go after these high-net-worth 

20

folks, we are going to go after these offshore activities with additional enforcement dollars? 

Mr. EVERSON. There is, and we have asked for more money. The 

Senate has provided thus far good funding for this. The House has 

not. I am sure Senator Lautenberg will come back with the estate 

tax question. But what we are trying to do with the reallocation 

of the resources here is—these resources from drawing down the 

estate tax people because the volume of returns has gone down by 

some 70 percent, we would put them, Senator, in just this area—

I think you used the words ‘‘casual returns.’’ That is not the intent. 

They would be used for abusive transactions and just this kind of 

work that we are talking about today, people who are generating 

a million dollars or more of income on their individual returns, income returns. 

Senator COLEMAN. Thank you, Commissioner. Senator Levin. 

Senator LEVIN. Thank you. 

Commissioner, you made a reference about where control is 

nominal and not real. You were referring, I believe, to the trusts. 

Is that correct? 

Mr. EVERSON. Yes. That takes place in a series of different kinds 

of transactions where there would be a purported economic viability or a real substance to the transaction or actually there is no tax 

that is going to come because of the trust, as you are indicating, 

presumably because somebody else is calling the shots. But, with 

a lot of these offshore trusts in their worst elements, that does not 

take place, as you have indicated. 

Senator LEVIN. And who is in those worst elements calling the 

shots? 

Mr. EVERSON. I think the people who are benefitting from—when 

you unwind the transaction, it is the people who have the money 

or the options or the shares, whatever it was that was of value to 

begin within. 

Senator LEVIN. That transferred those to the trust? 

Mr. EVERSON. In many instances, yes, sir. That would be our 

concern. 

Senator LEVIN. Right, and the concern is then in those cases that 

the control of that trust by the trustees is nominal. They are the 

nominal trustees, but the real control in that grouping is by the 

people who put the money or the asset into the trust to begin with. 

Mr. EVERSON. That is exactly right. There are two questions. 

Does the transaction itself work through all the complexity? And 

then is it real as purported on paper? And what you are getting 

to, it is not real because nothing really happened. The same people 

are still in charge. 

Senator LEVIN. Now, the amount of effort that you are putting 

in to crack the secrecy walls that surround these jurisdictions, 

when you are auditing returns or in your enforcement division, how 

would you compare that effort? What do you need and what are 

you getting to mount that effort? 

Mr. EVERSON. Well, abusive transactions overall are still a relatively small portion of our revenue agent work on individuals. It 

is something like one in six, maybe, of all the efforts we make are 

in that area. 

21

Now, there has been a much greater focus, as you know from our 

work on Son of Boss when we worked with the Subcommittee, on 

other areas, stock—we had a stock options settlement agreement. 

But more resources are definitely needed here. But, again, the real 

answer is making sure that the professions are not providing lousy 

advice and that we have a return to integrity in the professions, 

as you indicated. 

Senator LEVIN. Yes, well, we all would agree that is important. 

But in terms of resources being needed, are more resources needed 

in this enforcement area? 

Mr. EVERSON. I can always use more resources on this, sir. 

Senator LEVIN. Have you asked for them? 

Mr. EVERSON. Yes. 

Senator LEVIN. Can you give us some idea as to what could be 

useful in this area, what you believe? Would it be a 50-percent increase? Give us some flavor here of what you believe you could usefully use? 

Mr. EVERSON. I would want to reflect on that, sir. As you know, 

within the Executive Branch, those conversations run through 

OMB where a series of weighting factors take place. 

Let me suggest another thing that could be very helpful: Thirdparty reporting. This Subcommittee knows—and, in fact, going 

back to the work you have done on contractors, government contractors, the Congress just passed third-party reporting and, in 

fact, withholding on some government contractors, much along the 

lines of what you have suggested. 

I would draw to your attention in this area of transparency that 

the Administration does have before the Congress some proposals 

for increased third-party reporting, most notably for credit card 

issuers, that will help not in this offshore area, but very much in 

the under eporting of income. 

So if we are going to work on this tax gap and on the transparency issue, we need to look at reporting, not just only resources. 

Senator LEVIN. You talked in your testimony about the question 

of where the real control is on a foreign entity, particularly in a tax 

haven. Right now, because of the secrecy laws of those jurisdictions, it is very difficult, as we can see just from the effort we had 

to put forth to get to where we are, to crack that veil of secrecy. 

Would you work with this Subcommittee in drafting or considering legislation which would create a presumption, which would 

be rebuttable, that in a tax haven, if you create a trust, that there 

is a presumption in a tax haven, as identified by the Secretary of 

Treasury, that control remains in the person who put the asset into 

the trust? 

Mr. EVERSON. Certainly we will consider that, sir. You mentioned it yesterday when we chatted on the phone, and I have sort 

of reflected on that, and that is how I came to this point of maybe 

it would be better to attack this, because there are many things 

that can be legitimate in these countries. And I do not want to tar 

everybody with this broad brush. But maybe what we ought to do 

is think about the protections that are afforded from penalties by 

the legal opinion. If the legal opinion is really at issue here, maybe 

a starting point would be to take away the penalty protection, 

which would get you, I would think, a lot of what you are looking 

22

at, because in these instances, they are oftentimes relying on a lot 

of paperwork and opinions that are put together by, as you have 

indicated, leading law firms many times. 

Senator LEVIN. Thank you, Mr. Commissioner. Thank you, Mr. 

Chairman. 

Senator COLEMAN. Thank you, Senator Levin. Senator Collins. 

Chairman COLLINS. Thank you, Mr. Chairman. 

Mr. Commissioner, unfortunately, the problem of the use of these 

offshore tax havens is not a new one. The Government Accountability Office has placed the Federal Government’s enforcement of 

its tax laws on its high-risk list, going back to 1990, the very first 

year that it comes out, and it was repeated most recently last year. 

So it is troubling that the issue of tax evasion has been with us 

for so long, and what has happened is over the years the schemes 

have grown ever more complex, which means that the Federal Government is losing ever more dollars. 

The GAO has discussed three general strategies for reducing the 

tax gap. First, GAO has suggested that we need to greatly simplify 

the Tax Code. Second, the GAO has recommended providing the 

IRS with additional enforcement authority and tools. And, third—

and you have just had this exchange with Senator Levin—GAO has 

recommended devoting additional resources to enforcing existing 

tax laws. 

Looking at those three strategies, where do you think our emphasis should be? What do you think would really make the difference 

if we want to crack down once and for all on this long-standing 

problem? 

Mr. EVERSON. Well, Senator, I think we need to do all of those 

things, and I think we also do need to take a serious look, again, 

at third-party reporting as we go down the road, because we know 

where there is third-party reporting, there is increased compliance. 

I will give you the simplest example. 

In 1986, the last real reform, it was mandated that the Social Security number of dependents be put on a 1040. The next year 5 

million dependents vanished. So third-party reporting or reporting 

works. People do not cheat on their wages. There is only a 1-percent noncompliance rate there as opposed to unreported business 

income, which is more like a 50-percent problem. 

So I would extend your list to include a careful look at thirdparty reporting. But GAO is right, all three of those areas are terribly important. In particular, I would say simplification of the 

Code. The other thing I would say is what the Congress does is it 

constantly changes the Code. An environment of stability would 

help both compliance through better understanding and also would 

help us in terms of getting after those who do not comply. 

Chairman COLLINS. Commissioner, in February, the IRS announced its ‘‘Dirty Dozen’’ list of the most notorious tax scams, and 

on this list was the use of offshore transactions to avoid U.S. taxes 

by hiding income offshore. Some of the other dirty dozen tax scams 

included the misuse of trusts and the abuse of charitable organizations and deductions. 

I am trying to get a sense of the relative problems of the dirty 

dozen. How widespread is the abuse of offshore transactions relVerDate 0ct 09 2002 07:08 Mar 29, 2007 Jkt 029760 PO 00000 Frm 00054 Fmt 6633 Sfmt 6601 C:\DOCS\29760.TXT SAFFAIRS PsN: PAT
23

ative to the other tax schemes that you listed as being particular 

problems? 

Mr. EVERSON. Right. Let me say first that Americans, by and 

large, are compliant. We have a great record in this country. The 

vast majority of Americans pay their taxes honestly and accurately. 

I do not think that is changing. What I think is changing is that 

in areas like this, you have increasing opportunism because of the 

changes in the global economy and the changes in technology. 

One thing that the Subcommittee report draws out that has not 

been mentioned thus far is the fact that some of this is migrating 

to less well-to-do taxpayers through things like advertisements in 

airline magazines. This is not only about the super-rich. This is 

also about preying on people who are of lesser means. 

So I do think, particularly for individuals, this is an area of 

growing concern. 

Chairman COLLINS. Thank you. Thank you, Mr. Chairman. 

Senator COLEMAN. Thank you, Senator Collins. Senator Dayton. 

Senator DAYTON. Thank you, Mr. Chairman. 

Commissioner, as you know, it is very hard to run an Executive 

Branch agency from the Legislative Branch. 

Mr. EVERSON. That does not stop some Senators, sir. 

Senator DAYTON. I realize that. And when they fail, it gets even 

more tempting, and I am not referring to your agency specifically, 

but there is that tendency when there are these kinds of egregious 

problems. 

You say that tax evasion is not a problem, but I believe the fig- ure cited is some $300 billion a year that is not collected that is 

owed? 

Mr. EVERSON. Sir, I did not say it is not a problem. What I said 

is we have every right to be proud of our system because the vast 

majority of Americans pay honestly and accurately. 

Senator DAYTON. Well, I would agree with that, and I think even 

more so given that your agency has really had, as others have said 

and I think you have acknowledged, so many of its resources taken 

away from it. And I think if we are looking at culprits here, as we 

should, Congress—and I would say it is previous Congresses because I am not aware of this Congress doing anything along those 

lines. But it has systematically cut back on your capability, and so 

the fact that so many Americans do pay their taxes from all income 

brackets, with the increased likelihood that they will not be audited no matter what they do, you are right, is a credit to the system. But that is still a very significant figure, and when you look 

at the deficits we are facing now chronically, that is money that 

would be—and you are agreeing. We are in agreement on that. 

Mr. EVERSON. Sir, I spent a lot of time arguing for reducing the 

tax gap. We are on the same side. 

Senator DAYTON. I realize your hands are bound by the Office of 

Management and Budget and those deliberations and the like. But 

when we read the report last week, that almost half of your estate 

tax lawyers and 17 of the support staff are going to be cut, according to one report, six of the IRS lawyers are likely to be laid off, 

acknowledge that the cuts were simply the latest moves behind the 

scenes at the IRS to protect people with political connections and 

complex tax avoidance schemes from detailed audits. 

24

Could you comment on that, please? 

Mr. EVERSON. Yes, I think that is garbage. That is total garbage. 

I run a clean agency. The Chairman and Senator Levin would both 

agree, I would hope, on that. There are two political appointees 

there. There is no politics in this at all, and I find that assertion 

offensive. The number of estate tax returns that have been filed is 

going down by 70 percent. Any sane businessman would adjust his 

activities. We will take those resources and put them into things 

like what we are talking about today. 

Let me make one other point. The hourly rate of return on work 

like the abusive tax transactions is double the rate of return on the 

smaller estates. So it makes good sense to do it, and until the Congress gives me the resources that I ask for, I have got to do things 

like this to make it work, sir. 

Senator DAYTON. And I think this would be very helpful. What 

resources, additional resources, do you need either that you have 

asked for here to date or that you have not been able to that you 

do need? I think Members of this Subcommittee on both sides are 

willing, are desirous to provide what you need. It is very hard to 

find out, often, when this gets filtered through OMB. 

Mr. EVERSON. Sure. And I hope that what will happen, sir—and 

I do not mean to get mad at you, but I am mad at the assertion 

that was made. 

Senator DAYTON. I have people mad at me all the time. [Laughter.] 

Almost as many as mad at you. 

Mr. EVERSON. Almost—well, I am not sure. 

But what you can do right here and now is make sure we get 

our funding that is in the 2007 request, because as I indicated, the 

House has cut that request by some $100 or $110 million, and that 

will hurt us and result in layoffs. The Senate right now has full 

funding. It has topped it up I believe even just a little bit more. 

So that would be the first request I would make, sir. 

Senator DAYTON. All right. That is a good start. 

Somebody was referencing here what for me was a very helpful 

set of recommendations by Robert S. McIntyre, head of the Citizens 

for Tax Justice, and he said we need to provide stiff fines on entities, including charities, pension plans, and local governments, that 

cooperate with tax shelter schemes. I would like to just recite these 

and ask for your comments, please. ‘‘We need to fight the lawyers 

and accountants with monetary penalties for abusive behavior so 

they stop selling and blessing tax shelter behavior. We need to 

force tax lawyers to file their often bogus tax-shelter-blessing opinion letters with the IRS so that schemes that rely on non-detection 

and playing the audit lottery will get scrutinized. We need to fix 

the loopholes in our anti-tax haven laws and expand the courtmade rule that tax deductions must have some real economic substance.’’

Do any of those stand out as ones you support or ones that you 

disagree with? 

Mr. EVERSON. Well, you moved through those pretty quickly. Let 

me speak about the first one. 

The use of tax in different entities for tax abusive transactions 

is a real problem. There are actions that are taking place to curb 

25

that. We have certainly set as one of our four enforcement priorities greater scrutiny of the tax-exempt sector. So that is a real 

problem. Finance and others are continually looking at that. We 

need to continue our efforts there. 

The second two points you mentioned are about the professions. 

As I indicated before, we are not going to fix this only through statutory or IRS actions. We have to have a cleaner set of professionals 

who help people pay no more than what they owe but what they 

owe. 

And the last point, yes, there are always loopholes, but, again, 

the real answer here, I think, is simplification of the Code, because 

every time you try to close a loophole, in this complex world you 

are oftentimes creating an opportunity for something else. 

Senator DAYTON. My time has expired. Thank you, Mr. Chairman. 

Senator COLEMAN. Thanks, Senator Dayton. 

Senator Levin, I understand you had one follow-up question. 

Senator LEVIN. One more question. Thank you, Mr. Chairman. 

Under the PATRIOT Act, the financial institutions are now required to identify the beneficial owners of foreign entities. They are 

not required at this point to report that, but they are required to 

identify the owners of foreign entities and keep that information in 

their records. 

Would it be helpful to you if the 1099s that they file were—added 

to that requirement of 1099s would be the requirement that where 

a U.S. person is identified by them to be the owner of a foreign entity, that they would notify you with a 1099? 

Mr. EVERSON. That sounds like it would be useful on the face of 

it, sir. I would want to make sure there was not some wrinkle in 

it. But, generally speaking, more information is of use to us, again, 

if we have a good infrastructure to process the information and it 

is actually usable. 

Another problem we have not discussed here is with all this complexity and all the transactions, your spaghetti chart, people count 

on the fact that there will be so much information coming into us 

that we are not going to be able to decipher it one way or the other. 

So if we get more information, we need to be able to process it and 

understand it. 

Senator LEVIN. But I am asking you, where the financial institutions identifies an American entity as the beneficial owner. 

Mr. EVERSON. On the face of it, that may very well be quite useful. I would want to get back to you after some reflection. 

Senator LEVIN. All right. Because they are the ones who have to 

cut through all the spaghetti and reach their own conclusion. They 

do it now. 

Mr. EVERSON. Yes, I understand. 

Senator LEVIN. And if they do it now for their own purposes inside their own file cabinets, why not share that with the IRS? 

Mr. EVERSON. Yes, Senator, you have made some very important 

recommendations in the report. I feel somewhat akin to Senator 

Lautenberg here. We just got it. They raise a lot of important 

issues. Before giving any particular reaction, I would like to make 

sure we had a chance to really look at it. 

26

1 At the conclusion of the hearing, Commissioner Everson responded as follows: ‘‘Senator 

Levin, the Subcommittee has made some very thoughtful recommendations in its report. Because most of these proposals involve significant policy issues, I have shared them with the 

Treasury Department’s Office of Tax Policy. I am sure that office would be glad to discuss them 

with you. I would note, however, that we would generally welcome changes that are designed 

to promote more disclosure and greater transparency. Furthermore, tax law simplification would 

greatly reduce opportunities for tax avoidance.’’

Senator LEVIN. Let us know for the record.1

Mr. EVERSON. Yes, sir, of course. 

Senator LEVIN. Thank you. Thank you, Mr. Chairman. 

Senator COLEMAN. Thank you, Commissioner. Just two observations. You mentioned that the issues we are dealing with now are 

not just focused on high-net-worth individuals, that average taxpayers go online and are attempting to make use of some of these 

same benefits. 

I would note that if you Google ‘‘offshore asset protection,’’ you 

get 479,000 references. So there is quite an industry that is out 

there. 

I also want to note for the record that you are not escaping Senator Lautenberg’s gaze. He has indicated that he will submit questions that he would like responses to, so that will become part of 

the record. Thank you, Commissioner. 

Mr. EVERSON. Thank you. 

Senator COLEMAN. I would now like to welcome our second panel: 

Professor Reuven Avi-Yonah, the Irwin I. Cohn Professor of Law at 

the University of Michigan School of Law in Ann Arbor, Michigan; 

and Gary Brown, attorney at Baker, Donelson, Bearman, Caldwell 

and Berkowitz in Nashville, Tennessee. 

I would note that Mr. Brown was formerly special counsel for my 

colleague, Senator Fred Thompson, and worked on this Subcommittee during its investigation of Enron. I welcome you back to 

Washington, Mr. Brown. 

Professor Avi-Yonah’s and Mr. Brown’s expertise are in the fields 

of securities and tax law. 

Gentlemen, I appreciate your attendance at today’s hearing and 

look forward to your testimony and perspective on the use of offshore jurisdictions by U.S. individuals to shelter assets from taxation. I am equally concerned about corporate insiders and large 

shareholders conducting securities transactions offshore, what challenges this presents under our Federal securities laws, and whether we have enough safeguards to protect the investing public. And 

I look forward to hearing both of your thoughts on these critical 

issues. 

Before we begin, pursuant to Rule VI, all witnesses before this 

Subcommittee are required to be sworn in. I would ask you to 

stand, as you have done, and raise your right hand. Do you swear 

that the testimony you are about to give before this Subcommittee 

is the truth, the whole truth, and nothing but the truth, so help 

you, God? 

Mr. AVI-YONAH. I do. 

Mr. BROWN. I do. 

Senator COLEMAN. As you have observed with the Commissioner, 

we are using a timing system. Approximately one minute before 

the red light comes on, you will see an amber light. At that point 

you can conclude your testimony, give your concluding remarks. 

27

1The prepared statement of Mr. Avi-Yonah appears in the Appendix on page 111. 

Your written testimony will be printed in the record in its entirety. 

We do ask that you limit your oral testimony to no more than 5 

minutes. 

Professor Avi-Yonah, we will have you go first, followed by Mr. 

Brown. After we have heard your testimony, we will turn to questions. Professor, please proceed. 

TESTIMONY OF REUVEN S. AVI-YONAH,1 IRWIN I. COHN PROFESSOR OF LAW, UNIVERSITY OF MICHIGAN SCHOOL OF 

LAW, ANN ARBOR, MICHIGAN 

Mr. AVI-YONAH. Thank you very much, Senator Coleman, Senator Levin. Thank you very much for inviting me, and thank you 

to the Subcommittee staff for their amazing work. I also only got 

this last night, so I cannot say I have read every word in the 370 

pages, but, nevertheless, I consider this is a very impressive piece 

of work, and some parts of it I had the opportunity to examine earlier. 

What I want to talk about is what I call the international part 

of the tax gap. As we have heard from Commissioner Everson earlier, the IRS has estimated there is about $300 billion of taxes that 

are owed each year and not collected. I have estimated that there 

is about a $50 billion part of that that is due to offshore transactions involving tax havens. That is a significant number. It is 

larger comparatively than some of the other numbers that the IRS 

has identified and maybe focus more on, like corporate tax shelters 

or EITC fraud. And it is something that is worth paying attention 

to. 

These transactions make use of offshore entities, trusts, corporations, and the like, that are located in jurisdictions that, as Senator 

Levin mentioned before, have two characteristics: One is a low or 

non-existent income tax, and the second one is a legal system that 

assures bank secrecy and the privacy of corporations so that it is 

impossible to know who is behind them. 

The use of the secrecy is essentially as a shield in order to prevent the IRS and other tax administrations from finding out who 

is, in fact, the beneficial owner of these transactions. 

Now, as Senator Collins mentioned before, we have had hearings 

like this going all the way back at least to 1937, and we have had 

a set of rules written in the tax laws that are designed to prevent 

U.S. citizens, U.S. taxpayers from abusing offshore trusts and offshore entities. So we have, for example, a whole set of rules that 

require U.S. shareholders in foreign corporations to pay tax currently on certain types of income, investment income that is earned 

through such entities. 

The problem is that, as illustrated by some of these transactions 

that the Subcommittee has examined, in particular the Wyly transactions, there are loopholes in these rules, and unless these loopholes are closed, I am afraid that the IRS may not be able to enforce them adequately. In particular, as was indicated by some of 

the questioning before, if you as a U.S. taxpayer set up a trust in, 

let’s say, the Isle of Man, and that trust is nominally independent 

of you in the sense that it has independent trustees, which can be 

28

1The prepared statement of Mr. Brown appears in the Appendix on page 120. 

a trust management company, and it has independent protectors, 

which are maybe your friends, maybe your employees, people that 

will do your bidding but they are not your family and they are not 

formally related to you so that the law does not consider them to 

be your related parties or affiliates, then this trust is considered 

independent and any corporations that it owns in a tax haven will 

also be considered independent. And the result of that is that if you 

just follow the form of the tax law, these types of trusts and corporations can then engage in transactions that clearly benefit you, 

such as the purchase of U.S. real estate, lending money, etc., to the 

U.S. taxpayer, without subjecting the U.S. taxpayer to current tax. 

We do have a set of rules regarding trusts. We have, for example, 

a provision that says that any foreign trust that has a current U.S. 

beneficiary will be treated as a grantor trust, and that means that 

it is treated as owned and controlled by the U.S. taxpayer and the 

U.S. taxpayer has to pay tax currently on all of the income of that 

trust. But the problem is that these trusts are not set up with current U.S. beneficiaries. They are set up with current foreign charitable beneficiaries, but the protectors make sure that the trust distributes no income to such charities, and in the future there are 

contingent U.S. beneficiaries that kick in, let’s say, after the settlor’s death, and they will be able to recover the income that way. 

So under current law, that is not caught. 

There are provisions in the law also, the other grantor trust provision, that say that if, in fact, a U.S. person, the settlor or grantor, 

controls the trust in certain ways, such as, for example, directing 

distributions and/or changing the mix of assets of the trust and so 

on, or having the right to force a reversion of the assets of the trust 

back to the United States, then, again, this is treated as a grantor 

trust. 

But the problem is those provisions also are interpreted very 

technically and narrowly, and the result is that you can avoid them 

by drafting the trust in the way that I suggested and essentially 

trusting the protectors to do their job. So, by and large, this is a 

significant loophole that I think it will be good to close in the ways 

that the Subcommittee report has suggested. 

I would just like to conclude by saying that—echoing some of the 

statements that were made before. This is a significant problem 

when rich U.S. individuals are able to avoid paying their U.S. 

taxes, whether legally or illegally, at a time where regular U.S. 

taxpayers that just get wage income and get withheld on or just 

have interest income that is reported to the IRS have to pay their 

taxes, and this undermines confidence in the system, and I think 

something should be done about it. Thank you very much. 

Senator COLEMAN. Thank you very much, Professor. Mr. Brown. 

TESTIMONY OF GARY M. BROWN,1 CHAIRMAN, CORPORATE 

DEPARTMENT, BAKER, DONELSON, BEARMAN, CALDWELL 

AND BERKOWITZ, NASHVILLE, TENNESSEE 

Mr. BROWN. Thank you, Chairman Coleman, Ranking Member 

Levin, Senator Collins—good to see you—Members of the Subcommittee. Thank you for the invitation to appear before you and 

29

share my thoughts on the U.S. Federal securities law implications 

of certain aspects of your investigation into tax havens and offshore 

tax shelters. I have prepared detailed written testimony that addresses several of the significant securities law aspects of the 

transactions that you have under investigation, and I would request that the full test of that be entered into the record. 

Senator COLEMAN. It shall, without objection. 

Mr. BROWN. The U.S. Federal securities laws are based upon 

principles of full disclosure. The disclosure that is required by those 

laws comes in many forms—information that is required when a 

company is selling securities, information about the persons seeking to acquire ownership of U.S. public companies, and also information about the directors, officers, and significant shareholders of 

U.S. public companies. 

To the extent the information that is required to be disclosed by 

U.S. securities laws is complete and accurate, the investing public 

has information with which to make an informed investment decision. From that comes the most important by-product in the U.S. 

securities marketplaces, and that is trust. Without trust in the underlying information that is disclosed about companies, the markets will simply not function or will do so in a very imperfect manner. 

We have all seen what happens when the investing public loses 

trust and confidence in the financial markets—think Enron, 

WorldCom, Tyco, etc. One of the purposes of the Sarbanes-Oxley 

Act of 2002 was to attempt to restore the public trust in the marketplace and to make financial statements of public companies 

transparent and reliable. 

For example, would you or anyone else take your 401(k), take it 

to Las Vegas, put it in a poker game that you think is rigged for 

the house? And that is in many respects how some people felt and 

continue to feel about the U.S. securities markets. 

But there is a lot more to transparency than what is required to 

and should be disclosed by the companies offering securities in the 

United States. Some of those requirements and their importance 

are detailed in my written testimony. The concerns that these requirements are meant to address include, in the context of your 

particular investigation, purported private placements of securities 

by U.S. companies to ‘‘independent’’ entities that, in fact, are controlled by promoters or affiliates of U.S. companies. Promoters have 

used these offshore vehicles to trade illegally in their own stocks, 

to engage in practices known as ‘‘painting the tape,’’ generating fictitious trades to drive up securities prices, and these securities are 

then resold, sometimes to U.S. investors, without full disclosure—

the types of transactions that strike at the very heart of the purpose of the Securities Act of 1933 and sometimes violate the provisions of that Act. 

Concentration of share ownership in U.S. public companies by affiliated groups that exceeds reporting thresholds imposed by the 

Securities Exchange Act of 1934—these prevent the companies in 

question from determining the identities of large beneficial owners 

and can give the appearance of greater liquidity in the way of public float for the market for the securities in question. 

30

To the extent that overseas companies are used to shield information that is difficult to discern even in a domestic context, the 

use of offshore entities in so-called secrecy jurisdictions without 

question exacerbates the issue of lack of transparency in the U.S. 

marketplaces, and I have given the example in my written statement here of a situation where a company and several executives 

were convicted in the late 1990s for engaging in transactions that 

violated Regulation S. 

I venture to say that the principal attraction of doing business 

in these havens is not the tax benefits. The benefits that are always present are also strict bank and corporate secrecy, lack of 

transparency in financial dealings, and the lack of any meaningful 

regulation or supervision in the financial services area. Lack of 

transparency and strict secrecy is particularly troublesome because 

it prevents regulators from, among other things, determining true 

beneficial ownership of offshore entities, particularly when ownership sometimes is evidenced by mere bearer instruments. 

Numerous Internet websites, as the Commissioner mentioned a 

moment ago, allow the opportunity to open offshore accounts, even 

set up offshore banks. A site that I visited just over the weekend 

when I was looking up some things said, ‘‘Click here for details,’’ 

and what that does is illustrate the ease with which people can either take advantage of or be taken advantage of by these venues. 

The U.S. should continue to explore—and some of those items 

have been mentioned this morning—effective means to break down 

the culture of secrecy to obstruction that prevails in many of these 

jurisdictions. Measures could include legislation and regulations 

and make doing business in those jurisdictions less attractive. Senator Levin and you, Senator Coleman, have mentioned some of 

those. Some of the policy considerations are also addressed in my 

written statement. 

But, above all, I have heard several times this morning instances 

about the professionals in this area. I believe and I can assure you 

that aggressive enforcement of the securities as well as the tax 

laws is a sound step in continuing to restore confidence in the fairness of the American securities market. I can tell you in the now 

5 years since the collapse of Enron, there is nothing that gets the 

attention of the business world more than watching investment 

bankers, lawyers, executives, and others who manipulate the securities system convicted and sent to prison. 

So let me finish where I began, and that is with trust. You cannot legislate trust, but you can, however, ensure that the laws and 

the regulations require complete disclosure, and the penalties for 

betraying the trust reposed by the investing public are severe and 

certain. 

Thank you again, Mr. Chairman. Your Subcommittee has a great 

tradition, and I am very honored to appear before you today, and 

I would be happy to respond to any questions. 

Senator COLEMAN. Thank you, Mr. Brown. 

It appears to me that there are two issues that we are dealing 

with here. One is the issue of trust and confidence in the system, 

and, Mr. Brown, you have talked about that. And, Professor, you 

have talked about the individuals who are kind of avoiding liability 

and the burden that really places on the rest of us. 

31

1See Exhibit 18 which appears in the Appendix on page 769. 

Let me start first with you, Mr. Brown, on this trust and confidence issue and the actions that undermine that. Could you turn 

to Exhibit 18,1 the real thick book there? 

Mr. BROWN. Yes, sir. 

Senator COLEMAN. Exhibit 18 purports to be a document from a 

trust protector to a particular trustee. And if you look at the next 

to the last paragraph—and this is one of the Wyly trusts—a purchase is to be limited to approximately 600,000, 700,000 calls in 

order to stay under 5 percent of outstanding shares and avoid SEC 

reporting. So, in other words, trustees are being directed to kind 

of stay below the radar. The SEC would not know the volume of 

shares that this trust would have. Is that correct? 

Mr. BROWN. That is correct, and I would point out, I think I mentioned in my detailed statement that there are specific SEC regulations that provide—when there is the use of a trust or other device 

specifically to avoid the reporting threshold, then you are deemed 

the beneficial owner. So this in and of itself violates the spirit of 

that regulation. 

Senator COLEMAN. So, in other words, if you had two or three 

trusts and the set-up was to split the shares among the trusts to 

avoid the SEC reporting requirement, that would be problematic 

from your perspective. 

Mr. BROWN. Yes, it would. 

Senator COLEMAN. Professor Avi-Yonah, you talk about trusts 

being nominally independent, and what I am hearing is that an individual could set up a trust, and the trust could have a trust protector, and as you indicated, as long as the protector is not family, 

then the grantor can add the protector as a kind of a layer of protection. But if in the end that trust were to provide the grantor 

with jewelry worth tens of thousands of dollars and loans would 

there be nothing technically illegal about that? 

Mr. AVI-YONAH. Well, it depends. I mean, it is just like the Commissioner talked about before. You have to go through two layers. 

One is kind of the technical transaction. As a technical transaction, 

I think if you believe that this trust is independent, then independent people can lend you money and can buy you jewelry and 

can do whatever they want. 

I think if the IRS knows about this, they can argue that this is 

a disguised distribution and that you are really the beneficiary, 

and then they can catch you. 

The problem is this was done in some of these transactions 

through the Caymans, and the Caymans have a pretty strict secrecy provision. So then how does the IRS know that the money is 

really coming from a trust that is controlled by the U.S. grantor. 

Senator COLEMAN. What you have is a shield by the laws in the 

Caymans and Nevis and the Isle of Man as to who the real beneficial owner is. 

Mr. AVI-YONAH. Right. 

Senator COLEMAN. And that goes to Mr. Brown’s comments that 

massive stock transactions that may actually benefit an individual, 

but nobody knows. 

32

I think you used the words, Professor, the form—with trust protectors, that the form of the tax law is not violated, but there is 

an issue here between form and substance. 

Mr. AVI-YONAH. Right. I think as a substantive matter it is clear 

in this case that the U.S. taxpayers, in fact, control the trust, and 

as a result they should be treated as the owners and grantors, and 

these should be treated as grantor trusts. 

Senator COLEMAN. So if you had a situation where there was a 

repeated pattern of very specific and explicit directions being given 

by the grantor to the trust protectors and then specific repetitive 

instructions from the trust protectors to the trustee, who on almost 

every instance followed the instructions, would that raise a question as to who the beneficial owner is? 

Mr. AVI-YONAH. Yes, I think that clearly would indicate that the 

beneficial owners are really the U.S. settlors. 

Senator COLEMAN. And what about loans of trust assets to a U.S. 

person? Again, when you have a situation where the grantor, the 

person who set up the trust, gives directions to a trust protector, 

who then goes to the trust itself, and in almost each and every instance, the trust then provides loans of paintings, jewelry, 

shouldn’t these be treated as taxable distributions? 

Mr. AVI-YONAH. They should be. 

Senator COLEMAN. But the issue here is that the lawyers can 

look at this and say from a form perspective there is a question 

about who the beneficial owner is? 

Mr. AVI-YONAH. I frankly find it hard to believe that any lawyer 

would actually condone these kinds of transactions that include the 

loans and the flowing of the money back to the United States. The 

documents that I have seen all had to do with the outflow of 

money. I mean the transfer of the options in exchange for the annuities and so on, these are blessed with legal opinions. I think it 

will be hard to find a lawyer who would actually say that there is 

no problem with all of these essentially distributions of trust assets 

back to the United States. That I think crosses the line. 

Senator COLEMAN. I think it crosses the line, too, and this is not 

my area of law. This is not my expertise. But common sense would 

dictate that when you have this repetitive pattern you have got a 

problem. 

Does the trust protector have some responsibility there? 

Mr. AVI-YONAH. I think the trust protectors have responsibility, 

but under current U.S. law—the trust protector is not a common 

concept in U.S. trust law. It is common in the laws of these other 

jurisdictions, so we do not really have this concept and, therefore, 

we do not impose any particular responsibility on the trust protectors as a legal matter. 

I mean, I certainly think that this is an area that we should perhaps be looking at. 

Senator COLEMAN. Let me, if I can, go to solutions. First of all, 

I think, Professor, you testified that the Organization of Economic 

Cooperation and Development could help us address the problem. 

Commissioner Everson said that he is not sure of that. 

Mr. AVI-YONAH. Yes. 

Senator COLEMAN. Can you tell us how the Organization of Economic Cooperation and Development could help? And then, Mr. 

33

1See Exhibit 1 which appears in the Appendix on page 622. 

Brown, if you would respond, what can we do to close these loopholes? What can we do to make sure that we somehow bolster the 

confidence in a system that right now has loopholes that people are 

driving big trucks through? 

Mr. AVI-YONAH. The OECD, the Organization of Economic Cooperation and Development, has had a project since 1998 to crack 

down on tax haven abuses, and we have a patchy history of cooperation with that project. That varied, I think. Basically, initially 

we cooperated very nicely. Then we did not cooperate very much. 

And after September 11, we realized that there may be terrorist 

money-laundering types of issues associated, so we started cooperating a little bit more. 

One particular example that I think would be helpful is that they 

have developed, the OECD has developed an exchange of information agreement in the model tax treaty and also model tax exchange of information agreement that is far in advance of anything 

that we have in our tax treaties today. And I think it would be very 

helpful if we renegotiate these agreements, for example, that Secretary O’Neill negotiated early on in the Bush Administration with 

the tax havens along those lines, because it provides for much more 

extensive, much more elaborate exchange of information than what 

is available today from any jurisdiction. 

Senator COLEMAN. Thank you. Mr. Brown. 

Mr. BROWN. Well, since you are focusing on the offshore aspects 

of this, I think we should look at possibly tightening up the Regulation S requirements, which I have referred to in my statement. 

Those were tightened up already in 1997 or 1998 in response to 

some abuses at that point, so some further tightening there. And 

a couple of people have already mentioned today further focus on 

the professionals and the companies handling these transactions. 

Senator COLEMAN. Thank you, Mr. Brown. Senator Levin. 

Senator LEVIN. Professor Avi-Yonah, just to kind of expand on 

your testimony here, the control—I do not know if you can see this. 

This is Exhibit 1 in your book,1 by the way, if it is easier for you. 

But just looking at that second column from the right, these securities were purchased at the direction of the Wylys, real estate purchased at the direction of the Wylys, business ventures invested in 

at the direction of the Wylys. This is what all the evidence is 

through e-mails and others and another witness, who was one of 

the protectors, will subsequently tell us about. Art and jewelry 

used by the Wyly families, paintings of the Wylys. 

What that shows, according to your testimony, is basically the 

beneficial—as you put it, that these should be treated, put it this 

way, as taxable transactions, basically. Is that correct? 

Mr. AVI-YONAH. I think what this would make is to render all 

of these trusts that are in your first column in the left into grantor 

trusts, which means that the assets are treated as assets of the 

Wylys and they get taxed on all of their income, not just the income that flows back into the United States, but the entire——

Senator LEVIN. All the income of the trust? 

Mr. AVI-YONAH. Yes. 

Senator LEVIN. Not just the second from the right column. 

34

Mr. AVI-YONAH. Correct. 

Senator LEVIN. Very specifically, in both areas, Professor, first 

you said that you have taken a look at some of the recommendations that we make in our report to try to pierce this veil of secrecy 

and to try to look at the substance rather than at the form and to 

try to make our laws much stronger, tougher, get rid of loopholes 

which focus on form rather than substance, which allow these kind 

of charades to occur. 

Specifically, what would be the one or two most important things 

that you think we could do in that regard? 

Mr. AVI-YONAH. Well, I think the main focus should be on this 

question of who controls various foreign entities, and I think it is 

a very good idea, what you recommended, that there will be a presumption that if a U.S. person sets up an entity in a tax haven jurisdiction, then there will be a rebuttable presumption that he or 

she controls that entity, which they can rebut. But currently, as 

you pointed out, the IRS bears the burden of proving it. 

The other aspect of this, I think, that needs to be addressed is 

the secrecy issue, that is, how will the IRS know that these entities 

in tax havens exist. And I think about that I would encourage giving the IRS more resources to focus on this area. I would encourage 

renegotiating, as I mentioned before, the exchange of information 

agreements to make them broader and more automatic and the 

like. 

Senator LEVIN. Thank you. 

Now, Mr. Brown, if someone directs the investment activities of 

offshore entities, should they include those stockholdings, basically, 

of those entities in their own SEC filings? 

Mr. BROWN. In my opinion, yes. Even unexercised control is control. 

Senator LEVIN. And where it is exercised, it is really control. 

Mr. BROWN. It is really control. 

Senator LEVIN. Thank you. 

Mr. Chairman, thank you, and I want to thank this panel, not 

just for their presentation here today, but they have also been very 

helpful to us in preparing for today, answering technical questions, 

and we are very grateful. 

Senator COLEMAN. Thank you, Senator Levin. Senator Lautenberg. 

Senator LAUTENBERG. Mr. Chairman, unfortunately I was not 

able to hear the testimony nor the questions that were previously 

asked, and I do not want to take up a lot of time, and I will reserve 

the opportunity to send questions in writing and look for a response. But I would just ask this, if it is not redundant, and I 

would appreciate your response: 

Have IRS resources kept up with the burgeoning tax shelter 

growth that we have seen over the past 10 years? 

Mr. AVI-YONAH. I think the answer is clearly no. The previous 

Commissioner, Commissioner Rossotti, testified in 2004 that there 

was a loss of about 20,000 full-time positions between the early 

1990s and 2004. This has to some extent been made up since then, 

but not fully, and you have to remember that in the meantime the 

complexity of the tax law is increasing all the time, and the comVerDate 0ct 09 2002 07:08 Mar 29, 2007 Jkt 029760 PO 00000 Frm 00066 Fmt 6633 Sfmt 6601 C:\DOCS\29760.TXT SAFFAIRS PsN: PAT
35

plexity of the economy is increasing all the time. So I think the answer is no, that they don’t have enough resources. 

Senator LAUTENBERG. Mr. Brown, do you have a view on that? 

Mr. BROWN. I really do not have a view as to the IRS. You might 

ask a similar question as to the other regulatory agencies, like the 

SEC, for example. They have had substantial increases in staff and 

funding, but you might ask whether that is appropriate levels for 

these areas. 

Senator LAUTENBERG. In short form, what is the SEC’s role? 

What would the SEC’s role be here? 

Mr. BROWN. In policing the securities aspects of these international transaction that violate Regulation S, the 1933 Act and 

violate the reporting provisions of Section 130 of the 1934 Act. 

Senator LAUTENBERG. But doesn’t that fall, Mr. Brown, to the 

IRS to ferret out these abuses and enforce the rules as they exist? 

One thing is obvious, and that is that the rules are inadequate in 

managing what should be routine reporting. 

So I think it is fair to say that—and I understand that Mr. 

Everson had some things to say after I left about the resources that 

the Administration was going to supply to IRS was adequate and 

that we should support it. But the fact is that the numbers are 

easy to deal with, and that is, there is a significant cut coming in 

terms of the number of people that—there are going to have to be 

reductions in force. So that there is a design, as far as I am concerned—and I stand on this. There is a design to not make it too 

tough on people who are so fortunate as to have amassed fortunes 

beyond the belief of most people in the country. And they are still 

not content with those, and we have—I recognize we are not writing laws on morality here, but that is too bad. But the fact is that 

where things are inadequate to the mission and when we see the 

revenues lost, when the deficit continues to burgeon, and we go 

happily along our path of making sure that taxes for the wealthy 

and the super-wealthy are diminished. 

I did not do badly in business, but I am not in that league, and 

I would not do it in the first place. 

Thanks, Mr. Chairman. 

Senator COLEMAN. Thank you, Senator Lautenberg. Senator Dayton. 

Senator DAYTON. All I can say to my colleague Senator Lautenberg is if this were a tome on morality, it would be extremely short, 

because there is not any morality here. These ventures are amoral 

at best, and immoral, as you said very eloquently in your opening 

statement, at worse. 

I do not have any specific questions of this panel, Mr. Chairman. 

Thank you. 

Senator COLEMAN. Thanks, Senator Dayton. 

I just want to, if I can, ask one follow-up question of the professor. These offshore jurisdictions, the Caymans, Isle of Man, Trinidad, Tobago, Jersey, and Guernsey, they depend on these offshore 

transactions. They are a big part of their economy. So do we have 

any leverage? Is there a carrot and a stick approach that we can 

use to, in effect, force them to work with us, to cut through the 

shroud of secrecy? Do we have the ability to get them to step up 

to the plate, to work with us to make sure that we can pierce the 

36

veil where, in fact, transactions are being conducted to perpetuate 

a fraud? 

Mr. AVI-YONAH. Yes, I think we certainly do. As far as the carrot 

is concerned, I think it would be a good idea to consider some form 

of aid to wean them off the offshore sector. A lot of the benefits of 

the offshore sector go to professionals that reside in the United 

States or in other rich jurisdictions. These fees and the transactions were not paid to people in the Caymans or in the Isle of 

Man. Those people do—I mean, these are shell corporations. They 

do ministerial things. They do not earn a lot of money. But, of 

course, for those jurisdictions this is a significant amount. For peanuts, we could really enable them to restore all of that income, and 

it is a very small percentage compared to the trillions of dollars 

that they handle. 

As far as the stick is concerned, I think fundamentally the reality is that nobody, except for maybe drug launderers, leaves their 

money in any of these jurisdictions. They have to go back into the 

United States or into other rich countries because that is where the 

investment opportunities are. So we can, I think, close up the tax 

havens overnight if we said something like if you don’t cooperate 

with the exchange of information, the payments to you will not be 

deductible, or they will not qualify for the interest exemption which 

would mean no withholding tax. 

If we did that, and we can do that in cooperation with the Europeans, who are very interested, and with the Japanese, we can 

shut them off within a week completely. 

Senator COLEMAN. Mr. Brown. 

Mr. BROWN. Two things along those lines, and, Senator Levin, 

the presumption of control that is much less problematic in the securities aspect than I think it would be in the tax aspect. The other 

is in the Regulation S offering, following up on what the professor 

was saying, that if you identify certain of these jurisdictions, the 

issue in some of the securities transactions is what I will call 

flowback into the United States, that is, the security leaves the 

United States and you do not want it coming back to the United 

States unless the protections are set. So require a longer holding 

period, for example, for securities that go into some of the jurisdictions that you have identified as abusive jurisdictions. 

Senator COLEMAN. Thank you, Mr. Brown. Thank you, Professor. 

The panel is excused. 

I would now like to call our third panel of witnesses: Haim 

Saban, Robert Wood Johnson IV, and Michael C. French. 

Mr. Saban and Mr. Johnson are two individuals who were advised to execute the POINT tax strategy to defer and eliminate capital gains from taxation. I am appreciative that they can testify before us today and look forward to understanding what their various 

advisors told them they could do, what they understood the POINT 

transaction could accomplish, as well as their understanding as to 

the validity of the transaction. 

Mr. Saban, I want to thank you on behalf of my children, who 

grew up watching the Mighty Morphin Power Rangers. You 

brought years of entertainment to my family. 

37

1The prepared statement of Mr. Saban appears in the Appendix on page 139. 

Mr. Johnson, I grew up in Brooklyn, New York, went to school 

at Hofstra, which is the training grounds for the New York Jets, 

and I wish you luck in the upcoming season. 

And I want to mention on the record that the Subcommittee invited Sam and Charles Wyly to testify before us today. I have been 

advised that the Wylys, along with Sharyl Robertson, who was involved in the operation of the Wyly offshore trusts as a trust protector, have all declined to testify, citing their Fifth Amendment 

privileges. It is unfortunate that the Wylys and Ms. Robertson are 

not before us today, but I respect their constitutional rights and 

privileges. However, I am looking forward to hearing from Michael 

French who was involved with the Wylys offshore network as a 

trust protector and will shed some light and details on the Wyly 

offshore trusts. 

To all witnesses, I appreciate your attendance at today’s hearing 

and look forward to your testimony. As you will note, before we 

begin, pursuant to Rule VI, all witnesses before this Subcommittee 

are required to be sworn. I would ask you to please stand and raise 

your right hand. Do you swear that the testimony you are about 

to give before this Subcommittee is the truth, the whole truth, and 

nothing but the truth, so help you, God? 

Mr. SABAN. I do. 

Mr. FRENCH. I do. 

Mr. JOHNSON. I do. 

Senator COLEMAN. Again, we will be using a timing system. At 

approximately one minute before the red light comes on, which 

means you should conclude your testimony, the light will go from 

green to yellow and will give you the clue to conclude your testimony. Your written testimony will be presented in the record in its 

entirety. We ask that you limit your oral testimony to no more 

than 5 minutes. 

Mr. Saban, we will have you go first, followed by Mr. Johnson. 

We will finish up with Mr. French. After we have heard your testimony, we will turn to questions. Mr. Saban, you may proceed. 

TESTIMONY OF HAIM SABAN,1 SABAN CAPITAL GROUP, INC, 

LOS ANGELES, CALIFORNIA 

Mr. SABAN. Thank you. Good morning, Mr. Chairman, Senator 

Levin, and Members of the Subcommittee. I understand that the 

Subcommittee’s focus this morning is on the role of professional 

firms and advisors with regard to certain tax-related transactions. 

Thank you for the invitation to testify regarding my own experience with the promoters of a 2001 transaction that you have referred to as ‘‘the POINT transaction.’’

To the extent that my testimony can in some way assist you in 

strengthening and improving public policy in this area, I am 

pleased to be able to do so. 

You asked that I be prepared to address a number of specific 

questions regarding the POINT transaction. If you would allow me, 

I would like to first give you some background on how I became 

involved with this transaction, and then I will be happy to answer 

specific questions that you may have. 

38

Since my arrival in this country in 1983 and my subsequent naturalization as an American citizen, I have been fortunate in countless ways, both in my personal life and in business. I have had the 

benefit of some very successful investment opportunities. In 2001, 

I found myself in a situation where it seemed likely that I would 

be receiving a significant amount of income from the anticipated 

sale of Fox Family Worldwide. I consulted my trusted tax and legal 

advisor, whose advice I have followed for 15 years, and asked that 

he explore tax planning possibilities regarding the expected income. 

After several months, my advisor, accompanied by an individual 

from Quellos, came to me with what appeared to be a very complicated proposal for tax deferral. It involved numerous steps and 

entities. I did not understand the structure of the transaction, but 

I did have two concerns that I raised with my advisor: That the 

transaction be legal, and that a reputable law firm would say so. 

My advisor assured me that this was the case. I am neither a 

lawyer nor an accountant. In fact, my formal education ended when 

I finished high school. As a result, I relied on those assurances and 

left the structures and details of the transaction to others. 

Long after the transaction was concluded, I learned that I had 

been poorly advised in 2001 and that there were problems with the 

assurances that I received at the time. I was quite upset, to say 

the least. I am now in the process of arranging with the IRS and 

State authorities to pay the taxes, interest, and substantial penalties. 

Again, I appreciate the opportunity to share my experience with 

you, and I would be happy to answer your questions. 

Senator COLEMAN. Thank you, Mr. Saban. Mr. Johnson. 

TESTIMONY OF ROBERT WOOD JOHNSON IV, NEW YORK, NEW 

YORK 

Mr. JOHNSON. My name is Woody Johnson, and I am here in response to the Subcommittee’s request to discuss a transaction that 

occurred more than 6 years ago. 

I have been in business for 30 years, and over that time I have 

entered into many transactions. In each transaction, I have always 

relied on advisors and counsel. In 2000, I entered into a financial 

transaction with complex tax implications. Before entering into this 

transaction, I was advised by my long-standing accountant, Larry 

Sheinfeld, an investment advisor at Quellos, and Cravath, Swaine 

and Moore, one of the most prestigious and well-established law 

firms in the country, that their analysis of the tax implications was 

consistent with the Tax Code. In short, I was assured by my advisors that this transaction was legal. I would never have entered 

this transaction had I believed otherwise. I even asked for and received a formal legal opinion from Cravath approving the transaction. 

I want to emphasize for the Subcommittee that I did not and do 

not have any personal knowledge about the particular steps or details of the transaction. As I do for all of my business dealings, 

even substantial ones, I relied on my staff and on our attorneys, 

accountants, and investment advisor to handle those details. And, 

therefore, I have previously told the Subcommittee I cannot answer 

necessarily specific questions about the details of the transaction. 

39

1The prepared statement of Mr. French appears in the Appendix on page 140. 

In 2002, again relying on the advice of my attorneys and accountants, I voluntarily came forward and fully disclosed this transaction to the IRS. In subsequent years, the IRS audited the transaction and challenged the claimed tax treatment. I then settled 

with the IRS and agreed to pay 100 percent of the tax owed, plus 

all interest. 

Also, I would be willing to answer questions that I am capable 

of answering. 

Senator COLEMAN. Mr. French. 

TESTIMONY OF MICHAEL C. FRENCH,1 FORMER WYLY TRUST 

PROTECTOR, DALLAS, TEXAS 

Mr. FRENCH. Thank you, Mr. Chairman. Mr. Chairman, Senator 

Levin, and Members of the Subcommittee, I would like to begin by 

thanking the Subcommittee staff, in particular Robert Roach and 

Mark Nelson, for their courtesy and professionalism with respect to 

this matter. 

My name is Michael C. French. I reside in Dallas, Texas. I am 

the retired chairman of the board of Scottish Re Group Limited, a 

life reinsurance company that I founded and took public in 1998 

and listed on the New York Stock Exchange. It has become one of 

the largest life reinsurance companies in North America. 

I practiced law in Dallas from 1970 to 1992 with the firm of 

Jackson and Walker, focused primarily on corporate transactions. 

Some of my largest clients in the law practice were companies in 

which the Wyly family in Dallas had interests. 

At the end of 1992, I left the active practice of law and formed 

a relationship with the Wyly family, joining several of their companies as a director and consultant. And I was also very active in the 

establishment, in 1993, of Maverick Capital, an investment management business that was sponsored by the family, and I remained active in that business until 2000, by which time Maverick 

had grown to have over $7 billion under management. 

I severed my relationship with the Wyly family and sold my interest in Maverick in the year 2000. 

It is important to note that in testifying today I am constrained 

by several factors. First, I have been instructed by the Wyly’s counsel that they consider me to have been providing legal services to 

them during the period from 1993 to 2000, and further instructing 

me not to disclose any privileged attorney-client communications or 

attorney work product. 

I am also limited in that I severed my ties with the Wyly family 

and their companies over 6 years ago and have very little knowledge of their activities since that time. And for that matter, a substantial portion of my time for up to 3 years before I severed my 

relationship with them was spent much more in building and operation Scottish Re on a full-time basis and not on Wyly family matters. 

In addition, my separation from the Wyly family was not entirely 

cordial and under the terms of a settlement agreement, I was required to return to them or destroy any documents I had relating 

to their affairs. 

40

1See Exhibit 6 which appears in the Appendix on page 722. 

And last, I am not an expert on tax issues relating to foreign 

trusts and have never practiced law in that area, although I was 

exposed over the years to the advice of a number of attorneys who 

did. 

In addition to my other activities, I served as a protector of various Wyly family trusts in the Isle of Man from 1992 until late 

2000. Both the Wyly family and I received advice from various lawyers and law firms regarding the establishment, structure, and operation of those trusts. To the extent that advice related to me individually, as opposed to me as a representative of the Wyly family, 

I am able to discuss it and I am not constrained by their attorneys’ 

instructions regarding their attorney-client privileges. 

In that regard, I was a beneficiary of an Isle of Man trust similar 

to some of the Wyly trusts and while I believed, based on the legal 

advice that was given to me, that the trust was a legally effective 

mechanism, I became concerned that it was too aggressive in light 

of the newer IRS pronouncements that started coming out around 

2000. Therefore, I unwound the deferral mechanism in February 

2001 and had the trust domesticated to the United States at the 

end of 2002. 

And with that, I will be pleased to try and answer any of your 

questions. 

Senator COLEMAN. Thank you very much, Mr. French. We appreciate your candor. We understand there are some limitations on 

your testimony 

Just first, Mr. Saban and Mr. Johnson, each of you were involved 

in transactions where you were going to realize a significant 

amount of gain, capital gain. And I presume it is not unusual in 

those circumstances to go to your lawyers and say hey, we would 

like to minimize our tax liability within the bounds of the law. I 

presume that is not an unusual thing to do? 

Mr. JOHNSON. That is right, it is not unusual. 

Senator COLEMAN. Mr. Saban. 

Mr. SABAN. I concur. 

Senator COLEMAN. Mr. Saban, you then went to Bryan Cave, a 

very prominent law firm in St. Louis. And Mr. Johnson, you went 

to Cravath, Swaine, which is a very prominent law firm in New 

York. Is that correct? 

Mr. JOHNSON. Correct. 

Senator COLEMAN. Mr. Saban. 

Mr. SABAN. I did not go to Bryan Cave. 

Senator COLEMAN. Let me back up. You requested that one, the 

POINT deal be kosher; and two, that prominent law would provide 

an opinion letter indicating that it was kosher. Is that correct? 

Mr. SABAN. This is accurate. 

Senator COLEMAN. And so, in the end, you got an opinion from 

a very prominent firm essentially saying this was a kosher deal? 

Mr. SABAN. Correct. 

Senator COLEMAN. If I can use Senator Levin’s chart on the 

POINT strategy,1 I have a couple more questions. 

41

Mr. Johnson, did anyone ever talk to you about the entities 

known as Jackstones or Barnville that were set up in the Isle of 

Man? 

Mr. JOHNSON. I testified before your Subcommittee and I did not 

recall that. 

Senator COLEMAN. Mr. Saban, did anyone talk to you about setting up entities in the Isle of Man named Barnville and 

Jackstones? Do you recall that? 

Mr. SABAN. When this chart was presented to me by my advisor 

I said to him, I am sorry, I cannot even begin to get my arms 

around this. 

Senator COLEMAN. Even if you had a college degree, Mr. Saban, 

it would be difficult getting your arms around this. 

Mr. SABAN. If I was a professor, I do not think I could get my 

arms around this. I just said answer those two questions. Is it kosher? And can we get a reputable firm to say so? 

Senator COLEMAN. One of the things involved in these transactions to support the tax benefits was an investment piece. Did 

anybody talk to you about the investment piece and why an investment piece was necessary for you to cover some tax losses, either 

Mr. Saban or Mr. Johnson? 

Mr. JOHNSON. I do not recall being told what the implication of 

the investment piece was, no. 

Senator COLEMAN. Mr. Saban. 

Mr. SABAN. It was mentioned to me that there were two components, the tax deferral component as well as the investment piece. 

Senator COLEMAN. Did Quellos indicate to you which was the 

main part of this deal, what this was all about? 

Mr. SABAN. It was very clear to me that the main part of the deal 

was tax deferral. 

Senator COLEMAN. This is a pretty significant way to write off a 

lot of gain. Did that raise any questions in your mind about the 

amount of gain that could be written off by this kind of complex 

transaction? Mr. Johnson. 

Mr. JOHNSON. I thought it was a deferral mechanism, rather 

than an ability not to ever pay those taxes. But it was one that I 

think we paid a fairly large fee, so I assumed that it had been carefully researched. 

Senator COLEMAN. Do you recall what your fee was? 

Mr. JOHNSON. I think it was over $5 million. 

Senator COLEMAN. Mr. Saban, do you recall what your fee was? 

Mr. SABAN. Close to $50 million. 

Senator COLEMAN. Mr. French, can you explain to the Subcommittee what a trust protector does, from your perspective? 

Mr. FRENCH. In the context that I was involved—— 

Senator COLEMAN. Specifically, from 1992 to 2000, regarding the 

offshore trusts of Sam and Charles Wyly, can you tell me what you 

saw your responsibilities to be? 

Mr. FRENCH. First, the—probably pretty much the only power 

that a protector had under those trust documents was to remove 

the trustee. In connection—and that essentially was it. There may 

have been a few other collateral powers, but not many. 

But in connection with my being appointed as a protector in 

those trusts in 1992, I personally asked for advice from the attorVerDate 0ct 09 2002 07:08 Mar 29, 2007 Jkt 029760 PO 00000 Frm 00073 Fmt 6633 Sfmt 6601 C:\DOCS\29760.TXT SAFFAIRS PsN: PAT
42

1See Exhibit 10 which appears in the Appendix on page 732. 

neys who were setting all of that up about what exactly is the role 

of a protector. And was told by them that one of the functions 

would be to serve as a communication trail between the beneficiaries and the trustees, that recommendations with respect to 

transactions could be made. 

And so that was what I understood to be part of the role and 

part of the role that was blessed by the attorneys who set up the 

entire structure. 

Senator COLEMAN. So, as trust protector, you would get recommendations from the grantor and the beneficiaries, and give 

them to the trustees themselves, who would then have the option 

of executing the recommendations; is that correct? 

Mr. FRENCH. That is correct. 

Senator COLEMAN. How many recommendations do you think you 

were involved in making? 

Mr. FRENCH. I really do not recall anymore, Senator. 

Senator COLEMAN. Can you give me a ballpark figure? 

Mr. FRENCH. It was a long time ago. No, I really do not because 

I phased out of that somewhere after the mid-1990s and I really 

do not recall. I saw a number of documents in the document list 

when I was testifying before the staff, but I never counted them, 

so really cannot. 

Senator COLEMAN. Do you recall a recommendation ever being 

rejected by the trustees? 

Mr. FRENCH. Not rejected. I do recall a few situations where the 

trustees had some concerns about some specific investments. 

Frankly, I do not recall making recommendations with respect to 

those investments. But they expressed a concern to me later about 

some investments they had. 

Senator COLEMAN. But not rejecting a recommendation? 

Mr. FRENCH. No. 

Senator COLEMAN. If I can ask you to look at Exhibit 10,1 it is 

a letter in the exhibit book over there. If you would just open that 

up and turn to Exhibit 10, the big thick book there. 

Mr. FRENCH. OK, I have Exhibit—a letter dated April 20? 

Senator COLEMAN. This purports to be a letter—I think this is 

from you, is it not? Your signature is on this, yours and Sharyl 

Robertson’s. This is to Lorne House Trust, whom I presume to be 

the trustee. 

And the letter is very detailed. ‘‘Pursuant to Section 8 of the 

Pitkin Non-Grantor Trustee Agreement,’’ etc. ‘‘To exercise 100,000 

Michaels Stores options held in Roaring Creek, Limited, which is 

owned by the Pitkin Non-Grantor Trust using a cashless exercise 

through First Boston Corporation and Lou Schaufele being the 

broker.’’ ‘‘The committee recommends selling all the stock at a price 

to exceed at least $20 per share.’’ ‘‘The exercise price is $3.00 a 

share, requiring $300,000 to exercise the stock with Michaels 

Stores.’’ ‘‘Cash in excess of’’—and so on. 

This is a very detailed letter that you sent. Where did this information come from? 

Mr. FRENCH. The information? 

43

1See Exhibit 18 which appears in the Appendix on page 769. 

Senator COLEMAN. Excuse me, where did the recommendation 

come from? 

Mr. FRENCH. The recommendation came from the Wylys. 

Senator COLEMAN. And that recommendation was then given to 

the trustee, who then executed this transaction? 

Mr. FRENCH. That is correct. I should note——

Senator COLEMAN. This transaction. 

Mr. FRENCH. Yes. I should note that the attorneys, again, that 

were involved in setting up these trusts were aware of this and had 

advised me that this was OK. 

Senator COLEMAN. Again, if you can turn to Exhibit 18 in the 

book.1

Mr. FRENCH. Yes. 

Senator COLEMAN. This is a fax transmittal from you to Ronald 

Buchanan. Was Mr. Buchanan a trustee at Lorne House Trust? 

Mr. FRENCH. Yes, he managed Lorne House Trust. 

Senator COLEMAN. Exhibit 18 starts off with ‘‘Please dispose of 

this fax after reading, as there will be ample documentation as 

needed.’’

And then it says ‘‘It is expected that a recommendation will be 

made to Wychwood that the Plaquemines Trust, and another trust 

settled with Wychwood by Pitkin, should contact Lehman regarding acquiring call options on SSW, probably for about 2 years in 

the market. Wychwood would finance the transactions through 

loans from Lorne House entities. It is likely that a portion of the 

price could be financed through Lehman.’’

Again, this direction came from where? 

Mr. FRENCH. This direction came from the Wylys. 

Senator COLEMAN. And by the way, this fax says ‘‘Wychwood 

would, in either case, be limited to approximately 600,000 to 

700,000 calls, in order to stay under 5 percent of outstanding 

shares and avoid SEC reporting.’’ Is that correct? 

Mr. FRENCH. That is what it says, yes. 

Senator COLEMAN. Did that ever raise any concerns to you, as a 

protector, that directions were being given here to avoid SEC reporting? 

Mr. FRENCH. The SEC—the 13(d) rules is what I think you have 

made reference to, and they were a little bit legalistic in the way 

they—and I think they still are, as a matter of fact. They literally 

look to who has the legal power to vote the shares, who has the 

legal power to sell the shares. And then there are other provisions 

in there. 

But I think—no, I did not—at the time, I thought this was OK. 

Senator COLEMAN. My time is up. I will turn to Senator Levin. 

I will come back to the witness. 

Senator LEVIN. First, let me thank all of our witnesses for coming here today. I know that, Mr. Saban, you had to travel a long 

way to get here and you are returning that distance. I do not know 

how far the other two came, but we appreciate your being here and 

just frankly, wish the Wylys were also here to give us their position. But they had a right to assert those constitutional rights. 

They did so. But it does mean that you should all be aware of the 

44

fact that your presence here is very much appreciated by this 

Sybcommittee. 

Mr. Saban, you made reference to the fact that at some point in 

the presentation of this tax structure to you of this tax shelter, that 

you were told that there needed to be an investment piece added 

to it; is that correct? 

Mr. SABAN. Correct. 

Senator LEVIN. And that you were told, as I understand, that the 

investment piece was needed so that the tax deferral piece would 

‘‘hold water?’’ 

Mr. SABAN. Correct. 

Senator LEVIN. And that the tax deferral was ‘‘ad infinitum.’’ 

Mr. SABAN. Correct. 

Senator LEVIN. Mr. Johnson, were you also told, when you were 

told that this was just a tax deferral and not tax avoidance that 

this was an ad infinitum tax deferral? 

Mr. JOHNSON. No, I do not recall that, no. 

Senator LEVIN. Did they tell you how long it would be deferred? 

Mr. JOHNSON. No. 

Senator LEVIN. Did you ask them how long it would be deferred? 

Mr. JOHNSON. I do not think—I do not remember doing that, no. 

Senator LEVIN. So that, in terms of what this bought you, in 

terms of what you thought it bought you—put it that way—which 

would be a tax loss to offset a tax gain, in your case, Mr. Saban, 

as I understood it, you had a taxable capital gain of about $1.5 billion; is that correct? 

Mr. SABAN. Correct. 

Senator LEVIN. And the cost to you, including that so-called in- vestment piece, was $50 million? 

Mr. SABAN. I think it is a little more than $50 million, including 

various fees but it is the ballpark. 

Senator LEVIN. So in the ballpark of $50 million. You were informed by your lawyer and adviser that you could obtain a capital 

loss to offset your capital gain of $1.5 billion. 

Now you are a businessman. Did that not raise alarm bells in your head? I know $50 million is a lot of money. It is about $49-

plus million more than I will ever have, and $49.9 million than 

most Americans will ever have. So I am not talking in terms of 

that not being a lot of money. I am talking about relative to what 

you were buying, a tax loss of $1.5 billion. That is about a 2,500 

percent return on that investment. 

Did that not ring off some alarm bells in your head? 

Mr. SABAN. It did, which is why I asked my advisor, who has 

been by my side for 15 years, is this completely kosher; i.e. legal? 

And would a reputable law firm say so? And the man who was 

with me for 15 years assured me that this is the case. 

Senator LEVIN. Have things really gotten so bad in this country 

that avoiding taxes to the extent that you thought you were 

doing—of not paying capital gains on a $1.5 billion—could be purchased with such a relatively small cost? 

It seems to me that is the fundamental question that you both 

face as legitimate business people. Have we really gotten to that 

point where you do not say something is wrong here? Something 

smells here. Something is rotten here? 

45

1See Exhibit 4 which appears in the Appendix on page 629. 

Mr. Johnson, did you have alarm bells go off in your head when 

you, for a few million dollars as I remember, were purchasing a tax 

loss of about—what was that, $145 million? 

Mr. JOHNSON. I think it is safe to say that—yes. And that is why 

I relied on my advisors, both legal advisers and investment advisers, and we got that opinion from Cravath because we wanted to 

make sure that this deferral strategy was correct and legal and copacetic with the IRS code. 

Senator LEVIN. It turns out it was not copacetic with the IRS, to 

put it mildly. And it is not copacetic or acceptable to, I think, any 

kind of average person who says what is going on here that professionals are giving advice to people who have huge capital gains 

that they can shed those capital gains, just shed them like a piece 

of clothing for a relatively tiny cost? 

We are going to press these professionals who come before us 

later. But I have to tell you I believe that there is some responsibility in you to just say to these people, something has got to be 

wrong here, have you folks checked out the transactions that underlie this creation? 

I will leave it at that for you. 

Mr. French, it appears that the Wyly protectors, and you being 

one of them, the trust protectors, made recommendations to the 

trustees. You have already testified to the Chairman’s question 

that these recommendations to the trustees were invariably carried 

out. There may have been an exception, but basically how many 

recommendations would have been made to the trustees? Would it 

be in the hundreds? 

Mr. FRENCH. I do not think I participated in that many recommendations but I do not have——

Senator LEVIN. Would it be a lot over the years? Would there be 

a significant number of what you call recommendations that were 

made? 

I am going to put in front of you Exhibit 4.1 These are recommendation after recommendation after recommendation. We 

have identified about 100 of them. Let me just give you some of the 

recommendations that were made to you—made to the protectors, 

first of all. 

In Exhibit 4, there is a letter from Shari Robertson. ‘‘Mike 

French and I would like to recommend to the trustee to purchase 

the following security from Sam Wyly . . . in one of the foreign corporations owned by Bulldog Trust.’’

Another one, ‘‘the protectors are prepared to recommend . . . to 

move a stock a block out at $15 a share.’’

Another e-mail, ‘‘Here’s a brief outline of the usual process . . . 

for acquisitions [of art].’’ Acquisitions of art. ‘‘I usually get the invoice and forward it to the Isle of Man . . . indicating that ‘the protectors recommend payment.’ ’’

Next, ‘‘The protectorate committee recommended that you consider that the Tyler Trust consider the purchase of collectibles and 

art work. I am attaching following invoices totaling $450,000.’’

46

Next, ‘‘Shari Robertson and I, as protectors, recommend that the trustee consider contributing $10,000 to the lobbying effort’’—this 

is a fax from you. 

And so forth, page after page of recommendations, so-called, to 

the nominal trustees here. 

Do you remember making these kinds of recommendations? 

Mr. FRENCH. Yes, to the extent that these reflect that they came 

from me, although some of the dates do not look right because the 

first one says 2002. I was long gone from the Wyly organization 

long before that. 

Senator LEVIN. But you remember these kind of recommendations being made? 

Mr. FRENCH. Not so much with respect to some of the artwork. 

There were a few that I recall about art, but not all of these, I do 

not believe. French Empire chandeliers and things like that. 

I believe when I went over this with the staff they had some—

these were faxes, not e-mails, and a lot of them may have had my 

name on it but no signature. And some others did not have my 

name on it, at all. 

Senator LEVIN. It says here, talking about chandeliers, ‘‘The protectors,’’ that is you, ‘‘recommend the purchase of French Empire 

chandelier for $24,421.’’ That was from Shari Robertson and you. 

Do you remember that? 

Mr. FRENCH. I believe if you go back and find that document, it 

has my name on it but I did not sign that document. 

Senator LEVIN. Were you aware of that kind of—— 

Mr. FRENCH. Actually no, not really. These in the later years, a 

lot of recommendations appeared to have been made that I was not 

aware of, particularly with respect to personal matters. 

Senator LEVIN. How about things like real estate investments 

and recommendations? 

Mr. FRENCH. I do not recall ever making a recommendation with 

respect to a real estate transaction. 

Senator LEVIN. What kind of recommendations did you make, 

that you recall? 

Mr. FRENCH. They were earlier on and they related to dealing 

with investments that were held by the trust, either investments 

in some of the companies, Sterling Software, Michaels Stores, etc., 

or Maverick Fund, things like that. 

Senator LEVIN. Where were those requests to you from? 

Mr. FRENCH. The request that you make the recommendation? 

Senator LEVIN. Yes. 

Mr. FRENCH. Those directions or instructions or requests, whatever, generally were communicated to me from the Wylys, usually 

via Shari Robertson. 

Senator LEVIN. My time is up. I hope there will be another 

round, though. 

Senator COLEMAN. We will have another round, Senator Levin. 

Senator LEVIN. Thank you. 

Senator COLEMAN. Senator Lautenberg. 

Senator LAUTENBERG. Thanks, Mr. Chairman. 

I want to thank our people at the witness table, Mr. Saban, Mr. 

Johnson, and Mr. French. I want to say this: I know both of you, 

not directly but through content, and have respect for you and your 

47

1See Exhibit 4 which appears in the Appendix on page 629. 

business accomplishments. Mr. Johnson, I know more about you 

because we come from the same State and respect what you have 

done. 

One of you shows that in America you can succeed as no other 

place. The other of you has taken family wealth acquired over a lot 

of years and used it for many good purposes, charitable in each 

case. 

But I am disturbed and the advantage that Senator Levin, he 

had the opportunity to ask my questions first. And that is—and by 

the way, Mr. Chairman, do any of these signs say disregard Lautenberg? 

Senator LEVIN. Exhibit 4.1

Senator LAUTENBERG. Exhibit 4 for the witnesses to see. 

Whether we use the words kosher or copacetic, I think I sense 

an area of discomfort in the use of the words, because there has 

to be an awareness of some sort that you are paying less tax. You 

both each said yes, deferred taxes. 

But why were taxes being deferred? Is that not, in your view, an 

obligation of citizenship? Either Mr. Saban or you, Mr. Johnson. 

Mr. JOHNSON. I agree 100 percent, it is an obligation. 

Mr. SABAN. I concur. 

Senator LAUTENBERG. So then why not? I almost feel on the 

other side of the table, and I started a company with a couple of 

other poor boys and we succeeded beyond our wildest expectation. 

But I feel that just being in this country, when my grandparents 

came they brought my parents as very small children, is such a 

distinct honor, such a distinct miracle. 

And believe me, I am not happy when my taxes or my estimates 

have to be paid and so forth. There is always some concern about 

what am I doing. 

And then when I think about the fact that we are spending 

money on research against cancer and diabetes and things of that 

nature, I say what a treat, that we are spending money on educating people. Not enough. But I think wow, what a wonderful opportunity this is. 

So forgive me each of you, we are just on a different telescope, 

I guess. 

Because some alarm had to be raised or some concern had to be 

raised with the fact that you were actually laying out very little 

cash, on a relative basis. We heard your discussion, Mr. Saban, 

with Senator Levin as he compared the down payment to the ultimate savings. 

I do not want to continue to ask the obvious but you sought the 

shelters, you got the shelters. And now, when they are out here in 

the public light, they do not look nice for either one of you for the 

kind of people that you are and the kind of people that you represent, in many cases so well. 

Mr. Chairman, I am going to conclude my comments with one 

thing I wanted to ask Mr. French, one thing could be two or three 

but in keeping within the time constraint as you have laid out. 

Mr. French, what was the value of Maverick when you joined 

them in 1993? 

48

1See Exhibit 18 which appears in the Appendix on page 769. 

Mr. FRENCH. Maverick Capital was a startup enterprise that was 

going in the investment management business. It is a hedge fund 

manager. In the summer of 1993 we brought in an investment 

manager named Lee Ainsley from Tiger Management in New York 

and started looking for outside investors. 

Senator LAUTENBERG. Do you remember what the capital was? 

Mr. FRENCH. The capital of? 

Senator LAUTENBERG. That was put in initially by the Wylys. 

Mr. FRENCH. Some of the Wyly Trust were investors in the original fund. I do not recall how much that was. I think it was about 

$40 million. 

I do not know what the investment in Maverick Capital, the 

management company itself, was. 

Senator LAUTENBERG. Because it grew to $7 billion by 2000——

Mr. FRENCH. Yes. The assets under management grew to at least 

$7 billion at the end of 2000. 

Senator LAUTENBERG. And your being an educated man in the 

law and so forth, I hear from your comments some discomfort with 

the reach for these shelters that were overseas; am I correct? 

Mr. FRENCH. I think that might be getting into legal advice or 

something like that, Senator. 

Senator LAUTENBERG. I do not want you to overstep a bound, but 

can I ask your opinion? If the Wylys were at the table with you, 

do you think that they could say they were not aware of the value 

of these shelters? 

Mr. FRENCH. Unfortunately, Senator, I cannot speak for them. I 

do not know what they would say. 

Senator LAUTENBERG. Yes, well, you know them well enough to 

have an opinion about them. 

Mr. FRENCH. No. I really do not have that opinion. 

Senator LAUTENBERG. Thank you, Mr. Chairman. 

Senator COLEMAN. Thank you, Senator Lautenberg. 

I would know and I would associate myself with the concerns 

raised by Senator Lautenberg. But I would say to my friend from 

New Jersey that not every American is as thrilled and as exhilarated by paying taxes, and the arrival of April 15 is not a day of 

celebration for many Americans. I just wanted to reflect on that a 

little bit. 

Let me get to Mr. French. I have a follow-up, Mr. French, about 

Exhibit 18.1

When you were interviewed by staff you explained the reason 

that you asked that this document be destroyed is that you were 

worried the instructions from the protectors were becoming too detailed; is that correct? 

Mr. FRENCH. I think that is not quite what I said, Senator. First 

of all I do not specifically recall this situation, because it was 11 

years ago in terms of the specific conversations. But I was concerned—I had become concerned with the whole issue of making 

recommendations. These were fairly specific recommendations. And 

I just was not that happy with being asked to continue to make 

these sorts of recommendations. 

49

1See Exhibit 44 which appears in the Appendix on page 1011. 

Senator COLEMAN. Again, the recommendations came from the 

Wylys to you, and you then forwarded them on to the trustees who 

then, invariably, on almost every occasion, executed the recommendations; is that correct? 

Mr. FRENCH. That is correct. To the extent that I was involved 

in recommendations, that is correct. 

Senator COLEMAN. The Ranking Member raised the issue of protectors recommending personal property purchases, in one case a 

painting. I am reflecting on something that was in the Wall Street 

Journal yesterday, I am not going to give that automatic credence. 

I am rather going to ask you. 

The paper noted that, in 1996, Sam Wyly successfully bid at 

Sotheby’s for a painting by John William Godward. Shortly thereafter, another Wyly-funded company in the Cayman Islands sent a 

letter to Mr. Buchanan at Lorne House stating, ‘‘The protectorate 

committee recommended buying the painting.’’ The article goes on 

to note that Buchanan responded a few days later questioning 

whether the painting was a wise investment. Then the article says 

he received a strong letter from Mr. French stating that ‘‘we need 

to resolve this issue at once,’’ and insisting that Mr. Buchanan had 

‘‘no legal grounds to question this transaction.’’ 

Did you, in fact write a letter to Mr. Buchanan regarding the 

painting by John William Godward? 

Mr. FRENCH. I do not recall the painting but the answer is yes. 

I think it is one of the exhibits around here someplace or it is referenced in this report. I am looking for it right now but I cannot 

quite find it. 

That letter basically pointed out to Mr. Buchanan that under the 

terms of the trust, the instrument, the trust was permitted to do 

these kinds of transactions. 

Senator COLEMAN. But Sam Wyly himself in this regard was 

worried very strongly about purchasing this painting; is that correct? You were not reflecting your own personal feeling about this 

painting. You had been instructed by the Wylys to push this matter. 

Mr. FRENCH. I had no personal feelings about the painting, Senator. 

Senator COLEMAN. Did Mr. Buchanan, in fact, apologize to you 

about this afterwards? 

Mr. FRENCH. Again I cannot find the document. 

Senator COLEMAN. I think Exhibit 44 is the document.1

It reads, ‘‘Attached is language from the Deed of Settlement of 

the Bessie Trust. This language clearly authorizes a purchase of 

personal property for personal use and enjoyment,’’ etc., ‘‘unless 

there is a clear and unequivocal requirement of IOM law (which I 

doubt), that any such purchase that is specifically authorized by 

the trust agreement must nevertheless be weighed against the investment,’’ etc. ‘‘The protectors have already recommended this 

transaction. Please advise if you are unwilling to proceed on that 

basis in light of the explicit authorization for the transaction contained in the Trust Deed.’’

Were you directed to prepare this message to Mr. Buchanan? 

50

1See Exhibit 11a which appears in the Appendix on page 741. 

Mr. FRENCH. It was my instruction, yes, to contact the trustee 

and see to it that this was accomplished, because it was permitted 

by the trust agreement. 

Senator COLEMAN. Again, you are not providing legal counsel 

here, but it is similar to the question that the Ranking Member 

asked Mr. Saban and Mr. Johnson. You are watching this go on, 

you are making very specific recommendations, and you have some 

knowledge that these trusts are supposed to have some independence. 

At some point, do you say to yourself that a line is being crossed 

here? When detailed, specific instructions are not being followed, 

you come back with stern warnings. Viscerally and internally, did 

a light not go on and say, ‘‘We are crossing a line here that should 

not be crossed?’’

Mr. FRENCH. Not in connection with this particular transaction, 

Senator. I am not sure where I can go with what my feelings were 

here as we got into the later part of the 1990s, because that may 

be getting into these attorney-client privilege issues. 

Senator COLEMAN. I am not asking you about any advice you 

gave the Wylys. Just internally, your own internal sense, did you 

have sense that these recommendations were too specific, too direct, and were you concerned about crossing a line? 

Mr. FRENCH. I was concerned. Whether they were or they were 

not, I cannot say because we had been advised long ago by the 

counsel that was involved in this that this—I have been advised by 

the counsel that were involved in this that this was OK. Notwithstanding that, it began to trouble me. 

Senator COLEMAN. Senator Levin. 

Senator LEVIN. Thank you. 

First, Mr. French, I made a reference to Exhibit 4 in the first direction that was given by you to the nominal trustees, where it 

said, ‘‘Mike French and I would like to recommend to the trustee 

to purchase the following security and one of the following corporations owned by the Bulldog trust.’’ 

And then, underneath it says, an October 9, 2002 letter. That is 

a misprint and we will correct that. You said you were not there 

in 2002. It should have been 1992. 

Mr. FRENCH. It was probably 1992. Yes. 

Senator LEVIN. Do you remember that, now that it is 1992? 

Mr. FRENCH. I still do not remember it. 

This was right after these, not too long after these trusts were 

set up. And again, the advice to me from the counsel who set all 

of these up was that it was OK to make these kinds of recommendations. 

Senator LEVIN. The exhibit that this refers to, by the way, is exhibit 11a, where you got a copy of the letter to the trustee from 

Cheryl Robertson, which is—we are on Exhibit 11a, it says, ‘‘Carbon copy, Michael French.’’ 1

Mr. FRENCH. Yes. Is this the one about the Photomatrix Corporation? 

Senator LEVIN. Yes. But you still do not remember that one? 

51

1See Exhibit 63b which appears in the Appendix on page 1287. 

Mr. FRENCH. I thought you had referenced that other one and I 

apologize, Senator. Yes. I recall this. 

Senator LEVIN. Where did that recommendation to you come 

from—that request, come from? 

Mr. FRENCH. I do not specifically remember. I believe it came 

from Shari Robertson. 

Senator LEVIN. Where would she have gotten it from? 

Mr. FRENCH. From Mr. Wyly. 

Senator LEVIN. Which one? Which Wyly would that have been? 

Mr. FRENCH. Probably Sam Wyly, since it says to buy the security from Sam Wyly. 

Senator LEVIN. Mr. Saban, I just want to be real clear on the motive—your motive and the reason and rationale for entering into 

this transaction. Am I real clear that the purpose of your entering 

into this transaction was that it was to reduce taxes? 

Mr. SABAN. That is correct. 

Senator LEVIN. Now, were you told by the Quellos people that 

the source of the securities portfolio was a series of book entry 

trades that involved no real stock and no real cash? Were you ever 

informed of that? 

Mr. SABAN. No. 

Senator LEVIN. Would you take a look if you would, Mr. Saban, 

at Exhibit 63b.1

Mr. SABAN. Is there a tab on 63b? Because I only see 63. 

Senator LEVIN. You do not see a 63b on there? 

Mr. SABAN. There is no tab. 

Senator LEVIN. I just want to make sure that is a document that 

you signed. It is called: ‘‘Haim Saban Representation Certificate for 

Titanium Trading Partners LLC Federal Income Tax Opinion.’’ 

Mr. SABAN. Thank you. 

Senator LEVIN. I guess that is the last page in the book. 

Mr. SABAN. That is my signature. 

Senator LEVIN. Did you read that document? 

Mr. SABAN. No. 

Senator LEVIN. That document purports to relate to an investment of some kind. But the investment that was made here was 

just so the tax shelter would ‘‘hold water?’’ 

You did not get into this whole deal to make money, other than 

the benefit that you intended to receive from the tax loss; is that 

correct? 

Mr. SABAN. That was the main purpose. 

Senator LEVIN. Was there any other purpose? 

Mr. SABAN. There was a theoretical possibility of making money 

on the transaction of buying and selling stock. 

Senator LEVIN. That was not what motivated you; is that fair to 

say? 

Mr. SABAN. No. 

Senator LEVIN. That is fair to say that, then? 

Mr. SABAN. That is fair to say. 

Senator LEVIN. All right. Thank you. 

52

1See Exhibit 38 which appears in the Appendix on page 990. 

Now, Mr. Johnson, did Quellos ever inform you that the source 

of the security’s portfolio was a series of book entry trades involving no real stock and no real cash? 

Mr. JOHNSON. No. 

Senator LEVIN. Mr. French if you would take a look at Exhibit 

38 for me.1

This is a chart that we have. Number 8 is taken from this exhibit. This relates to the Bulldog Trust. 

Mr. FRENCH. I have the exhibit. 

Senator LEVIN. All right. 

This was prepared I guess after you left by a Wyly trustee. He 

prepared a document describing the Bulldog Trust, which was a 

1992 trust. If you look at Exhibit 38, you will see the first line 

there says that, ‘‘The Bulldog Trust was created by a trust agreement dated March 11, 1992, between Sam Wyly, a wealthy U.S. 

person, and Lorne House Trust Company Limited. The current 

trustee of the trust is IFG International Trust Company Limited.’’

Then the next paragraph is what I want to ask you about. ‘‘The 

reason for creating the trust was tax driven. Its purpose was to 

take the assets held/to become held within the trust and various 

Isle of Man companies owned by it outside of the settlor’s estate 

for U.S. gifts and estate tax purposes and at the same time to create a fund the income and gains of which were not attributable to 

any of the settlor or his family. The assets within the trust are now 

very substantial.’’

Was that an accurate description, from your recollection, of the 

Bulldog Trust? 

Mr. FRENCH. Senator, one of the things I am not an expert on 

is the attorney-client privilege. Let me make sure I am not stepping over the line again. [Consults attorney.] 

Yes. That was my understanding. I apologize. 

Senator LEVIN. That is OK. That was an accurate statement of 

the Bulldog Trust? 

Mr. FRENCH. Yes. 

Senator LEVIN. It was tax driven? 

Mr. FRENCH. Yes. 

Senator LEVIN. Thank you, Mr. Chairman. 

Thank you again, all the witnesses. I do not know if Senator 

Lautenberg has any questions. 

Senator COLEMAN. Senator Lautenberg. 

Senator LAUTENBERG. I will be brief, Mr. Chairman. 

Once again it is obvious that our friends with the professional 

talent that they call upon would not knowingly do anything that 

it was illegal, that was against the law. And I respect that. The 

legal question is not one that I am looking at here at all. 

But there is something that goes beyond the legality that talks 

about what other kinds of obligations that one has. It is a strange 

anomaly, because I see two gentleman before me who have a conscience and have a commitment to America. But yet, in this world 

of acquisition and, if I may say, even greed, there are things that 

are maybe legal but I do not think are appropriate or, to use a trite 

word, nice. 

53

Mr. Chairman, I come away with the conclusion that if things 

bear out what is said here, that is, that there is a lack of awareness which I find shocking for such good businesspeople not to 

know they were getting a super deal on something that beats all 

of the odds and that permits them to avoid responsibility to provide 

their share of the load that we all have as citizens in this country. 

And I think that is something I have learned, Mr. Chairman, 

that is, that we can point fingers here for bad judgment, but I 

think we have to look at the IRS and its enforcement process and 

see how lack of diligence was permitted because these things 

should never have escaped. And maybe we have to change the laws 

and we should do it—the tax law. But we also want to make sure 

that the Department of Internal Revenue knows that it has a responsibility to go after people and not be content with shortcuts, 

and resources, and movement of people that arouses suspicion 

within the framework. 

So, there is a lesson I think that we are all learning from this 

investigation and these hearings. And once again, I commend my 

colleagues Senator Coleman and Senator Levin for their diligence 

and thoroughness in this pursuit. 

Mr. Chairman, that concludes my interest in the questioning of 

these witnesses. 

Senator COLEMAN. Thank you, Senator Lautenberg. 

I would just note, from the last comments upon Exhibit 63 in 

which you signed your representation certificate. That is based on 

an 80-page opinion. I take it you did not read the 80-page opinion. 

Mr. SABAN. I did not. 

Senator COLEMAN. This is the 80-page opinion that told you this 

deal was kosher? 

Mr. SABAN. That is what my adviser told me. 

Senator COLEMAN. I want to thank all of the members of this 

panel. I appreciate your cooperation with this investigation. We appreciate your appearing here today. We understand the difficult 

circumstances under which you appeared in front of this Subcommittee—Mr. French, particularly—this Subcommittee is appreciative of all your efforts and cooperation. 

With that, this panel is excused. 

I would like to call our fourth panel of witnesses. 

Louis Schaufele is a securities broker, formerly with the Bank of 

America, Credit Swisse, First Boston, and currently with Stanford 

Group Co. 

Jeffrey Greenstein, Chief Executive Officer of the Quellos Group. 

Michael Conn, Bank of America’s Private Bank, Northwest Region President. 

And finally, George T. Wendler, Senior Executive Vice President, 

and Chief Credit Officer of HSBC Bank, U.S.A. 

Mr. Schaufele was a securities broker for various offshore accounts associated with the Wylys. I am looking forward to hearing 

details about securities transactions involving Wyly-related offshore corporations. 

I am concerned that efforts were made to circumvent or avoid 

Federal security laws reporting. 

Mr. Conn, I am eager to hear your understanding of various security transactions involving Wyly-related offshore accounts, and 

54

whether the Bank of America properly complied with anti-money 

laundering requirements. 

Mr. Greenstein, I want to thank you for coming this morning. I 

recall that you testified before us in 2003 during our previous investigation into tax shelters. I do have questions about the Quellosdesigned POINT strategy, which appears to have been designed to 

offset capital gains and minimize taxes. I am looking forward to 

your testimony this morning. 

Mr. Wendler, I am looking forward to hearing about your understanding of the POINT transaction, as I want to understand the extent to which banks should be concerned with providing financial 

services to support highly aggressive tax transactions. 

I want to, again, thank you all for coming to this important hearing. I look forward to your testimony. 

Pursuant to Rule 6, all witnesses before this Subcommittee are 

required to be sworn at this point. I would ask you all to please 

stand and raise your right hand. 

Do you swear the testimony you are about to give before this 

Subcommittee is the truth, the whole truth, and nothing but the 

truth, so help you, God. 

Mr. SCHAUFELE. I do. 

Mr. CONN. I do. 

Mr. GREENSTEIN. I do. 

Mr. WENDLER. I do. 

Senator COLEMAN. Again, we will be using a timing system. I 

would like you to keep your remarks to within 5 minutes. Your entire written statement will be entered into the record, as a whole. 

When the lights go from green to amber, that will tell you that you 

have about a minute left and you should conclude your testimony. 

Mr. Schaufele, we will have you go first, followed by Mr. Greenstein, then Mr. Conn. We will finish up with Mr. Wendler. After 

we have heard your testimony, we will turn to questions. 

Mr. Schaufele, you may proceed. 

TESTIMONY OF LOUIS J. SCHAUFELE, III, SECURITIES 

BROKER. 

Mr. SCHAUFELE. Thank you so much, Mr. Chairman and Senator 

Levin, for the invitation. 

One thing I would like to correct early on, I believe that in employment history, you stated that I was currently at UBS. I am actually at Stanford Management Group. 

Senator COLEMAN. That will be corrected in the record, Mr. 

Schaufele. 

Mr. SCHAUFELE. Mr. Chairman, I voluntarily met with the Subcommittee staff twice, and I have come today to answer questions 

that the Subcommittee may have. I have provided everything that 

the Subcommittee staff has asked of me. 

My work with the offshore companies has been subject to the 

compliance and guidance requirements of the firms where I have 

been employed. 

I welcome whatever questions the Subcommittee may have, and 

will do my best to answer them. Thank you. 

Senator COLEMAN. Thank you, Mr. Schaufele. Mr. Greenstein. 

55

1The prepared statement of Mr. Greenstein appears in the Appendix on page 142. 

TESTIMONY OF JEFFREY GREENSTEIN,1 CHIEF EXECUTIVE 

OFFICER, QUELLOS GROUP, LLC, SEATTLE, WASHINGTON 

Mr. GREENSTEIN. Chairman Coleman, Senator Levin, Members of 

the Subcommittee, my name is Jeff Greenstein. I am Chief Executive Officer, Quellos Group, and I appear here voluntarily. 

Quellos is an investment management firm founded in 1994 and 

headquartered in Seattle. Globally, we employ 270 people and manage more than $15 billion in assets for financial institutions, private and government employee pension plans, university endowments, foundations, and private clients. For several months, 

Quellos has cooperated with the staff of the Subcommittee during 

its review of a tax advantage strategy called POINT. Quellos employees voluntarily participated in interviews and we produced tens 

of thousands of pages of documents. 

Yesterday, the staff of this Subcommittee issued its report. We 

believe the report is unfair, one-sided, and inaccurate. I apologize 

in advance if I seem frustrated, but from my position, and I am 

neither a lawyer nor a tax expert, the report seems to have glossed 

over several basic facts. Unfortunately, I don’t have time in my 

opening statement to address all the mistakes and errors, but in 

my limited time, I wanted to briefly describe the POINT transaction and then highlight some of the fundamental errors. 

Six POINT transactions were executed 5 to 6 years ago by 

Quellos Custom Strategies, a small and now dormant subsidiary of 

the firm. The transaction combined a popular investment strategy 

with a tax strategy frequently executed in the United States by 

major investment banks. This Subcommittee should be aware of a 

couple fundamental aspects as it relates to POINT. 

These transactions were executed based on extensive consultation with leading tax lawyers, several of whom gave tax opinions 

approving the transactions. Each transaction had substantial opportunity for economic profit. Indeed, the report acknowledged that 

millions of dollars in gross trading profits were earned. Every client 

consulted his or her own professional advisors regarding the strategy. In fact, several directed us to communicate with their chosen 

advisors, and as a result, each of the transactions had significant 

differences. And finally, from the outset, we told the IRS about 

POINT by registering it. 

Let me now address several glaring problems with the staff report. First, the report indicates inaccurately that the POINT transaction is a black box that Quellos and others sought to hide from 

the U.S. Government. Nothing could be further from the truth. Almost 6 years ago, we registered the POINT transaction with the 

IRS as a tax shelter. We shared with the IRS information required 

by its disclosure regulation, and as a result, the IRS is reviewing 

this transaction. Thus, as opposed to being a black box, POINT was 

disclosed by us to the Federal Government early on. 

Second, the report suggests that the POINT transaction did not 

offer an opportunity for profit. In fact, POINT gave investors the 

potential either to earn profit or losses incurred based solely on 

market fluctuations. For the report to suggest otherwise is flat out 

wrong. 

56

1The prepared statement of Mr. Conn appears in the Appendix on page 147. 

Third, the report erroneously characterizes book entry transactions as fake. Every day, trillions of dollars of securities, commodities, and Treasury obligations are traded on a book entry 

basis. Over-the-counter derivatives and swap transactions are contracts that obligate parties to pay amounts based upon market 

movements in the underlying security or commodity involved. Because POINT had real opportunities for profit and loss, we and the 

clients or their advisors closely followed their portfolios. 

Finally, the report criticizes our involvement with offshore entities. However, we worked with and relied upon the EuropeanAmerican Investment Group because of its reputation—because of 

the reputation and broad experience of the principals in the overthe-counter markets. Euram assured us about its abilities to establish the portfolio. Euram, not us, selected the offshore entities, and 

Euram, not us, vouched for the abilities of those entities to engage 

in the transaction. Barnville and Jackstones satisfied their financial obligations to the partnerships, including the payment of millions of dollars and the delivery of shares when requested. 

Quellos is a well-regarded investment advisor. It has not implemented POINT or any similar transaction since 2001. Quellos has 

established an independently advised transaction review committee 

to review transactions with tax aspects. We take these issues and 

our reputation seriously. 

I hope these remarks have put things in better perspective, Mr. 

Chairman, Senator Levin. Thank you again for giving Quellos the 

opportunity to speak here today. 

Senator COLEMAN. Mr. Conn. 

TESTIMONY OF MICHAEL G. CONN,1 PRIVATE BANK NORTHWEST REGION PRESIDENT, BANK OF AMERICA, SAN FRANCISCO, CALIFORNIA 

Mr. CONN. Good morning, Chairman Coleman, Ranking Member 

Levin, and Members of the Subcommittee. I appreciate the invitation to appear before the Permanent Subcommittee on Investigations to discuss certain domestic brokerage accounts maintained by 

offshore private investment corporations that are the subject of the 

Subcommittee’s letter. 

My name is Michael Conn and I am a Regional President of the 

Private Bank of America. I have spent 26 years in the brokerage 

business and have been in private banking for the last 4 years. 

I would like to begin by emphasizing that Bank of America takes 

very seriously its regulatory obligations to know its customers, report suspicious activity, and assist law enforcement and its regulators in the fight against money laundering and other illegal activity. We are committed to improving our systems and process in an 

ever-changing and challenging world. 

We believe that our cooperation with the Subcommittee staff during the last year is an example of the bank’s commitment to cooperation with regulatory and law enforcement authorities. The 

bank fully recognizes that its delay in demanding specific beneficial 

ownership information from the customers of the brokerage accounts that we will discuss today was inconsistent with the bank’s 

57

commitment to knowing its customer. As I will explain in a moment, a number of factors explain but do not excuse the delay in 

demanding this information. 

Upon review of the facts here, senior management instructed 

bank personnel to demand that the customers provide the beneficial ownership information, ordered that the accounts be closed 

when the customers did not provide the information, and directed 

that significant remedial action be taken. Moreover, we have made 

numerous changes in response to the issues we identified during 

our review of our conduct with respect to these accounts. 

The Subcommittee has asked us to testify about the bank’s relationship with Sam and Charles Wyly. The Wyly relationship with 

the Private Bank began in 1994. It included checking and savings 

accounts, lines of credit, and mortgages. The Private Investment 

Corporation (PIC) accounts were transferred to Bank of America 

Securities (BAS) in February 2002, when BAS hired a broker from 

another financial institution who brought the accounts with him. 

The broker understood that the PICs were owned by trusts that 

were endowed by Charles and Sam Wyly for the benefit of the Wyly 

family members. The bank’s policies at the time were less stringent 

than they are today and did not always require that beneficial ownership information be obtained at account opening. In this case, the 

bank did not obtain specific beneficial ownership information as we 

would today. 

In August 2003, these accounts were transferred as part of a 

wholesale move of all retail accounts from BAS to BAI. NFS is the 

clearing firm for Bank of American Investment Services (BAI). In 

2004, NFS asked BAI compliance for certain information concerning certain of the PICs, including beneficial ownership information. The inquiries led to a dialogue between BAI associates, inhouse lawyers, and compliance personnel in NFS. This dialogue 

continued for months, as various alternative proposals for obtaining the beneficial ownership were considered. The customers’ representative maintained that they were not required by law to disclose such information, even if the information was required by 

BAI’s policies. The customers told BAI through the broker and 

other BAI associates that their reluctance to provide this information was motivated by confidentiality and asset protection considerations. 

Ultimately, BAI decided to require the customers to provide specific beneficial information. BAI and NFS agreed upon a list of 

questions to send to the customers requesting beneficial ownership 

information and other information about the accounts. Around this 

time, the bank received governmental inquiries relating to these 

accounts. When senior management became involved, the bank demanded beneficial ownership information from the customers. 

When the customers did not provide this information, BAI closed 

the accounts. The bank also decided to terminate its broader private banking relationship with the Wylys. 

The bank recognizes that, looking back, this process took way too 

long and it is difficult to understand the delay. In evaluating the 

delay, it is important to consider several important factors. BAI associates had a good faith belief that the accounts were not being 

used for illegal activity, which meant that the BAI personnel did 

58

1The prepared statement of Mr. Wendler appears in the Appendix on page 155. 

not view this issue as requiring immediate resolution. The Wyly 

family had a longstanding private bank relationship. The Wyly 

brothers are well-known businessmen and philanthropists in the 

Dallas community and nationally. There were extensive discussions 

between BAI and the customers and their representatives as to 

whether the beneficial ownership was legally required. The customers, through their representative, maintained that other similar 

institutions did not require such information. 

Ultimately, the bank took remedial action. As mentioned previously, the bank closed the accounts for the PICs and the broader 

Wyly relationship. The bank also took disciplinary action and personnel action with respect to BAI associates who were involved 

with discussions on this issue and did not immediately demand 

that the customers provide beneficial ownership information. 

Following a review of the facts underlying this matter, the bank 

took numerous other remedial steps, including improving compliance processes and structures, improving lines of communication 

with NFS, improving training, enhancing account opening and closure procedures, review of certain accounts, including PICs. Chairman Coleman and Senator Levin and others, I am now prepared 

to answer questions and welcome the opportunity to discuss these 

issues with you. Thank you. 

Chairman COLEMAN. Thank you very much, Mr. Conn. Mr. 

Wendler. 

TESTIMONY OF GEORGE T. WENDLER,1 SENIOR EXECUTIVE 

VICE PRESIDENT AND CHIEF CREDIT OFFICER, HSBC BANK 

USA, MARLBORO, NEW JERSEY 

Mr. WENDLER. Thank you, Mr. Chairman, Senator Levin, and 

Members of the Subcommittee. My name is George T. Wendler. I 

am Senior Executive Vice President and Chief Credit Officer for 

HSBC Bank USA, N.A. I am here primarily to answer the Subcommittee’s questions about the bridge loan and derivative collar 

services that HSBC provided to two Quellos-advised clients between the years 2000 and 2002. 

Bank personnel have only recently learned of Quellos using the 

phrase POINT strategy to describe a series of transactions that included our bridge loan and derivative collar services. I will also describe briefly the changes in law and bank policies that have occurred since the transactions took place. Because of those changes, 

HSBC would not provide support for the Quellos-advised POINT 

transactions if we were presented with them today. HSBC is committed to ensuring that it operates its business in full compliance 

with applicable laws and regulations and in accordance with best 

practices to limit the risk of our bank’s involvement in abusive tax 

shelters. 

I was Chief Credit Officer of HSBC Bank USA between 2000 and 

2002 and I serve in that role today. I trust the Subcommittee will 

understand that my business expertise is in credit matters and not 

in compliance or know-your-customer matters. I also was not the 

client contact or relationship officer. As a result, some of the information from my testimony was provided to me by bank personnel. 

59

They have greater knowledge than me on such matters. Having 

said that, I will do my best to answer all of your questions. 

HSBC’s domestic private bank was approached by the Quellos 

Group in the fall of 2000. It was asked to make a competitive bid 

on a bridge loan and derivative collar for a very high net worth 

Quellos client. The private bank was told that the client needed 

short-term financing to make an investment and that the collar 

was part of the investment strategy. During the course of negotiations for the loan and collar, the private bank learned more about 

the transaction. It learned that some of the Quellos-advised transactions involved acquisitions of LLC units and underlying technology stocks from Isle of Man companies and that a potential benefit would include U.S. tax deferral as well as an investment gain 

opportunity. 

HSBC was not the client’s tax advisor. Consistent with HSBC 

policies at the time, the private bank took steps to determine that 

the bank’s transactions with the client would be adequately 

collateralized, that they were highly likely to be repaid, and they 

were being entered into with reputable individuals and entities. 

This included personal meetings with the clients and consultations 

with other involved entities. 

The private bank also insisted that the flow of funds and stocks 

take place in cash and custody accounts established and monitored 

by HSBC, that the private bank’s internal and external counsel 

have the opportunity to review a tax opinion from a leading U.S. 

law firm before the transactions were executed, that the client acknowledge in writing that it was relying on independent tax and 

investment advice, and that it was not relying on any such advice 

from HSBC. HSBC also took steps to determine that the private 

bank itself had no tax shelter registration or any other tax reporting obligations relating to the transaction. 

The private bank did provide a loan and collar in the 2000 transaction and again in a larger 2001 transaction involving a second 

Quellos client. Finally, HSBC provided a collar to the first client 

again in a similar 2002 transaction. 

We believe our involvement, level of review, and diligence with 

respect to these transactions was lawful and consistent with general industry standards at the time. We are confident that the 

bank complied fully with its legal obligations. 

But I want to emphasize that for any similar proposal today, the 

bank would take significant additional steps. This is in part because the law has changed. For example, large loss transaction now 

require additional IRS reports, and know-your-customer and diligence requirements are more robust. They have new emphasis on 

complex structured finance activities. In addition, HSBC’s prudential requirements for diligence, lending and structuring services are 

significantly different today. In retrospect, there were some warning signs. Today, they would lead us to make additional inquiries 

and analyses concerning the underlying transactions and parties 

involved. If presented with the POINT transaction today, we would 

not participate. 

My written statement provides additional descriptions of our current credit approval and compliance policies. There was a December 2005 letter to our private bank managers that provides a good 

60

1See Exhibit 5 which appears in the Appendix on page 677. 

summary of HSBC’s standards today. I quote from that letter. ‘‘No 

customer or business arrangement is worth our reputation. Knowing our customers makes good business sense and helps us preserve our reputation for integrity and fair dealing. This responsibility cannot be delegated or abdicated and should never be taken 

lightly.’’ Let me assure the Subcommittee that HSBC does its best 

to live up to those standards in its daily business dealings. 

Thank you for the opportunity to appear today. I will be pleased 

to answer any of your questions. 

Chairman COLEMAN. Thank you very much, Mr. Wendler. 

I wonder if we could look at Exhibit 5 regarding the POINT 

strategy.1

Mr. Greenstein, I am going to start with you, and there is a lot 

that we need to cover in this panel. One, is it your testimony that 

the POINT transaction represented a popular investment strategy? 

Mr. GREENSTEIN. My testimony was some of the initial genesis 

of the POINT transaction represented a popular investment strategy from Western Europe, and that was a piece of the transaction. 

Chairman COLEMAN. But we have heard testimony that the purpose of the POINT strategy from the investors’, the clients’ perspective, was tax deferral. Tax avoidance was the purpose of POINT, 

is that correct? 

Mr. GREENSTEIN. Clearly, tax deferral was a key objective. There 

were investment opportunities associated with it, as well. 

Chairman COLEMAN. But clearly, the investment opportunities 

were de minimis. You heard both Mr. Johnson and Mr. Saban talking—do you believe they had any intent or any belief that this was 

an investment opportunity? 

Mr. GREENSTEIN. There was, as I said, clearly tax deferral. Once 

the clients, and in the case of Mr. Johnson and Mr. Saban, we 

talked to their advisors on a regular basis, once they had the profit 

and loss exposure associated with the equity securities, we talked 

to many of the clients almost daily because they were very concerned about the price movement in those securities. So while the 

tax deferral component was a large and important factor, there 

nonetheless was a profit and loss opportunity and it is not inconsistent for there to be investment attributes as well as tax attributes in a strategy. 

Chairman COLEMAN. Now, the transactions between Jackstones 

and Barnville, both Isle of Man entities, were what one would call 

netted or circular transactions. In other words, stock wasn’t actually exchanged. What Jackstones purported to own, $9.6 billion of 

shares, Barnville purports to buy, but Barnville loans the same securities back to Jackstones, which loans Barnville back the purchase price—no cash and no services are actually transferred, is 

that correct? 

Mr. GREENSTEIN. These transactions that you are referring to 

were legal contracts, not dissimilar to swaps or contract for differences or single stock futures, where in all of those cases there 

is no cash transfer but there is a legal obligation and there is no 

ownership transfer of specific entities unless the delivery is reVerDate 0ct 09 2002 07:08 Mar 29, 2007 Jkt 029760 PO 00000 Frm 00092 Fmt 6633 Sfmt 6601 C:\DOCS\29760.TXT SAFFAIRS PsN: PAT
61

1See Exhibit 60b which appears in the Appedix on page 1190. 

quested. And in the case of these transactions, when clients requested delivery, the delivery of the shares was made. 

Chairman COLEMAN. Were you aware that Jackstones and 

Barnville were capitalized with two pounds, five dollars? That is 

the extent of capital in these——

Mr. GREENSTEIN. No, I don’t believe that representation is correct. That would be analogous if the par value, say, in a stock in 

the United States, is a penny, the assets of the company and the 

share value could be significantly more. So I believe that amount 

represented the amount that the company was formed with but did 

not represent the assets, and we received assurances from the professionals at European American Investment Group that the entities had the wherewithal and the willingness to enter into the various contractual obligations. 

Chairman COLEMAN. Did you know that—and again, you talk 

about the willingness and the wherewithal—these were net obligations between Jackstones and Barnville. You could have picked 9.5 

billion. You could have picked X-billion, whatever it was. In effect, 

the obligations went back and forth and there was no net profit or 

anything to be made on this. 

Mr. GREENSTEIN. They entered into the transactions and then 

hedged those transactions and we reviewed—it is my understanding that these transactions, the nature of the transactions 

were reviewed extensively with the lawyers involved and opining 

on the transaction. 

Chairman COLEMAN. Did you share that with clients? 

Mr. GREENSTEIN. Yes, with the clients’ advisors. It is my understanding—I had, again, very little interaction with many of the advisors, but it is my understanding we went through these in detail, 

and in fact, one of the clients asked for verification along those 

lines and Euram went out and hired one of the top U.K. chartered 

accounting firms to actually verify the books and records of 

Euram—excuse me, Barnville and Jackstones as it related to the 

contractual obligations. 

Chairman COLEMAN. Mr. Wendler, looking at Exhibit 60b,1

Barnville and Jackstones, Limited were Isle of Man companies, 

each owned by trusts with mutually overlapping boards. Were you 

aware of the netting transactions and the nature of the relationship between Jackstones and Barnville? 

Mr. WENDLER. No, sir. 

Chairman COLEMAN. And you have indicated, if presented with 

the POINT strategy today, you wouldn’t go forward with that strategy, would you? 

Mr. WENDLER. Yes, correct. 

Chairman COLEMAN. I have more questions. Let me turn to another avenue of inquiry, but we will come back to this. 

Mr. Schaufele, I am trying to understand this issue of control in 

regard to security transactions. I understand from the testimony 

from Mr. French that the protectors would make recommendations 

to the trustees and ultimately the trustees would approve those 

recommendations, is that correct? 

62

1See Exhibit 21a which appears in the Appendix on page 777. 

Mr. SCHAUFELE. What I understood was the protectorates would 

make a recommendation to the trustee and the trustee then would 

make an order or whatever to me. That is correct. 

Chairman COLEMAN. Now, you understood this issue of being an 

independent entity, is that correct? 

Mr. SCHAUFELE. That is correct. 

Chairman COLEMAN. There had to be independence here. If I can 

turn to Exhibit 21a,1 when you changed jobs from Lehman Brothers to Bank of America in 2002, you informed the Wylys that their 

offshore accounts were being transferred to Bank of America as totally separate entities without any linkage. Can you explain what 

you meant when you said that? 

Mr. SCHAUFELE. Yes. As you heard, the onshore, the Wyly family 

onshore was a large client of Bank of America. They were a large 

creditor to Bank of America. The offshore was moving assets to 

Bank of America. The family wanted to make sure that these were 

treated totally separately, i.e., if there was a default by the onshore 

of one of their loans, that the bank wouldn’t go in and grab these 

offshore assets. 

Chairman COLEMAN. But you note in the—you noted that you 

want this to be sent to Charles and Sam. While the accounts were 

at Lehman, Lehman came to view some of the accounts as linked. 

Lehman went so far as getting counsel from Michael’s on the phone 

to see if they viewed the offshore accounts as affiliates. Even 

though the counsel did not view the offshore as affiliates, Lehman 

chose to treat them as affiliates. 

Mr. SCHAUFELE. And what—that happened in a transaction that 

we were proposing to both the Sam Wyly and to the Devotion, that 

Lehman viewed that the relationship between Sam and Devotion 

was going to be an affiliate relationship. We got counsel on the 

phone, all right. Sam then chose to proceed with the transaction on 

his side, which was just selling it. Devotion did nothing. Then nothing happened from the standpoint, from a Lehman’s standpoint of 

were they viewing these accounts as affiliates. 

If Lehman had chosen to view these as affiliates, we would have 

had to—I would have been instructed to treat them differently, 

whether that is in increased margin costs, transactions, etc., and 

no instructions came from Lehman after that. So it was somewhat 

dropped, sir. 

Chairman COLEMAN. Wasn’t, though, the purpose of this treatment of accounts as separate entities to make sure they would not 

be considered affiliates of Michael Stores under SEC regulations 

with limited transactions involving company stock held by corporate insiders? 

Mr. SCHAUFELE. I am sorry, would you say your question again? 

Chairman COLEMAN. Sam Wyly and others, they are corporate 

insiders in terms of Michael’s, right? 

Mr. SCHAUFELE. Correct. 

Chairman COLEMAN. They are doing transactions in these offshore accounts and there are SEC regulations that limit transactions involving company insiders. 

Mr. SCHAUFELE. Correct. 

63

1See Exhibit 5 which appears in the Appendix on page 677. 

2See Exhibit 49d which appears in the Appendix on page 1078. 

Chairman COLEMAN. And did the Wylys comply with these SEC 

regulations regarding limitations on insider trading? 

Mr. SCHAUFELE. The offshore entities, all right, we had counsel 

from both internal counsel of Michael Stores and their outside 

counsel of Michael Stores and Lehman Brothers and subsequently 

Bank of America legal people say that they felt that they were not 

affiliates. 

Chairman COLEMAN. So Sam Wyly is making specific recommendations about the sale of Michael’s options, Michael’s stock, 

and the opinion is that they are not affiliates? 

Mr. SCHAUFELE. No, sir. Sam Wyly never made specific recommendations to me. The recommendations came from the trustee 

or the protectorate. 

Chairman COLEMAN. Your testimony is that the recommendations about these sales came from the trustees and from the trust 

protectors? 

Mr. SCHAUFELE. That is—and the trustees, yes. 

Chairman COLEMAN. And Mr. French testified as a trust protector that the recommendations came directly from Sam Wyly. 

Mr. SCHAUFELE. To the protectors. I had no contact with Sam or 

Charles regarding any orders or anything of that nature. 

Chairman COLEMAN. If we look at Exhibit 5,1 I think the directions are from Sam Wyly, not the protectors. This is a 4/26/2000 

e-mail from Evan Wyly. ‘‘Sam recommends the trustees exercise 

and sell the remainder of the Michael options at $40 or better.’’ 

Sam wants additional cash in Edinburgh so it is up to $20 million 

by the anniversary date. Fund it with offshore cash since it will 

take time. He wanted to know what he expects. Just spoke to Sam, 

he recommends proceeding with the exercise of sale of 1250 Michael options held by offshore entity . . .’’ All of these recommendations were communicated to trust protectors and communicated to trustees and were executed. 

Mr. SCHAUFELE. Correct. 

Chairman COLEMAN. Your testimony is that you were not aware 

that these recommendations were coming from Sam to the trust 

protector? 

Mr. SCHAUFELE. That is correct. 

Chairman COLEMAN. All right. I have no further questions at 

this time. Senator Levin. 

Senator LEVIN. Thank you, Mr. Chairman. 

Chairman COLEMAN. Because my time has expired, but we will 

come back to this line of questioning. 

Senator LEVIN. Mr. Greenstein, would you take a look at Exhibit 

49d? 2

Mr. GREENSTEIN. Yes, Senator. 

Senator LEVIN. Now, 49d is a series of e-mails in May 2000 between you and your Quellos associates, Chuck Wilk and Larry 

Scheinfeld, is that correct? 

Mr. GREENSTEIN. Yes. 

Senator LEVIN. Mr. Scheinfeld writes, if you look at the bottom 

of that page where the correspondence begins, ‘‘It looks like we 

64

have no more room on the POINT trade. We would be very careful 

about selling any more.’’ When he says no more room, what does 

he mean by that? 

Mr. GREENSTEIN. That there was a portfolio where the high basis 

was different than the fair market value of the stock, and because, 

again, looking back at these periods in the market, technology and 

telecommunications stocks were extremely volatile, so that basis 

differential was changing literally on a daily basis. So it could be, 

for example, that the market rallied significantly and there would 

be no more basis differential or opportunity——

Senator LEVIN. What was the limit that you could reach in that portfolio? Was it $9 billion? 

Mr. GREENSTEIN. No. It was really a function of——

Senator LEVIN. What was the number, dollar? The limit. How 

much could you sell? 

Mr. GREENSTEIN. It was a function of the market prices for it to 

be——

Senator LEVIN. Approximately what was it? 

Mr. GREENSTEIN. I think it was—and it varied over different periods of time—maybe a billion dollars, a billion-five, maximum. 

Senator LEVIN. Didn’t Mr. Saban alone have a tax loss of a billion-five? 

Mr. GREENSTEIN. To the best of my understanding, the basis dif- ferential using the stocks that we did amounted to about $1.3, $1.4 

billion in deferral. 

Senator LEVIN. And that is the list you put together? 

Mr. GREENSTEIN. That was the portfolio. So when——

Senator LEVIN. Did you put that portfolio together? 

Mr. GREENSTEIN. Yes. I put the portfolios together. 

Senator LEVIN. And then you sent those portfolios over to 

Euram? 

Mr. GREENSTEIN. Well, what we did, if we start, we entered a series of transactions on a large portfolio. Some of the prices of the 

portfolio appreciated. Some of them depreciated. For each one of 

the POINT transactions, a diversified basket of stocks were taken 

out of that larger pool. So I was involved with both of those. 

Senator LEVIN. You would take out that basket? 

Mr. GREENSTEIN. Yes. 

Senator LEVIN. Which would have a loss in it? 

Mr. GREENSTEIN. It would have a differential——

Senator LEVIN. Which was a loss? 

Mr. GREENSTEIN. An unrealized loss, yes. 

Senator LEVIN. Unrealized loss. And then that loss differential, 

as you put it, was sent over to Euram? 

Mr. GREENSTEIN. No. That——

Senator LEVIN. How did that get to Euram? 

Mr. GREENSTEIN. That loss, and again, it is my understanding 

because I am not a tax expert on the nuances of the transaction, 

but those positions were put into a partnership that U.S. investors——

Senator LEVIN. You are way ahead of the game. 

Mr. GREENSTEIN. Sorry. 

Senator LEVIN. How did Euram get the list from you? You made 

up the list. How did it get to Euram? Did you send it to them? 

65

Mr. GREENSTEIN. I communicated that to them, yes. 

Senator LEVIN. OK. So you communicated the list——

Mr. GREENSTEIN. Correct. 

Senator LEVIN [continuing]. Which had these tax losses in the 

list to Euram, is that correct? Unrealized tax losses in the list, 

right? 

Mr. GREENSTEIN. Yes, to what stocks. 

Senator LEVIN. Right. And you connected the loss to the stocks 

that you had selected, is that correct? 

Mr. GREENSTEIN. If I understand your question, what we would 

do is build a portfolio that had a basis differential, and that basis 

differential would reflect the amount of tax deferral the client was 

seeking. 

Senator LEVIN. And that was an unrealized loss, is that correct? 

Mr. GREENSTEIN. Correct. 

Senator LEVIN. So the clients were seeking losses, is that correct? 

Mr. GREENSTEIN. Yes. 

Senator LEVIN. And that is why they signed up with your structure, is that correct? 

Mr. GREENSTEIN. Yes. The clients that executed the POINT 

transaction, it is my understanding, had been evaluating a number 

of different tax deferral strategies. 

Senator LEVIN. And the losses here, if you could look back at that 

Exhibit 49d again, were dependent on—the amount of the loss was 

dependent on market moves, is that correct? 

Mr. GREENSTEIN. Yes. 

Senator LEVIN. And the market was moving to reduce the 

amount of the loss, so you said in this—they said in this e-mail 

that you better move quickly, is that correct? 

Mr. GREENSTEIN. Yes. The 2000–2001 period, particularly in the 

NASDAQ and technology stocks, was very volatile and——

Senator LEVIN. And you were losing losses there pretty rapidly, 

right? 

Mr. GREENSTEIN. Yes. 

Senator LEVIN. Losses were shrinking. And that was bad news 

for your structure, wasn’t it? People had better move quickly. Step 

up, folks. Get your loss quick before they are all sold out. That is 

basically what that e-mail says, is that correct? 

Mr. GREENSTEIN. Yes. There was limited capacity and it was first 

come, first serve. 

Senator LEVIN. And then it says here that we will try to add 

more positions to generate losses, right? That is what the goal was, 

generating losses, right? 

Mr. GREENSTEIN. On this structure, yes. 

Senator LEVIN. That is a hell of an investment strategy. When 

you say there is an element of investment strategy here, I have to 

tell you, it totally runs against every e-mail that you or anyone else 

wrote, which showed your purpose was to generate losses. I know 

there was an investment strategy attached to it very minutely. We 

had the dollars. We got that from Mr. Saban and Mr. Johnson 

today. That was the detail which you wanted to wag the dog. But 

it doesn’t wag the dog legally. Legally, it has got to be a significant 

investment strategy in proportion to the loss. 

66

And now let me go back to ask you a question. You then say here 

that people, unless they move quickly—excuse me. You said that 

there is only a billion-four in usable losses at the beginning of the 

morning, but at the close, you only had $1.15 billion. So you were 

losing the opportunity to sell your structure quickly in 1 day. You 

lost the possibility of selling $285 million of losses, and so the email was saying, we had better get on with this thing and get this 

sold pretty quickly. Is that the gist of it? 

Mr. GREENSTEIN. The e-mail was saying the opportunity is 

squarely linked to the market price, and the market price is changing——

Senator LEVIN. And they are going up, right? The loss is shrinking today. Isn’t that what that e-mail says? 

Mr. GREENSTEIN. Today. There were periods during that time period where it was changing—it was going the other way. 

Senator LEVIN. Right. 

Mr. GREENSTEIN. But the point was, yes, and we had a number 

of clients who had expressed interest in this transaction and that 

is what we were communicating. 

Senator LEVIN. Right, and did you sell to anybody that didn’t 

need a capital loss? 

Mr. GREENSTEIN. No. 

Senator LEVIN. That sort of says it all, doesn’t it, in terms of any 

investment strategy? 

You are not touting this transaction to people who are trying to 

invest money and make money on their investment. You are touting this, you are selling this to people who have capital gains and 

need to offset those capital gains with capital losses, is that not 

true? 

Mr. GREENSTEIN. Yes, that is true, Senator——

Senator LEVIN. All right. 

Mr. GREENSTEIN [continuing]. But I would say your question 

does not accurately characterize the economics because there were, 

in fact, economics. But as I have stated, the tax deferral element, 

and as the witnesses earlier stated, was a primary motivator in the 

transaction. 

Senator LEVIN. How do you feel when clients of yours testify in 

front of us under oath what they went through because of the 

structure that you sold? What is your reaction to that? You heard 

here this morning from two business people in this country, when 

you sold structures to them—one of whom has already had to pay 

off the IRS for the amount of taxes that he owed plus interest, the 

other one is negotiating right now—do you have a feeling about 

that? These were customers of yours. 

Mr. GREENSTEIN. These are—these were strategies that, again, 

the clients, I think as they have testified, were seeking a tax deferral strategy. We were providing that strategy in working with, 

again, some of, in our opinion, the preeminent tax lawyers in this 

country on a strategy that was legally permissible to accomplish 

those objectives. 

Senator LEVIN. My question is, what do you feel like when customers of yours testify as they did today? These are people who 

have had legitimate business careers, who were sold strategies by 

your company that now are costing them dearly, and, by the way, 

67

should cost them dearly, should cost them, because these are as 

phony as a three-dollar bill, these strategies. Now, what is your 

feeling? How do you feel? 

Mr. GREENSTEIN. First of all, I disagree with the characterization, but in one of the cases, in Mr. Johnson’s case, that was a registered tax shelter. 

Senator LEVIN. Do you feel badly when a customer of yours has 

to settle with IRS, pay the entire amount of the tax gain subject 

to a capital gains tax and pay interest on top of that? Do you feel 

anything? 

Mr. GREENSTEIN. I think every client or the client’s professional 

advisor clearly understood the risk, the tax risk associated with the 

transaction and in consultation with the lawyers were comfortable 

in pursuing that. They were very aware that the tax opinion by the 

appropriate lawyers was a more likely than not. A more likely than 

not is certainly not a 100 percent, so they knew there was very significant risk. Would we have preferred that not be the case? Yes, 

but this was a strategy that we had done a lot of work on and consulted a lot of people. 

Senator LEVIN. By the way, did you tell the lawyers that the tax 

loss was the primary purpose of the strategy? 

Mr. GREENSTEIN. The tax deferral? I think the lawyers——

Senator LEVIN. Did you tell them that? 

Mr. GREENSTEIN. Yes. That is my understanding. I would add 

that——

Senator LEVIN. It is your understanding that you told them that? 

Mr. GREENSTEIN. I rarely spoke with the tax lawyers. It is my 

understanding that they understood all of the details and the objectives for the transaction, and it is also my understanding that they 

met directly with the clients. 

Senator LEVIN. Did you or your firm tell the tax lawyers that the 

primary purpose of this was a tax loss sale? Did you tell them that, 

or did anyone in your firm tell them that? 

Mr. GREENSTEIN. I don’t know. I know there were very extensive 

conversations between members of our firm with the tax lawyers. 

I was not involved in those conversations. 

Senator LEVIN. If I could just ask one more question in this 

round, Mr. Chairman. Is this all right? Did you assure Euram, did 

you give them assurances that the book entry nature of these 

transactions was known by the counsel with whom you developed 

the strategy? 

Mr. GREENSTEIN. I didn’t speak extensively with Euram as it related to this issue. My understanding was that was the case, and 

in fact, I think in the report, it acknowledges that one of the law 

firms had all of the documentation describing the various transactions between the offshore entities. So as a result of having all 

of that documentation and highlighting it in the report, I would assume that was the case. 

Senator LEVIN. I want to ask the question again. Did you give 

Euram assurances that the book entry nature of these transactions 

was known by the attorneys with whom you developed the strategy? 

Mr. GREENSTEIN. Again, my understanding was that was the 

case. 

68

Senator LEVIN. That you did give those assurances? 

Mr. GREENSTEIN. Are you asking if I did personally——

Senator LEVIN. No, your firm. 

Mr. GREENSTEIN. That was my understanding, yes. 

Senator LEVIN. Thank you. 

Chairman COLEMAN. Senator Collins. 

Chairman COLLINS. Thank you. 

Mr. Greenstein, I want to follow up on the line of questioning 

from Senator Levin. In your written statement, you are very critical of the Subcommittee’s report and you say that the report is, 

‘‘flat wrong in suggesting that the POINT transaction did not offer 

an opportunity for a profit.’’ You go on to say, ‘‘In fact, POINT gave 

investors the potential to either earn profits or incur losses based 

solely on market fluctuations.’’ But, in fact, the whole point, not to 

make a bad pun here, but the whole purpose of the POINT strategy 

was to generate capital losses. It wasn’t to generate profits. It was 

to generate losses. So, in fact, what the Subcommittee’s report says 

is correct. 

Mr. GREENSTEIN. The opportunity to generate a profit or the opportunity to generate a loss based on the positions held was very 

distinct. I am not denying that the prime objective was tax deferral. But, in fact, in one of the transactions, in Mr. Saban’s transaction, a fee element was tied to the performance of the stock basket. A component of Quellos’s fee was linked to how that stock basket did. So while the primary motivator was tax deferral, there was 

clearly economic risk and reward and that is why the duration on 

every POINT strategy was different. 

Chairman COLLINS. Wasn’t this marketed as a tax product, the 

purpose of which was to allow your clients to avoid paying taxes 

on gains? 

Mr. GREENSTEIN. Yes. It was a tax-advantaged strategy, and my 

only point, Senator, was that there were economics associated with 

the tax-advantaged strategy. 

Chairman COLLINS. Do you believe that the POINT strategy was 

a legitimate transaction? 

Mr. GREENSTEIN. Absolutely. We consulted, again, some of the 

top law firms in this country. 

Chairman COLLINS. I am not asking, did you believe at the time. 

I am saying, in view of the fact that Mr. Johnson got audited and 

had to pay back taxes and interest due, are you still maintaining 

that this was a legitimate tax strategy? 

Mr. GREENSTEIN. It was a legitimate tax strategy—and again, I 

am not a tax lawyer so I am qualifying that—it was a legitimate 

tax strategy that was registered with the IRS as a tax shelter, so 

they had the information. They had the road map. And the IRS determined that it was not a viable strategy——

Chairman COLLINS. Then how can you maintain to this day that 

it was a legitimate strategy? If it was a legitimate strategy, then 

poor Mr. Johnson should not have been saddled with back taxes 

and penalties and interest. 

Mr. GREENSTEIN. My understanding was the strategy was legitimate and legal. The IRS disagreed with the conclusions. But I don’t 

believe that means it is not legitimate. 

69

Chairman COLLINS. Well, I can tell you that I would think your 

clients would think it wasn’t legitimate if it resulted in back taxes, 

interest, and penalties for them. 

Mr. GREENSTEIN. Well, I think in that case, Senator, the process 

worked. The clients had a more likely than not opinion, so they 

knew going into it this was far from a sure thing. Otherwise, it 

would have been a much different opinion. It was registered as a 

tax shelter in Mr. Johnson’s case, so the IRS had knowledge and 

it was registered 6 years ago. The IRS had knowledge of the transaction. We provided the information. They evaluated it. And whether a client settled with the IRS or took it to court, that was really 

an issue up to them. 

Chairman COLLINS. I don’t see how you can argue with what was 

the outcome of the IRS’s audit of your client. I am not saying that 

Mr. Johnson escapes responsibility here. He does have his own advisors. But the fact is that it did not work out well for him and 

this transaction ultimately was found to not pass the smell test. 

Mr. GREENSTEIN. No, and we understood, again, like the clients, 

that there was no guarantee that it would pass the smell test. 

Chairman COLLINS. I guess that brings me full circle to my question. I don’t know how you can sit here today and say that you still 

view the POINT strategy as a legitimate one when it has been rejected by the IRS. 

Mr. GREENSTEIN. Again, and I am not a tax expert, so trying to 

understand the tax legitimacy, I can’t comment on that. Was it legitimate to enter into that transaction based on the advice and information we know? Yes. As it turns out, it was not a viable strategy and we respect that and we knew that the IRS interpretation, 

or again, my understanding was that the IRS interpretation could 

rule against that and that was appropriate. And I think, again, my 

understanding is that is how the system is supposed to work. 

Chairman COLLINS. Mr. Conn, I give Bank of America credit for 

acknowledging that the bank’s performance was not what it should 

have been in reviewing the Wyly transactions, and you have outlined in your testimony a number of remedial actions that the bank 

has taken. That brings me to a fundamental question for you and 

that is, are you confident that the new measures that you have put 

in place would have prevented the bank’s involvement in the kinds 

of transactions that are the focus of this investigation? In other 

words, if you had the procedures, the safeguards, the processes, arguably the culture that you have now, had that been in place prior 

to your entering into these transactions, would those reforms have 

prevented your involvement? 

Mr. CONN. Thank you, Senator, for acknowledging our remedial 

actions. To make one point clear, we were not involved in the 

POINT transaction——

Chairman COLLINS. No, but you were in the Wyly transactions, 

which were discussed earlier. 

Mr. CONN. With regard to the Wylys—the answer to your question, yes, our remedial actions, I feel confident that we would not—

and ultimately come to the same conclusion. We would do that, and 

that was we needed the beneficial ownership information, and if it 

is not supplied, we will not entertain opening those accounts. And 

so I believe that would be a continuation of our policy that we ultiVerDate 0ct 09 2002 07:08 Mar 29, 2007 Jkt 029760 PO 00000 Frm 00101 Fmt 6633 Sfmt 6601 C:\DOCS\29760.TXT SAFFAIRS PsN: PAT
70

mately had. So I believe it would have been quicker and we would 

not have those accounts if the client would not give us the information, which they ultimately would not, and we would never have 

opened the accounts. 

Chairman COLLINS. Just one final question if I may, Mr. Chairman. Is it sufficient for Congress to rely on banks such as yours 

to put in place the reforms that are needed, or do we need to pass 

new legislation or new regulations to make sure that you maintain 

this kind of commitment going forward or that other institutions 

that haven’t adopted the reforms that you so painfully had to adopt 

don’t make the same kinds of errors? 

Mr. CONN. Senator, I believe it would be a partnership. I believe 

that our institutions, working with the government, should come to 

a conclusion, do we need better laws? That is how I could answer 

that question. Ultimately, a partnership between corporate America and the government to make those decisions. 

Chairman COLLINS. Thank you, Mr. Chairman. 

Chairman COLEMAN. I just want to follow up a little bit more on 

this issue of the profit. Would it be fair to say, Mr. Greenstein, that 

the source of the purported economic profit on the transaction was 

the warrant premiums? 

Mr. GREENSTEIN. That was one potential. The main source of the 

profits was the basket of securities——

Chairman COLEMAN. The gain in the baskets here, that was 

capped at 8 percent, wasn’t it? You have a cap on that, is that correct? 

Mr. GREENSTEIN. There was a 90-day collar. That collar, there 

were several situations where we had discussions to change that 

collar. So that could have been rolled. It could have been reduced. 

It could have been extended, and we explored for our clients different options, again based on how the portfolio had moved and 

what the prevailing——

Chairman COLEMAN. You are picking stocks that you believe are 

going to fall in value. 

Mr. GREENSTEIN. No, the stocks that were originally put in the 

portfolio, let us say we took an example, Microsoft, and Microsoft 

hypothetically, let us say, fell from 100 to 25 and then it was put 

into the partnership that the client bought. Once the client owned 

it at 25, that price could go up or down and the reason the portfolio 

was built the way it was was to try to take advantage of some of 

the opportunities in the market, again remembering back that we 

had the technology and the telecommunication meltdown, so to try 

to take advantage of some of those opportunities to earn the money 

back. 

Chairman COLEMAN. You would disagree with an assertion that 

a very significant source of the purported economic profit on the 

transaction was to be the warrant premium? 

Mr. GREENSTEIN. That was a potential, as was the potential on 

the stock. So I would not disagree with the question as you asked 

it, Senator. 

Chairman COLEMAN. But the benefit of the warrant premium 

was that it was one that would accrue to the individual if it was 

held for a period of time, is that correct? 

71

Mr. GREENSTEIN. To the best of my recollection, it was my understanding that the structure that involved the warrants was to replicate a common investment vehicle in Europe that was known as 

a BLOC or a HYPO, and essentially, what that was was a portfolio 

of equity securities with a long-dated call option written against it, 

or a warrant in this case, and then that was sold potentially to investors. So that would be the opportunity, which would require 

holding the equity basket for a considerable time——

Chairman COLEMAN. But in this transaction, in each and every 

case, the warrant was unwound. A certain loss was achieved and 

the warrant was unwound at that time, so there was no long-term 

hold. It was simply unwound at a certain point in time when you 

got the loss you needed. 

Mr. GREENSTEIN. Yes, Senator. 

Chairman COLEMAN. I think that is part of the problem, I would 

suspect, from the IRS is perspective. To claim that there is an intent here to generate some profit or benefit from a warrant that ostensibly is going to gain value over a long period of time, but in 

each and every instance is unwound, I think is obviously one of the 

problems here. 

Mr. GREENSTEIN. Well, I agree that is one opportunity to make 

profit. The other is just the outright ownership of the equity basket, and that varied considerably investor by investor in terms of 

when they wanted to get out. 

Chairman COLEMAN. But that opportunity, again, it was consistently cut off. At the time you got your loss, you unwound the warrant and you were out, even though the projection in terms of gain 

was for holding those warrants for an extended period of time, is 

that correct? 

Mr. GREENSTEIN. Yes, they were closed early. 

Chairman COLEMAN. And if I can get back, Mr. Conn, and I appreciate the recognition by Senator Collins about the change in policy, in terms of the Wyly-related offshore trusts and corporations, 

from 2002 to 2005, what were the procedures that were followed? 

Could you just give me an overview of when the accounts were 

opened and how did the implementation of the PATRIOT Act modify or change the bank’s procedures related to these accounts? 

Mr. CONN. Certainly, Senator. Just to give you a history, the accounts were transferred into Bank of America in February 2002. 

We did not actively or do not actively open these type of accounts 

up as a type of product that we offer for U.S. citizens. We don’t—

it is just not something that the Private Bank actively does. So we 

get the accounts, and at that point in time, we believe we were 

complying with the PATRIOT Act when it came to knowing your 

client. 

What had happened, because I think at that time there was a 

question whether we needed specific information about beneficial 

owner. I am not here to split hairs, but I think there was legal interpretation in February 2002 that you really didn’t need that. 

Now, I am not saying that we ultimately didn’t come to the conclusion. Our policy ultimately became, as the law evolved, you need 

that information. 

72

Chairman COLEMAN. But that is part of the problem here. The 

Wylys are the beneficial owners and no one is revealing that. You 

know they are the beneficial owners. 

Mr. CONN. We believed that the actual beneficial owners, we 

were told, were relatives of the Wylys, grandchildren, specific charities. Now, when this was highlighted to us at NFS, and this is one 

thing that came up through our relationship with them, what they 

do for us, they are our clearing agent, just to make that clear, that 

what NFS does is they highlight situations that we need to further 

investigate. That came up in January that we needed that, I believe, and we went through a process and a dialogue with the representatives of the trust—we were not talking to the Wylys because 

we believed this was separate—that we wanted this information. 

And they came back to us saying, well, we understand from your 

competitors that you do not have to get this information. 

Our policy was at that time, and still is, we need that information. So we entertained a dialogue with the representatives, is 

there a way to get that information without violating their confidentiality requests. We came to the conclusion that, no, there was 

no way we could do that, and I believe it was in June. We went 

to NFS and said, put together a series of questions that we have 

to ask and want to ask the beneficiaries, or the representatives of 

the trust, and if we do that and they don’t answer them, we are 

prepared to take appropriate action, and that is what we did. 

We ultimately asked for the information on beneficial ownership. 

They refused to give it to us. We closed the accounts and filed the 

appropriate forms. 

Chairman COLEMAN. If I have no objection from my colleagues, 

I just want to follow up with another question. Mr. Schaufele to tie 

into this, could you talk a little bit about the concept of beneficial 

ownership? I take it you are familiar with security laws and the 

requirement that large shareholders declare their beneficial ownership in a publicly-traded company, is that correct? 

Mr. SCHAUFELE. I am not a lawyer, I am a broker, but I know 

large shareholders do have to, if they are an insider or own more 

than 5 percent, there is a filing that does need to be made, yes, sir. 

Chairman COLEMAN. We see instances where offshore accounts 

are set up by the Wylys. I think there were, by the way, 65 securities accounts set up by Bank of America, is that correct, Mr. Conn? 

Mr. CONN. I don’t know the exact number, Senator, at this time 

of how many security accounts there were. 

Chairman COLEMAN. The record indicates that there were 65 

opened by your bank. We have offshore accounts opened by the 

Wylys holding large amounts of stock that were originally deposited by the Wylys. Mr. Conn or Mr. Schaufele, at the time this was 

happening, were there any concerns that the Wylys were attempting to circumvent disclosure obligations under security laws by 

using the offshore trusts? 

Mr. SCHAUFELE. There was no concern from my standpoint. The 

firms that I was with knew that the Wylys were beneficial owners 

of these accounts and I relied on the compliance folks for what they 

would recommend to do. At one point, this was back, I believe, at 

Lehman Brothers—and I believe it says this in the report—some 

of these accounts actually were 13(d) filers. 

73

1See Exhibit 54 which appears in the Appendix on page 1138. 

Chairman COLEMAN. But there was an effort in at least one instance where a number of the offshore accounts actually kind of 

split shares among themselves to reach a level of holdings underneath 13(d) filers. But you are saying you had no knowledge of 

that? 

Mr. SCHAUFELE. That is correct. 

Chairman COLEMAN. Mr. Conn. 

Mr. CONN. As I understand it, we were assured by the protectorate, the trustees of the accounts that there was no affiliation. 

While we believed through our financial advisors that the Wylys 

endowed the accounts, we felt that through the representation of 

the individuals that there was not an affiliation there, that it was 

entirely independent. 

Chairman COLEMAN. Senator Levin. 

Senator LEVIN. Mr. Greenstein, is it true that it was always your 

understanding that there would be no cash transfers passed between those two companies? 

Mr. GREENSTEIN. No. I did not understand the ultimate mechanics of those. We relied upon Euram, European American, to execute 

those. 

Senator LEVIN. Do you know who John Staddon is? 

Mr. GREENSTEIN. Yes. 

Senator LEVIN. Take a look, if you would, at Exhibit 54.1 Who 

is John Staddon? Is he with Euram? 

Mr. GREENSTEIN. Yes. 

Senator LEVIN. So you had a lot of dealings with him, did you? 

Mr. GREENSTEIN. I had more dealings when he was in the legal 

department at UBS than I did at Euram. 

Senator LEVIN. Then you had dealings with him at Euram? 

Mr. GREENSTEIN. Yes. 

Senator LEVIN. OK. Now, look on page 2 of that document, near 

the bottom, the third paragraph from the bottom where it says, 

‘‘Because the transactions—’’ Do you see that paragraph? 

Mr. GREENSTEIN. The third paragraph? 

Senator LEVIN. This says page 2 on here. It is page 5. I have the 

wrong page number. Near the bottom of page 5. ‘‘Because the 

transactions were conducted—’’ Do you see that paragraph? 

Mr. GREENSTEIN. Yes. 

Senator LEVIN. I want to read it to you now and you can follow 

it. ‘‘Because the transactions were conducted in this manner 

through the enclosed documents, no physical transfer of shares 

were made, no transactions took place over any exchange, and no 

cash transfers passed between bank accounts of the two companies. 

This, however, was always understood to be the case. Euram obtained assurances from Quellos that the book entry nature of these 

transactions had been known by the counsel with whom they developed the strategy and that it would be disclosed to any client advisor and opinion provider involved in any subsequent implementation.’’ So far, do you agree with that? 

Mr. GREENSTEIN. Yes. These are common over-the-counter——

Senator LEVIN. But a minute ago, you said that you did not understand that there would not be cash transactions. Now you say 

74

you did understand that no cash transfers passed between bank accounts of the two companies. 

Mr. GREENSTEIN. I was referring to, and I apologize if I misinterpreted your question, when the transaction was initially initiated, 

that was the case. Yes. These are descriptions of standard over-thecounter-type agreements. 

Senator LEVIN. I know that is your testimony, but is this the accurate description of what was going on with those two shell companies in the Isle of Man? Were you aware of that fact? 

Mr. GREENSTEIN. I don’t understand the movement of cash. What 

I do know is that when there were obligations by Barnville or 

Jackstones to pay cash to the client, to deliver shares to the client 

upon request, they met those financial obligations in all cases. So 

in that respect, certainly if there was cash paid to a client, there 

had to have been cash movement between those entities. What that 

is, I don’t have knowledge of that and wasn’t involved in that level 

of detail. 

Senator LEVIN. Now you are saying you did believe there was 

cash that moved between those two entities, whereas I just read 

you a statement that came from Euram to us that said that it was 

well known—let me get the exact words here—‘‘no transactions 

took place over any exchange and no cash transfers passed between 

bank accounts of the two companies.’’ And it says, ‘‘This, however, 

was always understood to be the case.’’ Did you understand that to 

be the case? 

Mr. GREENSTEIN. Yes. If I could respond to comments that you 

made in your question. First of all, I am puzzled why Euram, who 

it is my understanding refused to be interviewed by the staff, submits a written statement that is contradictory to oral and written 

communication they had given to us many years ago, and that is 

assumed to be fact. 

Senator LEVIN. I am just asking you if it is a fact. I don’t assume 

anything. I am asking you, and you said it—first, you said it is 

true, and then you said it is not true. 

Mr. GREENSTEIN. My understanding, and the way I was trying 

to answer your question, Senator, is that there were obligations entered into between those two entities. 

Senator LEVIN. Did cash transfer between those two entities? 

Mr. GREENSTEIN. No. Up front, these are legal contractual obligations, which I believe he referred to. As is the case, say, with a contract for differences or a swap, there is no cash transaction that occurs immediately. I was referring to that. But at the end——

Senator LEVIN. Not immediately——

Mr. GREENSTEIN. At the end, there has got to be some settling 

between those entities of whether it is delivering stock, whether it 

is paying obligations. So as it relates to a cash movement on the 

settling of the contractual obligations, yes, I believe there was—or 

it was my understanding and my assurance, I received assurance 

that there was that movement at that portion. So I misinterpreted 

and I apologize——

Senator LEVIN. Would you present that understanding that you 

received from Euram to the Subcommittee? 

Mr. GREENSTEIN. Would I present that? 

Senator LEVIN. Yes, will you give it to us. 

75

1See Exhibit 51 a–k which appears in the Appendix on page 1085. 

Mr. GREENSTEIN. My understanding——

Senator LEVIN. You said you got written assurance from them 

early. Would you provide that to us after this hearing is over? 

Mr. GREENSTEIN. I believe we have, and I was referring to—yes, 

I believe you have correspondence from Euram from us, and also 

there was verbal assurances that we received. As an example, in 

your report, they told us that the owners of Barnville and 

Jackstones were authorized to enter these transactions, that there 

was complex ownership, and I think in the e-mail that you had in 

your report, they said, we are not keen on disclosing who those 

owners are. So that was what they told us. They didn’t say, we 

don’t know who the owners are, like they communicated to you. 

Senator LEVIN. Did you know who the owners were? 

Mr. GREENSTEIN. No. We relied upon them. 

Senator LEVIN. Did Euram know who the owners were? 

Mr. GREENSTEIN. They had communicated to us that they knew 

and they were—as the e-mail said—keen not to disclose it. So it 

was our understanding, and again, relying on the reputation and 

past dealings we had with them, that when they said they were 

keen on not disclosing it, that we could take comfort in that. 

Senator LEVIN. So you view Euram as being an honest—you have 

always dealt with them and felt that they are an honest company? 

Mr. GREENSTEIN. At that point in time, that was the case. When 

I see statements made today that contradict that, that is disappointing to me. 

Senator LEVIN. I want to go back to that value of the portfolios 

that you selected and that you sent to Euram. You insisted that 

the total value was only about a billion-and-a-half and I want to 

go through that with you, because I add up to $9.5 billion. 

Mr. GREENSTEIN. OK. 

Senator LEVIN. Take a look at Exhibit 51.1

Mr. GREENSTEIN. Any particular page? 

Senator LEVIN. No. If you look at the value of the stocks that 

were identified that you passed along to Euram, that is $397 million on that day. By the way, these documents came from you, from 

your company. So just round it off. December 28, the portfolio that 

you sent the names of was $400 million. 

Then take a look at Exhibit 51b, and these documents, these are 

contracts between the two shell companies in the Isle of Man, this 

back-and-forth money and cash—excuse me, cash and stocks that 

didn’t exist. This is Exhibit 51b, and the amount of this list that 

you provided to them is $1.648 billion. Someone is adding these up 

for me back there. 

Take a look now at Exhibit 51c. This is another portfolio that you 

created for them, $1.1 billion. 

Now look at Exhibit 51d. This portfolio of stocks that you created 

and sent them the list, this one was $3.3 billion. 

Exhibit 51e, which is dated June 6, $3 billion almost even. That 

totals $9.6 billion. 

Mr. GREENSTEIN. Sure. 

Senator LEVIN. Is that true? 

76

Mr. GREENSTEIN. That is true. What I was responding to earlier 

was the question as it related to the basis differential, the difference between——

Senator LEVIN. Excuse me, Mr. Greenstein. I was very careful 

when I asked you about the total value of those stocks, the list of 

which you sent to Euram. You said it was one-point-something billion dollars. Whether you said that or not, the record will speak for 

itself. Are you now acknowledging that the lists of stocks that you 

sent to Euram that would then be sent to one of these two companies to be exchanged with the other company totaled about $9.6 billion? 

Mr. GREENSTEIN. Yes, and I apologize if I misunderstood your 

question. I thought you had asked about the basis differential, 

which is my recollection, $1.4 billion. I know we were talking about 

those two interchangeably, so those two numbers would be correct. 

Senator LEVIN. The basis differential is the amount that you had 

to sell, right? 

Mr. GREENSTEIN. The potential tax deferral amount, yes. 

Senator LEVIN. That you were selling to taxpayers looking for tax 

losses, right? 

Mr. GREENSTEIN. Correct, tax deferral. 

Senator LEVIN. Were you aware of the fact that those companies 

had two pounds each paid-in capital? 

Mr. GREENSTEIN. Again, as I had stated earlier, paid in capital 

might be analogous to par value, where you might look at in the 

United States, the par value of a share is a penny, and that has 

no relationship whatsoever to what the share price is or the assets. 

So paid in capital, it is not unusual in an offshore investment company to have a very nominal paid in capital and very significant 

assets. So I don’t think it represents the assets or the liabilities of 

the company. 

Senator LEVIN. Do you have any idea what those assets or liabilities were in those two companies? 

Mr. GREENSTEIN. No, and as I had testified earlier, that is where 

we relied upon Euram and where Euram was paid a significant 

amount of money to assist in aspects of the transaction which this 

was clearly one of them. 

Senator LEVIN. Thank you. Thank you, Mr. Chairman. 

Chairman COLEMAN. Thank you, Senator Levin. 

I notice Senator Carper has joined us. Senator Carper. 

OPENING STATEMENT OF SENATOR CARPER 

Senator CARPER. Thanks, Mr. Chairman. Not long ago, I was 

talking with someone back in my own State, a fellow who was not 

particularly happy with paying taxes. He said to me, I would feel 

a lot better about paying the taxes that I do if I were convinced 

that a lot of other people who have a whole lot more money than 

I do were paying their fair share, as well. 

I know Mark Everson was here and testified earlier today in the 

hearing. He has testified before our Subcommittee, as well, and he 

testified to us that there was $300 billion in taxes that were owed 

last year that were not collected. In some cases, they have a pretty 

good idea who owed the money, the magnitude of the money that 

was owed. They just don’t have the resources to go out and get it. 

77

Our tax laws are vague enough and people are smart enough to 

find ways to avoid their responsibilities. 

I just want to thank you and particularly Senator Levin for convening this hearing today and for the kind of dogged determination 

that I know you bring to this pursuit. We face huge budget deficits 

in this country, $300, $400 billion a year, and as we look ahead to 

my generation retiring, we note that they are not going to get 

much smaller as long as we are involved in wars in Afghanistan 

and Iraq and problems like Katrina to deal with and people in my 

generation becoming eligible eventually for Medicare and Social Security and all. It is important that we find out who owes money 

and to make sure that they pay their fair share so that the rest 

of us don’t have to pay more than our fair share. 

I have some questions I would like to ask for the record. I am 

not going to ask them here at this time. But I want to thank you 

both for holding this hearing and for airing these issues, which 

they certainly need to be aired. 

The last thing I would say, it is important for us collectively to 

provide the resources that the IRS needs, not just dollars and cents 

personnel to go out and do their job, but also to make sure that 

we pass legislation here and that it is in a form that somebody who 

is enforcing our tax laws can understand it and can go out and collect the monies that are actually owed. Thank you. 

Chairman COLEMAN. Thank you, Senator Carper. You represent 

a State, Delaware, in which banking and financial institutions are 

important to your State economy. Financial institutions depend 

upon trust and confidence, and when that subdues, I think it has 

a negative impact on the entire system. So I appreciate your presence and I appreciate your interest and involvement in these 

issues. 

I think Senator Levin, I understand, had one other line of questioning. 

Senator LEVIN. I did. You made reference to your fees, Mr. 

Greenstein. You said that there was in one case, at least, that a 

part of your fee was tied to any profit that might be earned in that 

incremental piece of this transaction, is that correct? 

Mr. GREENSTEIN. Vaguely, I believe that is the case, yes. 

Senator LEVIN. Is it not the case that the greater the losses here, 

the greater your fees? 

Mr. GREENSTEIN. Our fees, the tax deferral was really the starting point for the fee negotiation. So in answer to your question, 

yes. From that starting point, other things were included, be it estate planning or investment management. But the starting point 

was correct, yes, the tax deferral. 

Senator LEVIN. So the key component to your fee was the size of 

the loss? 

Mr. GREENSTEIN. That was the starting point, yes. 

Senator LEVIN. Was it also the key component of your fee as well 

as the starting point? 

Mr. GREENSTEIN. Yes. 

Senator LEVIN. And the greater the loss, the greater your fee? 

Mr. GREENSTEIN. Correct. 

78

Senator LEVIN. I think that speaks volumes as to what this is all 

about. You weren’t selling investments. You were selling losses, 

and your fees went up with the loss. It is just as clear as can be. 

You can say that there were possibilities here of investment 

gains, and I guess there were theoretically tiny possibilities, but 

what you can’t say is that the purpose of this was anything other 

than to create a tax loss by using two shell corporations, which 

have no capital, $5 each in capital. You have no idea what assets 

they have beyond that. That is what Euram told you. Nobody 

knows who owns them. And then you send to them $9.6 billion in 

stocks that you identify that you know will be just swapped back 

and forth for nonexistent cash, unless you think that those companies had $9.6 billion in cash, which I don’t think you believe. And 

so what it comes down to is this absolutely strains credulity. 

I don’t believe anybody looking at this transaction, including lawyers who we are now going to talk to, knowing what they now 

know, can believe that these transactions represented economic 

substance. What these transactions represented was a concoction to 

create tax losses which were then sold to taxpayers to offset capital 

gains. 

Mr. Greenstein, I think that any fair reading of this leads not 

only inevitably, but immediately to that conclusion. 

I have questions for the record for our other three witnesses. I 

am sorry, I don’t know if they are sorry, but I am sorry that I 

didn’t have a chance to ask them some questions. But I want to 

thank our witnesses for coming forward. 

Chairman COLEMAN. Mr. Greenstein, do you want to reply? 

Mr. GREENSTEIN. I didn’t know if there was a question there. I 

strongly disagree with a number of the points, but——

Chairman COLEMAN. I want to thank the panel, Mr. Conn in particular, Bank of America and HSBC. We do appreciate the changes 

that you have made in dealing with this. 

My concern. as this panel leaves, is that lawyers, experts, and 

everyone else told clients they could do this. So much of this flies 

in the face of common sense and strains credulity, that there were 

folks with beneficial interests directing assets and transactions, 

that there weren’t concerns that POINT clearly was not a strategy 

designed to generate profit. As a result, a lot of people, or a number of people with great wealth, ultimately paid the price, but beyond that, I think the entire economic system and all of us who pay 

taxes are openly hurt by these transactions and that is what is so 

disturbing here. 

With that, I want to thank the panel and we will call our last 

panel. 

Our final panel today, the witnesses for today’s hearing are Michael G. Chatzky of Chatzky and Associates; Lewis R. Steinberg, 

a former partner at Cravath, Swaine and Moore; John P. Barrie of 

Bryan Cave; and finally, Charles W. Blau of Meadows, Owens, Collier, Reed, Cousins and Blau. 

Mr. Chatzky and Mr. Blau, I understand that you or your firms 

assisted in providing advice on the Wylys’ offshore network. I have 

concerns about whether the offshore structures comported with our 

laws and look forward to hearing each of your testimony. 

79

Mr. Steinberg and Mr. Barrie, I understand that you advised clients purchasing the Quellos-designed POINT transaction. Lawyers 

played a central role in this transaction, representing to clients 

that these strategies were within the letter of the law. I am concerned that our legal profession may be called upon to analyze 

these transactions possibly without a full understanding of the material facts. I appreciate your attendance at today’s hearing and 

look forward to your testimony and perspective on the role of counsel in facilitating these types of transactions. 

Mr. Steinberg, I want to add that I sincerely appreciate your 

changing your scheduled family vacation to accommodate us at today’s hearing. 

Before we begin, again, pursuant to Rule 6, all witnesses who 

testify before this Subcommittee are required to be sworn in. 

Please stand and raise your right hand. Do you swear the testimony you are about to give before this Subcommittee is the truth, 

the whole truth, and nothing but the truth, so help you, God? 

Mr. CHATZKY. I do. 

Mr. STEINBERG. I do. 

Mr. BARRIE. I do. 

Mr. BLAU. I do. 

Chairman COLEMAN. I would like to ask you to limit your testimony to 5 minutes. When the lights turn from green to amber, you 

have a minute left to conclude your testimony. Your written statements will be included in the record in their entirety. 

Mr. Chatzky, we will have you go first, followed by Mr. Steinberg, then Mr. Barrie, and Mr. Blau, we will have you conclude. 

Mr. Chatzky, please proceed. 

TESTIMONY OF MICHAEL G. CHATZKY, CHATZKY AND 

ASSOCIATES, SAN DIEGO, CALIFORNIA 

Mr. CHATZKY. Thank you very much, Chairman Coleman. Chairman Coleman, Ranking Member Levin, Members of the Subcommittee, and the Permanent Subcommittee on Investigations 

staff, I appreciate your inviting me to participate at this morning’s 

hearing, and I would also especially like to commend the professionalism, or the professional way I was treated by the staff. Especially, I would like to commend Laura Stuber, Mark Nelson, and 

Robert Roach for their very kind method in treating me. 

My background is I have been practicing law since 1970. I am 

a California attorney. My practice is primarily engaged in the field 

of wealth protection. That includes several different aspects, including taxation, estate planning, business planning, and asset protection. 

A wealth protection attorney, such as myself, normally addresses 

issues which pertain to wealth erosions, in other words, threats 

against your wealth, and those particular threats generally consist 

of the following: Probate, estate tax, income tax, and lawsuits. So 

if you have accumulated wealth, which is very commendable, that 

is fine, but you need to be concerned about these threats to your 

wealth because they can lower your net worth. And so as a lawyer, 

what we normally do is we inform people about these threats and 

ways and means to address them. 

80

We have freedom of choice in our country in which we can explore alternatives. For example, if someone is starting a new business, they have the choice. They can start the business as a sole 

proprietorship, as a corporation, or they can start it as a corporation that makes a Subchapter S selection, or they might be able to 

start it in States that permit it as a limited liability company with 

a sole member. Each one of those alternatives has different legal 

consequences. Each one of those alternatives has different tax consequences. 

Privacy may exist in the foreign area. This morning, we heard 

ample testimony and had ample discussion on the privacy concerns 

that this Subcommittee is very correctly raising. However, one 

thing that I did not hear this morning that I think is critically important is that privacy in foreign jurisdictions, which have legislation that states that members of the financial services sector are 

not allowed to freely disclose transactions or it can be a criminal 

offense, that doesn’t pertain to U.S. people and from a different 

angle, and that different angle is the following. 

If you are a U.S. citizen and you establish a foreign trust, then 

you are required by the Internal Revenue Service and by the Internal Revenue Code to file a form with the Internal Revenue Service. 

That form is Form 3520. Form 3520 in the last 10 years or thereabouts has been greatly modified. It now includes not just reporting who you are—you are a U.S. citizen, you are forming a foreign 

trust—but you also have to provide very specific information about 

the trust. 

So even though members of the foreign financial services sector, 

such as a trust company in another jurisdiction, are not allowed to 

reveal information about the trust, as a U.S. citizen who forms the 

trust, you are required to inform the Internal Revenue Service all 

about the trust, and when I say all about the trust, Form 3520 includes such items as your name and Social Security number. You 

have to provide a copy of the trust instrument itself. If the trust 

instrument has been amended, you have to provide a copy with the 

amendment or any modifications to the trust instrument. If there 

is a written understanding between you and the trustee, you have 

to provide that written understanding and attach it to your Form 

3520. If there is no written understanding but there is an oral understanding, you have to reduce the oral understanding to writing 

and attach that to Form 3520. 

So the point is that Form 3520 has been changed in recent years 

with respect to reporting requirements. It has been additionally 

changed in recent years with respect to penalties. It used to be if 

you didn’t file Form 3520, the penalty was a fine of $1,000. Well, 

if you are someone who is quite wealthy, a thousand-dollar fine 

might not be that horrible. The current penalty, however, is much 

more serious than that. It begins at an amount of 35 percent of the 

trust assets that you transferred to the trust, and then if the IRS 

demands payment of that fine and you refuse to pay the fine, it 

goes up in increments of $10,000. So the point is if you transfer a 

substantial amount of money to a foreign trust, you not only have 

to reveal it to the Internal Revenue Service in great detail, but you 

also run the risk of being subject to a very significant fine. 

81

In addition, there have been some other changes in the last 10 

years or thereabouts that have certainly beefed up enforcement 

and, you might say, removed the cloak of privacy in the field of foreign planning. The Internal Revenue Service in the year 2000 proposed new regulations dealing with Internal Revenue Code Sections 679 and 684. Section 679 is a statute that, in essence, says 

if you are a U.S. citizen who transfers assets to a foreign trust that 

has or is capable of having at least one U.S. beneficiary during the 

year, then you, the U.S. transferror, will be taxable on the income 

generated from the assets you transferred to that trust until your 

death. Internal Revenue Code Section 684 is a section that has to 

do with a taxation on the transfer of appreciated assets to a foreign 

trust. 

The Internal Revenue Service came out in the year 2000 with 

some proposed regulations. The proposed regulations were very detailed. They were very voluminous and they were very tough. I 

don’t think they were very fair, but they are very tough and they 

are in existence and they are what we have to face today. 

Those regulations make it very difficult for any U.S. citizen to effectively use a foreign trust to save taxes. In my career, which 

spans several decades, from 1970 all the way to today, I found that 

people who come to our firm and are seeking a foreign trust have 

done so for a different purpose. 

In the 1970s, especially the early 1970s, the primary reason why 

someone would want a foreign trust was to save income taxes, specifically to defer income tax, because a foreign trust could be effectively designed in that era so that the income from the trust would 

not be currently taxable. It would only be taxable when it was distributed, and there were very many, very attractive ways and 

means to distribute funds from a foreign trust effectively without 

having the funds be considered a taxable distribution. 

However, that changed in the 1976 Tax Reform Act. However, 

the 1976 Tax Reform Act, which is the statute, or which is the Act 

that enacted Section 679, which taxes U.S. transferrors to foreign 

trusts, that Act did not have any guidance for taxpayers until the 

year 2000 other than the legislative history and other than textual 

writings that could be found in law review articles and other legal 

journals. 

In the year 2000, the Internal Revenue Service decided to address that concern and came out with very voluminous, very detailed regulations that were proposed to stop U.S. people from 

using different approaches to save taxes with foreign trusts. Those 

regulations were largely finalized in the year 2001 by the Internal 

Revenue Service. 

Just in concluding my talk, I just want to point out some other, 

very briefly, some other changes that have been made. The Internal Revenue Service has come out recently with Circular 230 

changes, which has to do with tax opinions, making it very difficult 

for a law firm to come out with a tax opinion on any tax subject 

that is going to be useful to a client to defend against penalties. 

The other thing is, foreign gifts are reportable on Form 3520 and 

all distributions from a foreign trust, regardless of whether they 

are taxable or not, are reportable to the Internal Revenue Service 

on Form 3520. 

82

So my point in concluding this opening statement is that in the 

last decade, the tax law has changed very dramatically, partially 

because of Congressional changes, but largely because of the Internal Revenue Service’s changes in regulations and forms and enforcement. So today, in today’s environment, it is unusual for a foreign trust to be designed effectively to save taxes for a U.S. person. 

Foreign trusts today are largely used more for asset protection purposes or for foreign investment purposes where certain foreign investments are not available to U.S. parties because foreign parties 

offering investments don’t want to run the risk of being regulated 

by State regulators and Securities and Exchange Commission regulators and so on, so they will issue such investments to foreign entities or U.S.——

Chairman COLEMAN. May I ask you to conclude your oral testimony, Mr. Chatzky? 

Mr. CHATZKY. Thank you, Mr. Chairman. 

Chairman COLEMAN. Thank you very much. Mr. Barrie. 

TESTIMONY OF JOHN P. BARRIE, BRYAN CAVE LLP, 

WASHINGTON, DC 

Mr. BARRIE. Thank you, Mr. Chairman. I am a partner in Bryan 

Cave. I have been a partner since 1993. As the Subcommittee is 

aware, we were introduced to Matt Krane, the long-time tax advisor of Mr. Saban, in May or June of the year 2001. The introduction was by Quellos and that resulted in our engagement by Mr. 

Saban to provide tax advice and counsel with respect to a very 

complex set of transactions that involved the POINT transaction. 

I am here today to provide testimony to you with respect to the 

role of U.S. tax lawyers in connection with the evaluation of tax advantaged transactions. These are very complex areas. I will do my 

best to respond to your questions. Thank you. 

Chairman COLEMAN. Thank you, Mr. Barrie. 

TIMONY OF LEWIS R. STEINBERG, FORMER PARTNER, 

CRAVATH, SWAINE AND MOORE LLP, NEW YORK, NEW YORK 

Mr. STEINBERG. Thank you, Mr. Chairman. Mr. Chairman, Senator Levin, my name is Lewis Steinberg. From 1991 until 2004, I 

was a partner in the tax department of Cravath, Swaine and 

Moore, having started there as an associate in 1984. I earned my 

J.D. degree from NYU School of Law in 1984, later earned a LLM 

in tax from NYU. I am a former Chair of the Tax Section of the 

New York State Bar Association, and since 1993, I have been the 

adjunct professor at NYU, teaching a course in advanced corporate 

tax problems. 

As I understand it, I have been asked to appear today to address 

legal advice I provided 6 or more years ago to several clients, 

Quadra Capital Management, now called Quellos Group, and certain individual taxpayers. As I am sure you understand, an attorney owes to his clients, including his former clients, a duty of 

confidentiality. I will endeavor to answer all questions today as 

completely as possible, consistent with that duty. At times, I may 

be unable to answer particular questions because they call for information protected by the attorney-client privilege or otherwise involve client confidences. 

83

1The prepared statement of Mr. Blau appears in the Appendix on page 158. 

I have retained counsel to assist me in addressing any issues of 

privilege that may arise and I ask for your indulgence if I need 

from time to time to consult with my counsel. Doing so will enable 

me to provide as much information as possible to the Subcommittee 

without breaching my duty to my former clients. 

My practice at Cravath primarily involved legal questions in the 

area of corporate taxation, particularly mergers and acquisitions 

and certain other commercial transactions. In 1999, I was asked by 

my client Quadra Capital Management to provide legal advice regarding a transaction structure that came to be known as POINT. 

I was asked to analyze the proposed structure to assess any tax 

consequences under the Internal Revenue Code. 

From the beginning, I understood that if I were to determine 

that the proposed structure met standards set forth in the code, I 

would be asked to prepare written legal opinions to a small number 

of individual investors regarding those tax consequences. This is 

what occurred, and I provided legal opinions to five individual investors in four transactions over the next several months. I understand that those opinions have been provided to the Subcommittee. 

I should also note that there has been much mention this morning of large fees paid to professional advisors in this transaction. 

In the case of the Johnson transaction, the fees received by 

Cravath were $25,000. The same fee was received with respect to 

the other four taxpayers in the other three transactions, $125,000 

in total. 

All of this happened at least 6 years ago. I recently reviewed 

those legal opinions in anticipation of appearing today and I can 

assure the Subcommittee that I believe they represent sound legal 

analysis based upon reasonable reliance on information provided by 

the clients. At all times, I viewed my role as providing and did provide straightforward legal advice about the tax consequences of the 

proposed structure using my many years of legal experience and 

expertise, and I would be happy to answer any of your questions. 

Chairman COLEMAN. Thank you, Mr. Steinberg. 

TIMONY OF CHARLES W. BLAU,1 MEADOWS, OWENS, COLLIER, 

REED, COUSINS AND BLAU, DALLAS, TEXAS 

Mr. BLAU. Chairman Coleman, Ranking Member Levin, and 

Members of the Subcommittee, my name is Charles Blau. I am a 

partner in the Dallas law firm of Meadows, Owens, Collier, Reed, 

Cousins and Blau. By agreement with the Subcommittee, I am appearing here today as the designated representative of our firm. 

I would like to spend just a moment to talk to you about what 

we do at Meadows, Owens, and what we are. We are a 31-member 

law firm with a practice concentration in taxation. The firm was 

established in 1983 and historically provided clients with legal 

services in essentially three areas, and those areas would be tax 

litigation, tax planning, and estate planning. The firm’s tax practice has expanded and we also now do tax litigation centering on 

representation of clients who have controversies both civilly and 

criminally with the Internal Revenue Service. The tax planning 

practice generally involves advising clients about the tax implicaVerDate 0ct 09 2002 07:08 Mar 29, 2007 Jkt 029760 PO 00000 Frm 00115 Fmt 6633 Sfmt 6601 C:\DOCS\29760.TXT SAFFAIRS PsN: PAT
84

tions of financial and business transactions. The estate practice is 

obviously concentrated in assisting clients in planning their estates. 

Over the course of the 23-year existence, we have expanded beyond this original scope to include real estate, corporate securities, 

white collar legal defense, and commercial litigation. Meadows, 

Owens does not, has not structured, promoted, or provided opinions 

to promoters in connection with listed transactions as identified by 

the Internal Revenue Service. We do, however, have a large litigation practice in controversies with the Internal Revenue Service 

both civilly and criminally, and some of our clients are tax shelter 

clients. 

Most of the attorneys of the firm who have practiced in this area 

have advanced degrees in taxation. Approximately 12 of our attorneys have LLMs in tax. Seven attorneys are certified under the 

Texas Board of Legal Specialization as certified in tax, and eight 

attorneys are non-practicing Certified Public Accountants. 

As previously communicated to the Members of the Subcommittee, Meadows, Owens’ formers clients, the Wylys, through 

its counsel—or through their counsel, I should say, have instructed 

the firm to maintain and protect the attorney-client work product 

privileges. Accordingly, as dictated by the law and the applicable 

rules of professional conduct in the State of Texas, we must at all 

times endeavor to uphold and respect our former clients’ instructions. While we strictly are going to honor these instructions, obviously, we have diligently attempted to assist the Subcommittee 

with this inquiry to the extent that we are ethically permitted to 

do so. 

Additionally, we would ask this Subcommittee to take notice of 

the fact that the attorney who oversaw and directed the majority 

of Meadows, Owens’ legal work with our former clients passed 

away on July 25, 2003. His passing creates obvious difficulties for 

us in researching the background and details of these specific 

transactions and inquiries made by the staff. 

These obstacles notwithstanding, I can tell you that Meadows, 

Owens was engaged from time to time by the clients in a variety 

of legal matters within the area in which we practice. The first of 

these engagements occurred on or about mid-1997. At this time, we 

no longer represent the clients. Our representation terminated 

when it became apparent to us that a conflict might exist because 

of the possibility of members of the firm might be witnesses in this 

matter. When we learned of this potential conflict, we informed the 

clients of our need to withdraw from further representation. 

I would say from my standpoint in trying to review all of these 

matters that we were involved with that during the period of our 

representation, I believe that the legal services performed were appropriate and in compliance with the applicable governing laws, 

principles guiding such matters at the time. 

And again, I hope to be able to answer your questions, but I may 

have some difficulties under the current circumstances of getting 

into any of the details of the legal advice that we provided these 

clients because of the privilege issue. 

Chairman COLEMAN. Thank you, Mr. Blau, and we appreciate 

you being here today and certainly understand. 

85

For all counsel, we appreciate and respect the attorney-client 

privilege, but there are some things that this Subcommittee would 

like to know and hopefully you can be helpful. 

Mr. Barrie and Mr. Steinberg, Mr. Greenstein from Quellos indicated that the POINT transaction was one that had tax deferral—

I want to make sure I don’t incorrectly paraphrase him—and from 

his perspective, there was a potential for profit. What did you understand the purpose of POINT to be? 

Mr. BARRIE. Let me speak first. My understanding of POINT was 

it was a tax deferral strategy. The securities that were put into the 

strategy, the basket of securities had a built-in loss. My understanding is there was an investment aspect of the securities in 

terms of picking securities that had the potential to make a gain 

in a very short period of time. But it was primarily a tax advantaged strategy. 

Chairman COLEMAN. Mr. Steinberg. 

Mr. STEINBERG. I would generally agree with that. My understanding is that these were high-basis assets and so there was a 

pre-tax economic potential as well as a desire to preserve the high 

basis in the securities that were in the partnerships. 

Chairman COLEMAN. When you talk about the pre-tax economic 

potential, does that create concerns from an IRS perspective? 

Doesn’t there have to be some real potential of economic gain here? 

Mr. STEINBERG. Yes, and my understanding is that there were 

two potential sources of gain. One would be the return on the warrant premium, and the second would be the fact that the stocks—

they were tech stocks. It was pretty volatile, and that there was, 

particularly in 2000, a realistic possibility they were going to go up. 

Chairman COLEMAN. Was it your understanding that the warrant premiums would be unwound as soon as the loss was recognized? 

Mr. STEINBERG. I think the opinion says that likely would occur. 

I think we said that in the opinion. So I think that we were fully 

aware and did reflect that, that the warrant might be unwound. 

When that event occurred, obviously, might be very relevant to the 

profit analysis. 

Chairman COLEMAN. It would be more than relevant. In fact, it 

makes the profit analysis a pretext. 

Mr. STEINBERG. If, in fact, the profit analysis, you would want 

to do over the period of the anticipated holding period of the underlying stock. 

Chairman COLEMAN. Mr. Barrie, were you aware that the warrants would be unwound as soon as the loss was recognized? 

Mr. BARRIE. Yes, we were, and we actually focused more on the 

basket of stocks in terms of whether or not there was a profit 

potential. In the Subcommittee’s documents, there is at least one 

e-mail from Quellos to us describing the potential profitability with 

a collar at 100 percent and 108 percent and it had set forth various 

fees, which at the time we believed were the fees that were related 

to the transaction and included Quellos fees. Based upon that collar, it appeared to us that there was a potential to make a profit 

with the collar and with the unwind of the position. 

Chairman COLEMAN. Were you told that no shares were involved, 

that this was simply a book entry transaction? 

86

1See Exhibit 6 which appears in the Appendix on page 722. 

Mr. BARRIE. No, sir. 

Chairman COLEMAN. Mr. Steinberg. 

Mr. STEINBERG. Because of attorney-client privilege, I can’t directly answer that question, but what I would say is the opinion 

set forth my understanding of the facts and that referred to a 

transfer of shares. 

Chairman COLEMAN. Let me then rephrase the question without 

this particular case. If you had such a transaction where, in fact, 

there were no shares involved, if this was simply book entry, a 

flow-through, would that have caused you to have some concerns 

about the nature of this transaction? 

Mr. STEINBERG. Chairman Coleman, I don’t want to quibble. If 

it were real shares but they were just transferred by book entry, 

that might or might not. That is a fairly standard process. If what 

you are asking me hypothetically is that there were no shares, obviously, that would give me some concern. 

Chairman COLEMAN. Mr. Barrie. 

Mr. BARRIE. That would give me great concern. 

Chairman COLEMAN. Let me ask you about the importance of understanding who owned Barnville and Jackstones. Would it be important for you in a transaction like this, where you are looking at 

$9.6 billion of reported transactions, to know who the folks were 

behind the entities involved in these transactions? Mr. Steinberg, 

and then Mr. Barrie? 

Mr. STEINBERG. Mr. Chairman, not necessarily. The reason is 

that the tax analysis really would not have turned on who the current owner of the shares were. So I am not sure that would have 

been particularly relevant to my——

Chairman COLEMAN. And maybe I am misphrasing it. The concern we have—if we can get Exhibit 6,1 please—is what we label 

as phantom trades, the transactions between Jackstones and Barnville. There is no cash, nothing. There is no economic substance 

there. That structure, were you aware that this was the structure 

involved in POINT? 

Mr. STEINBERG. Can I just ask my counsel about attorney-client 

privilege on that one issue? 

Chairman COLEMAN. I am not asking you about advice, just 

whether you were aware that this was involved. 

Mr. STEINBERG. To the best of my recollection, the answer is no. 

Chairman COLEMAN. Mr. Barrie. 

Mr. BARRIE. Not to my knowledge, either. 

Chairman COLEMAN. Mr. Chatzky, I appreciate the dissertation 

on changes in tax policy. But one of the principal concerns here is 

control. In spite of all the changes in tax law, if I understand, that 

these trusts are non-grantor trusts. So, in other words, is it fair to 

say that they have some tax advantages for the individual who set 

up the trusts? Is that a fair statement? 

Mr. CHATZKY. It depends on the facts. For example, if a foreigner 

sets up a foreign trust and retains a grantor trust power over the 

trust and it is recognized——

Chairman COLEMAN. If a U.S. citizen sets up a grantor trust——

Mr. CHATZKY. Right. 

87

Chairman COLEMAN [continuing]. Would they have greater tax liabilities than if they had set-up a non-grantor trust? 

Mr. CHATZKY. Well, to answer your question specifically, if a U.S. 

person sets up a trust and the trust is a grantor trust, then the 

U.S. person setting up the trust remains taxable on the assets 

transferred to the trust. 

Chairman COLEMAN. Mr. Blau, do you agree with that interpretation? 

Mr. BLAU. I am not a trust expert in this area, but I would generally say these things are factually driven and it depends on the 

time that they take place. There are different tax regimes for different years and the rules change. 

Chairman COLEMAN. I think it is fair to state that if the grantor 

retains control of the trust, then, in fact, the trust would be determined to be a grantor trust even in 2000. 

Mr. CHATZKY. May I be a little bit more specific, because the law 

is more complicated than that. If you have a domestic trust, a trust 

that is administered in the United States and a U.S. citizen funds 

that trust and retains a grantor trust power over that trust, the 

U.S. person is taxable on the income of the trust. If it is a foreign 

trust funded by a U.S. person, even if the U.S. person surrenders 

all control over the foreign trust, the U.S. person nevertheless remains fully taxable on the assets transferred to the trust until the 

U.S. person dies. That is because that is what Section 679 says, 

which may be of questionable constitutionality, but it is in the Internal Revenue Code and it is enforced. 

Chairman COLEMAN. I know the laws have changed several 

times, but if a grantor directs a trust protector to tell the trustee 

when to sell stock, when to buy stock, when to sell options, when 

to buy options, what furniture, what jewelry, and what real estate 

to buy, and in each and every instance the trust protector relays 

the information to the trustee who complies, does that raise any 

concerns with you about whether that individual grantor is exercising some control over that trust? Does that raise——

Mr. CHATZKY. Are you asking me? 

Chairman COLEMAN. Yes, Mr. Chatzky. 

Mr. CHATZKY. Yes. I mean, and again, I don’t want to relate this 

to the Wylys——

Chairman COLEMAN. I am not relating it. I am just asking that 

hypothetical. Does that raise a concern with you? 

Mr. CHATZKY. As a general principle, I would say, yes, it raises 

a concern because it raises an issue. And as Mr. Blau correctly 

pointed out on another point recently, it is very factual-driven. For 

example, if a U.S. person makes a suggestion as to how the trust 

assets should be invested and the trustee has the power to accept 

or reject that suggestion, that is legally permissible. 

It has been approved by the tax court in a case called Goodwyn. 

Goodwyn actually is a case where Mr. Goodwyn formed a trust, relinquished all legal control over the trust, had independent trustees, but the trust existed for many years, probably a quarter of a 

century, and the trustees testified that they always followed Mr. 

Goodwyn’s advice, without any exception. 

If Mr. Goodwyn said, don’t do it, they didn’t do it. If Mr. 

Goodwyn said, do it, they did. And the tax court said that doesn’t 

88

matter, because at any point in time, the trustees had the legal 

power to reject the advice. It was merely influential advice. It 

wasn’t compelling. 

Chairman COLEMAN. These are certainly, again, factual issues, 

and I am respecting the attorney-client privilege by not raising the 

specifics in this case. 

But I will say, Mr. Chatzky, that if, in fact, that is the case, and 

you have a case where an individual each and every time directs 

a trust protector regarding what to do, gives complex discussions 

to the protector about what type of securities transactions are to 

be involved, and the protectors can fire the trustees if they say no, 

and there is a threat that will happen, then a loophole is still 

there, and we had better change it. It flies in the face of common 

sense to suggest there isn’t control. And if that loophole is there, 

then we have a problem. 

There is an ongoing investigation in the case of the Wylys, but 

as I sit here from this vantage point and look at this record, it is 

very hard for me to understand how it is not very clear that control 

is being exercised. 

Mr. CHATZKY. Well, let me just make this additional point. That 

is that irrespective of tax objectives or tax purposes, it is very common for a trustee to communicate with a beneficiary about proposed investments and it is equally very common for a beneficiary 

of a trust to communicate with the trustee about what the beneficiary would like to do. The trustee, though, has the power to reject the recommendations. So, I mean, again, it is very factual. 

If you have a situation where the whole thing is a sham, if the 

trustee is nothing more than a conduit or an agent and isn’t exercising independent responsibilities, that is something as a lawyer 

I would be very concerned about. 

However, I am also very concerned about the opposite side of the 

coin, which is the trustee of a trust established for the benefit of 

beneficiaries has legally enforceable fiduciary duties to those beneficiaries. 

So if, for example, I am the beneficiary of a trust and I go to the 

trustee and I say, I want you to invest the trust corpus in Microsoft 

stock and that investment, let us assume, is not to the interest of 

the other beneficiaries of the trust, the trustee who is making that 

decision has responsibility to the other beneficiaries and might be 

sued for breach of fiduciary duty if that type of investment were 

improper. Probably wouldn’t be, but——

Chairman COLEMAN. Absolutely, but there are hundreds of examples in the record where on each and every occasion the instructions given by the grantor or given by the beneficiary, and this is 

the Wylys, were followed by the trustees. Some of these instructions were very clear and very explicit, and the record shows that, 

in fact, when there was some resistance by the trustees, additional 

pressure was put on them, I think you have a problem. 

I will turn to my Ranking Member and come back to the questioning. Senator Levin. 

Senator LEVIN. I sure agree with the Chairman. I don’t know 

how you can possibly say where you have hundreds of directions 

from the grantor that are just funneled right through and carried 

out by trustees on the Isle of Man, who I think you know and I 

89

know are basically there to carry out instructions of others and not 

to act independently, I don’t know how you can say there is much 

doubt about who should be taxed on the income of this trust or who 

is directing the trust. I don’t quite get it. 

Mr. CHATZKY. Let me say this. In the 1970s, the Internal Revenue Service said almost in the exact same language that you just 

stated that same argument in two cases. They are both Goodwyn’s 

cases. One was an income tax case, and one was an estate tax case. 

Senator LEVIN. Both in tax havens? 

Mr. CHATZKY. No, they were both domestic trusts. They were 

trusts where Mr. Goodwyn——

Senator LEVIN. So they knew—they were able to get their hands 

on the trustees. They could find out what actions the trustees took 

and why, right? 

Mr. CHATZKY. Well, what I am saying is the trustees stipulated, 

I mean, they admitted in the tax court and the testimony that during the entire term of their being the trustees—during the entire 

term of their administering the trust that they always took the recommendations of the grantor, Mr. Goodwyn, the late Mr. Goodwyn, 

and they always followed them. And if Mr. Goodwyn says, don’t do 

something, they wouldn’t do it. If Mr. Goodwyn said, do it, they did 

it. There are no exceptions. 

Senator LEVIN. Did they argue that they were independent? 

Mr. CHATZKY. Yes. They said that we are independent, and the 

IRS took your argument. And it would have said, how can you be 

independent when you are always, invariably, following the advice 

of Mr. Goodwyn? 

Senator LEVIN. And I added the tax haven there, where you can’t 

get your hands on the trustees. 

Shouldn’t there be a presumption in a tax haven where your 

trustees are always carrying out the instructions of the grantor, 

shouldn’t there at least be a presumption that in tax havens, secrecy jurisdictions that the grantor should be responsible for paying 

the taxes? Doesn’t something change because of all the secrecy 

here? 

Mr. CHATZKY. Well, two points to answer the question. One is the 

tax court in Goodwyn specifically said that the IRS’s argument was 

rejected and they went along with the taxpayer’s argument. They 

said that the point is not that Mr. Goodwyn in fact made recommendations to the trustees which were always followed. The 

point is that the trustees had the legal power to reject the recommendations. In fact, I am a lawyer——

Senator LEVIN. And is it not true that they argued they were 

independent? 

Mr. CHATZKY. Yes. They argued they were independent. 

Senator LEVIN. Can you even find out what the argument is of 

the trustees here on the Isle of Man? 

Mr. CHATZKY. Well, my point is that in your hypothetical where 

you have a U.S. person setting up a foreign trust in a jurisdiction 

like the Isle of Man, which has confidentiality and secrecy provisions——

Senator LEVIN. Right. 

Mr. CHATZKY [continuing]. That it doesn’t matter, that it doesn’t 

matter because the law presently says—Form 3520 says if you are 

90

a U.S. person and you set up a foreign trust in a place like the Isle 

of Man, you are responsible for the tax consequences of that foreign 

trust as long as that foreign trust has or is capable of having at 

least one U.S. beneficiary. So if I set up a trust for the benefit of 

you and you are a U.S. person, I have to report it. 

Senator LEVIN. But is it not true that in those cases, the trustee 

argued that they were independent regardless of the fact that they 

followed the recommendations of the grantor? 

Mr. CHATZKY. That is absolutely true. 

Senator LEVIN. That is not true here. It is a big distinction. 

These are secrecy jurisdictions. They are not arguing anything. 

The other distinction is this. With domestic trusts, the trusts pay 

taxes, don’t they? 

Mr. CHATZKY. It is complicated because of the way you folks 

write the law——

Senator LEVIN. Somebody pays taxes, don’t they? 

Mr. CHATZKY. Not necessarily. If you have a domestic——

Senator LEVIN. Someone should pay taxes on income, shouldn’t 

they? 

Mr. CHATZKY. Generally speaking——

Senator LEVIN. Generally speaking. But in tax havens, no one 

pays taxes. That is the whole point, isn’t it? 

Mr. CHATZKY. No. If you are a U.S. person and you—in a tax 

haven, and I will define a tax haven just for the purpose of discussion as a jurisdiction that does not impose taxes on the trust or any 

part of the trust——

Senator LEVIN. Or on anybody. 

Mr. CHATZKY. On anybody. But I am saying that is the tax haven 

jurisdictions on tax law. 

Senator LEVIN. Right. 

Mr. CHATZKY. But if you are a U.S. person and you are funding 

that foreign trust, then under U.S. tax law, even though the trust 

is administered offshore, you are taxable until your death. 

Senator LEVIN. OK. 

Mr. CHATZKY. That is Section 679 of the Internal Revenue Code. 

Senator LEVIN. OK. Let me now go back to the other witnesses 

here. 

First of all, Mr. Barrie, let me start with you. You indicated that 

you would be very concerned, I believe was your word, if there were 

no shares involved in those transfers between those two corporations on the Isle of Man, is that correct? 

Mr. BARRIE. That is correct. 

Senator LEVIN. Did you understand, or were you informed by 

Quellos that as a matter of fact, there would be no transfer of real 

shares? 

Mr. BARRIE. We were not so informed. 

Senator LEVIN. Did you hear the testimony here today? 

Mr. BARRIE. I did. 

Senator LEVIN. Well, I think the testimony was that they did inform you——

Mr. BARRIE. My recollection is that I was never informed of the 

lack of shares. We always understood that there were shares, there 

was a real purchase. We had some issues as to how to verify that 

from Mr. Saban’s perspective. 

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1See Exhibit 54 which appears in the Appendix on page 1138. 

And, by the way, I am very pleased Mr. Saban, as a lawyer, has 

allowed me to come here today to talk about this——

Senator LEVIN. And we are, too, by the way. 

Mr. BARRIE [continuing]. That we spent time with trying to find 

out, did they own the shares? We saw some of the documents, and 

if we saw all the documents, the documents on their face appeared 

to be ones where they actually owned the shares. 

We ended up going to seek representations that they actually 

purchased the shares. There was, I believe, an accountant’s report 

to verify that the shares were owned, which was something that 

was of great concern to us as Mr. Saban’s counsel. 

Senator LEVIN. Did you have any idea to the scope of the alleged 

cash that transferred here, $9 billion between——

Mr. BARRIE. No, sir. 

Senator LEVIN. Would that raise a concern for you if you knew 

about it? 

Mr. BARRIE. I was told that the portfolio of the Barnville fund 

was very large and that they had culled out a basket of tech stocks 

that had high basis, low value. My concern from Mr. Saban’s perspective was whether or not those shares were, in fact, real and 

whether or not he acquired them with a high tax basis. 

Senator LEVIN. OK. And why was it relevant to you that there 

would be real stock? It was important to you, but why was it important? 

Mr. BARRIE. The transaction is a tax-advantaged transaction. It 

allows for the purchase of a partnership interest that has embedded in it stock with high basis, low value. If the stock wasn’t real, 

Mr. Saban couldn’t sell anything. If the basis wasn’t there, there 

would be no losses. He would have spent a lot of money for nothing. 

Senator LEVIN. So that if the stock wasn’t real, you would have 

recommended against his participating in this transaction? 

Mr. BARRIE. If it turned out that the stock wasn’t real but there 

were book entries, if there was something that justified it, we 

would have to research that and make a decision as to whether or 

not we felt a comfort level for that, given the size of this portfolio. 

Senator LEVIN. All right. But if you knew that the stock was not 

real, you would have recommended against it? 

Mr. BARRIE. Yes, sir. 

Senator LEVIN. And the letter which we received here from 

Euram which says the following—it is Exhibit 54 if you want to follow that.1 This is on page 5. I read this before, near the bottom, 

about the third paragraph from the bottom. 

Mr. BARRIE. Yes, a letter dated July 6, 2006, from the Subcommittee to Mr. Saban? 

Senator LEVIN. No, this is Exhibit 54, page 5. 

Mr. BARRIE. Yes. 

Senator LEVIN. And then where it says, ‘‘Because the transactions were conducted in this manner—’’ Do you see that paragraph near the bottom? 

Mr. BARRIE. Yes, I do. 

92

1See Exhibit 62d which appears in the Appendix on page 1202. 

Senator LEVIN. And the second sentence. ‘‘No transactions took 

place over any exchange and no cash transfers passed between 

bank accounts of the two companies. This, however, was always understood to be the case. Euram obtained assurances from Quellos 

that the book entry nature of these transactions had been known 

by the counsel with whom they developed the strategy and that it 

would be disclosed to any client advisor and opinion provider involved in any subsequent implementation.’’ Was it? 

Mr. BARRIE. Not to my recollection. 

Chairman COLEMAN. With you, Mr. Steinberg? 

Mr. STEINBERG. Not to my recollection, either. 

Senator LEVIN. Mr. Steinberg, you have written an opinion, 

which is Exhibit 62d. Before I ask you that, would it have been important to you to have known that there was no actual transfer of 

real stock here, Mr. Steinberg? Had you known that at the time, 

would you have recommended the purchase of this? 

Mr. STEINBERG. Senator Levin, let me answer the question in 

two pieces, if I may. From the point of view, as I said earlier, if 

in giving this opinion, if someone had said to me, we will tell you 

as a matter of fact there is no stock, that would have been very 

troubling to me and could very well have meant that I could not 

give that opinion. 

Senator LEVIN. And there was no cash transferring. 

Mr. STEINBERG. I mean, again, without going through details, the 

entire transaction. The other thing, though, which may be a distinction between my role and Mr. Barrie’s role, is because I had 

looked at the transaction for Quadra, now Quellos, I felt that my 

role should be limited to passing on the transaction and that other 

regular advisors—tax advisors, etc.—for the individual clients 

should be involved in looking at suitability issues, looking at making sure the opinion they felt was correct and complete, that the 

facts were accurate. 

So there may be a slight difference in the role here between myself and Mr. Barrie, given my prior representation of Quadra. 

Senator LEVIN. OK. So you had previously represented Quadra 

before Quellos took over? 

Mr. STEINBERG. Yes. 

Senator LEVIN. And then you were representing Mr. Johnson? 

Mr. STEINBERG. Correct. 

Senator LEVIN. So to avoid a conflict, is that what you are talking about——

Mr. STEINBERG. Correct. 

Senator LEVIN [continuing]. You make that distinction that you 

just made? 

Mr. STEINBERG. Correct. 

Senator LEVIN. Now go to Exhibit 62d,1 page 7, if you would. 

This is your opinion here. 

Mr. STEINBERG. Yes. 

Senator LEVIN. Where you say: ‘‘A remote possibility of pre-tax 

profit or the possibility of pre-tax profit that is unreasonably small 

when compared to the tax benefits attributable to the transaction 

is insufficient to satisfy this test.’’ Do you stand by that? 

93

Mr. STEINBERG. Yes. 

Senator LEVIN. Do you know what the pre-tax profit possibility 

was in this transaction for your client? 

Mr. STEINBERG. We would have looked at that, yes. 

Senator LEVIN. What was it? 

Mr. STEINBERG. To be frank, I don’t remember, Senator. 

Senator LEVIN. Do you know what the profit was, or the loss, the 

cost? Do you know what the cost was to your client? 

Mr. STEINBERG. The actual profit earned on the transaction? 

Senator LEVIN. Yes. 

Mr. STEINBERG. No. To the best of my recollection, no, I don’t 

know that. 

Senator LEVIN. Do you know now after paying his fees whether 

he made any profit, other than this huge tax loss? 

Mr. STEINBERG. My understanding during interview with the 

Senate staff is that I believe they said Mr. Johnson made a loss. 

I don’t know if that is the case. 

Senator LEVIN. Do you know, Mr. Barrie, whether your client 

had any profit at all, other than that huge tax loss that he bought? 

Mr. BARRIE. My understanding at the time was that he made a 

small profit at the time he disposed of his shares in November 

2001. I understand that what the Subcommittee report indicates 

and what Mr. Saban has said is that there was a loss on the transaction. 

Senator LEVIN. Whether there was a loss or a small profit on 

that transaction, it was, would you not say, tiny compared to the 

tax loss which he was acquiring? 

Mr. BARRIE. It was a small loss, yes. The comparison of——

Senator LEVIN. So it would have been a few million compared to 

a billion-and-a-half? 

Mr. BARRIE. Absolutely, yes. 

Senator LEVIN. OK. So now if Mr. Steinberg’s opinion is correct, 

that a remote possibility of a pre-tax profit, or the possibility of a 

pre-tax profit that is unreasonably small, or I will add nonexistent, 

when compared with the tax benefits attributable to the transaction is insufficient to satisfy that test, do you agree with that? 

Mr. BARRIE. Based upon the projections that we were given, that 

with a 108 percent collar there was the possibility of making a 

moderate profit from a percentage standpoint, certainly from a dollar standpoint——

Senator LEVIN. What would that be, a moderate profit? 

Mr. BARRIE. The figures that I have seen—I recall seeing is a 9 

percent profit at 108 percent. That is in the exhibit, I think July 

2001. 

Senator LEVIN. OK. Would that pass the test, even if you could 

make up to 9 percent, compared to 100 percent tax loss? Would you 

say that that is not small, relatively, compared to the tax benefits 

attributed to the transaction? 

Mr. BARRIE. The tax benefits were significantly larger. What concerned me——

Senator LEVIN. At a minimum, I think your numbers are wrong. 

It is ten times larger. 

Mr. BARRIE. They were——

Senator LEVIN. Eleven times larger. 

94

Mr. BARRIE. I agree with you. 

Senator LEVIN. Is there going to be an additional round here? 

Chairman COLEMAN. Senator Levin, why don’t you continue. I 

am not going to do an additional round. I am going to say a couple 

of words before you close. 

Senator LEVIN. OK, thank you. 

Let me just make sure that both of you agree with what I am 

saying, or if you do not, then you have an opportunity to say you 

disagree. 

If you knew then that there was no real stock, there was no cash 

that went between those two Isle of Man corporations, and if you 

knew that the profit that was maximum to your client would have 

been 9 percent, and I think that is high in your case, Mr. Barrie, 

or in your case, Mr. Steinberg, a few million dollars compared to 

a $150 billion tax loss, would you have recommended that your clients acquire this tax shelter? Mr. Barrie. 

Mr. BARRIE. As to your first question, if the transaction involving 

the shares was a sham, as is indicated in the report, we would 

have advised against doing the transaction. 

Senator LEVIN. A sham being no real stock, and no cash——

Mr. BARRIE. No real stock, no cash, not being a real transaction, 

we would have advised not to go into the transaction. 

Senator LEVIN. And if you, in fact, had the potential maximum 

profit of 9 percent of tax loss, is that, in your judgment, sufficient 

to address the IRS concerns about whether you are buying a tax 

loss or whether there is a real economic transaction? Is 9 percent 

sufficient in your book? 

Mr. BARRIE. It is done on a——

Senator LEVIN. That is maximum. It is maximum profit. 

Mr. BARRIE. Well, that number was based upon a hypothetical 

put to us prior to the transaction. I hate to pick a number, but 

what I can say is that we would analyze that in terms of the potential for profit versus the amount. I think on this transaction, as the 

code existed, you could have a very minute business purpose and 

still satisfy the requirements of the code. The law was changed to 

prevent what I will call the trafficking in losses in the partnership 

context. 

Senator LEVIN. Mr. Steinberg. 

Mr. STEINBERG. Yes, Senator Levin. Let me take that again in 

two pieces, and let me also just say again, I think the issue for me 

would not be recommending to the client, since that was not my 

role. 

Senator LEVIN. Would you recommend to a client under these circumstances. 

Mr. STEINBERG. Well, let us take it in two pieces. If, in fact, we 

assume that there were no shares, I would find it impossible to recommend a client to do that transaction. If what you are saying to 

me is, assume for a second that taking into account transaction 

costs you were guaranteed a loss, I don’t think that satisfies the 

law. 

Senator LEVIN. How about guaranteed a profit which at the most 

would be 5 percent of the tax loss? 

Mr. STEINBERG. That, I don’t know. I mean, I would have to 

think about that in the context of the overall transaction. 

95

Senator LEVIN. If it is all right, Mr. Chairman, just a couple of 

questions to Mr. Blau about offshore corporations. Who was the client of your law firm? Was it the Wylys or was it the offshore entities? 

Mr. BLAU. It depended on the representation matter that we 

were asked to deal with. Some cases, it was Sam Wyly. Some cases, 

it was Charles Wyly. Some cases, it was other members of their 

family. 

Senator LEVIN. Did you ever bill the offshore corporations? 

Mr. BLAU. Yes, we did. 

Senator LEVIN. You did bill them? Would you say that a significant percentage of your billing relative to those transactions would 

have gone to the offshore corporations? 

Mr. BLAU. If the transaction dealt with, let us just say an offshore-related manner, generally, we were instructed to bill it toward that entity, the offshore entity. 

Senator LEVIN. Would that have happened frequently? 

Mr. BLAU. I can’t sit here today and give you whether it was frequent or infrequent, but just on a general review of our bills over 

the period of representation, we did bill the foreign entity probably 

more than we billed the individual client. But within that, you 

have to understand that there are a lot of different representation 

matters. 

Senator LEVIN. My staff is reminding me that it wasn’t the actual corporation, it was the Irish Trust that I——

Mr. BLAU. That is correct, and I stand corrected, as well. I understood your question. 

Senator LEVIN. All right. Mr. Chatzky, why were the option 

swaps originally structured to be with the Nevada corporations if 

they were immediately going to assign the options and annuity contracts on to corporations of the same name in the Isle of Man? 

Mr. CHATZKY. Well, I would assume that any answer I would 

give to that question would violate the attorney-client privilege. 

Senator LEVIN. Why? 

Mr. CHATZKY. Because it would be concerned with legal advice 

which was given. 

Senator LEVIN. This was legal advice that you gave them that 

they were following? 

Mr. CHATZKY. Well, I mean, I can’t really discuss the situation——

Senator LEVIN. I am not asking you to tell us the legal advice. 

I am saying, why would somebody——

Mr. CHATZKY. Why would someone use a Nevada corporation——

Senator LEVIN. Yes. 

Mr. CHATZKY [continuing]. Instead of a foreign——

Senator LEVIN. As a pass-through to an Isle of Man corporation, 

same exact same annuities——

Mr. CHATZKY. The reason it existed at the time was actually a 

non-reason or a non-issue, but what it was is there was a technical 

concern that Internal Revenue Code Section 4371, which imposes 

an excise tax on annuities issued by a foreign insurance company 

on the life of a U.S. person, might apply if a foreign entity that is 

not an insurance company issues the annuity. 

96

Ultimately, it was discovered through additional research that 

wasn’t the case. It had to be an insurance company for that excise 

tax to apply. But because of that concern, out of an abundance of 

caution, one might use a domestic entity to avoid that particular 

excise tax. 

Senator LEVIN. Thank you. 

Mr. CHATZKY. You are welcome. 

Chairman COLEMAN. Thank you, Senator Levin. I want to again 

compliment your staff, Senator Levin, and my own staff for the tremendous amount of work that has been done. 

I do want to say, and I want to make it clear, I am a former prosecutor, and the Wylys aren’t here and they have exercised their 

Fifth Amendment privilege and I take that seriously. 

I think it is important to state that we are not here to judge guilt 

or innocence. We have no exculpatory information that has been 

presented. Attorney-client privilege prevents us from getting that. 

So I want to make it clear, we only have part of the record here 

and I understand that. Others will make judgments about criminal 

liability. 

But I do want to say this, the concern I have in looking at the Wyly case is that more than $140 million in loans were authorized 

by offshore trusts set up by the Wylys to advance Sam and Charles 

Wyly’s personal business interests; $85 million was authorized by 

offshore trusts set up by the Wylys to purchase real estate in the 

United States that the Wylys are able to use, live in and enjoy; and 

nearly $30 million was authorized by an offshore trust to purchase 

artwork, furnishings, and jewelry that members of the Wyly family 

are able to use and enjoy as their own. 

So regardless of the legality or illegality of this, there is something wrong with our system if this kind of money can come back 

into the United States and not be taxed. 

And if, in fact, the legal arguments prevail and there is no legal 

liability, we still have to address this situation because it is outrageous and it is offensive, and it hurts average taxpayers. And so 

it was fascinating to listen to the discussion between Mr. Chatzky 

and the Ranking Member, and I am sure others will have this 

same discussion. 

Regardless of the legality of the transactions we have discussed, 

common sense dictates that if individuals can control assets and 

use them for their personal benefit in a way that allows them to 

simply avoid tax liability, we should change the system. 

Senator Levin, I look forward to working with you to make sure 

we accomplish that goal. 

Mr. CHATZKY. Excuse me, Senator. May I make a comment on 

that, please? 

Chairman COLEMAN. Yes. Very briefly. 

Mr. CHATZKY. Very briefly, OK. I once was in another country 

and I talked to someone who lived there about their tax system, 

which was a flat tax, just a pure flat tax. The same tax rate applied to everyone. And I asked him, I said, are people in your country satisfied with that tax system, and he said, absolutely. I said, 

well, do people in your country ever do any tax planning, and he 

said, normally, no. But if a transaction can be structured so that 

it takes place outside of our country, therefore it would not be subVerDate 0ct 09 2002 07:08 Mar 29, 2007 Jkt 029760 PO 00000 Frm 00128 Fmt 6633 Sfmt 6601 C:\DOCS\29760.TXT SAFFAIRS PsN: PAT
97

ject to the taxation, then it sometimes occurs. Then he said that 

the people in our country are very content. We have had this tax 

system in place for many years and it has worked very well. It is 

very simple, straightforward, and fair. 

Not that you are not aware of a flat tax or other kinds of alternative proposals that might make the system both fair and equitable and easy to enforce, but my suggestion is that if you consider 

a system like that, then the issues that Senator Levin and I are 

talking about, and Senator Coleman and I are talking about would, 

I think, largely be resolved. I think that would go a long ways to 

having greater enforcement and greater respectability of the tax 

laws. 

Chairman COLEMAN. I appreciate that, because that is the first 

argument you have made today, Mr. Chatzky, that would put you 

out of business. [Laughter.] 

Mr. CHATZKY. Well, that is OK. I still have asset protection to 

handle. 

Senator LEVIN. If I could just have one minute——

Chairman COLEMAN. Senator Levin. 

Senator LEVIN. Mr. Chairman, thank you again for all you have 

done to make this possible here today, and your staff and my staff 

have been utterly extraordinary. The two cases that we have discussed today demonstrate basically that these offshore tax havens 

and these secrecy jurisdictions are totally out of control. 

As I said before, and I mean this, I believe those tax havens that 

operate in secrecy have declared economic warfare on the taxpayers 

of the United States. We are talking here perhaps $100 billion. The 

estimates vary, but it is somewhere between $40 and $100 billion 

per year. One of the reasons you don’t know more precisely is because of the secrecy. 

The grease that these wheels operate with is secrecy in these tax 

havens and we have to just simply not accept it. Create the presumption that if you want to transfer assets to tax havens, that 

you are going to be taxed on any income from those assets. You are 

going to be responsible to the IRS just as though you transferred 

it to a non-tax haven, into a non-secrecy jurisdiction. We have to 

reverse that presumption. Otherwise, we are going to be here a 

year, 5 years, or 10 years from now. 

Today, what we saw in our report illustrates in great detail, starting with the Wylys, $190 million of stock options moved offshore, no taxes paid for years and maybe will never be paid on 

parts of it. Fifty-eight offshore trusts and corporations established 

to cash in these options, use the cash for investments that are directed by the Wylys. 

And, by the way, Enron established 440 shell corporations in one 

offshore jurisdiction. And back to what we heard today, $2 billion in capital gains 

erased—at least you thought you guys erased them—by fake stock 

trades between shell corporation whose owners are hidden. Nobody 

knows the owners of those two shell corporations. You can’t find 

that out. And we have lawyers who engage in contortions, as far 

as I am concerned, legally and stayed blinded from what the real 

facts are, blinded themselves from the real facts in order to write 

opinions that are more likely than not going to justify these sham 

98

trusts and shell corporations and fake economic transactions which 

we see here today. 

So, Mr. Chairman, I again want to thank you. I think you have 

hit the nail on the head with the bill that you and I have introduced maybe a year ago now which would make transactions in tax 

havens taxable in the United States. We have to end this charade, 

and we are not going to be able to do it, frankly, with nuanced new 

regulations. 

We are going to have to do it by taking this bull—and I cut short 

the word that I really should say, a longer word than ‘‘bull,’’ but 

it starts with the same four letters—we have got to end this, take 

this bull by the horns and just simply put these tax havens out of 

business as far as American taxpayers are concerned when there 

is no transparency and they hide these sham transactions in shell 

corporations and will not disclose to the IRS what is going on and 

who runs them. 

So we had a lot of good testimony today, which I think was very 

helpful. We do appreciate, as our Chairman has said, those who did 

appear and did not exercise their rights under the Constitution. 

Those that did had a right to do so. This Subcommittee has always 

accepted that. But those who did show up here to attempt to answer questions, it seems to me do at least deserve our thanks for 

coming here, even though, frankly, I must tell you, I am utterly 

mystified how some of these opinions could in good conscience be 

written. It mystifies me. 

You have seen your clients here today, your clients today had to 

come before this Subcommittee and say that they have either had 

to return, give the IRS all of the taxes that would have been owed 

but for these legal opinions, plus interest. Mr. Saban is now negotiating with the IRS to do the same thing. 

When I asked Mr. Greenstein, how did he feel about his clients, 

there was no reaction, basically. Well, the process worked, he said. 

If this is the process and if it is working and if that is the result, 

we have really got to change the process. 

But I also hope that you, as lawyers—and I am a lawyer—would 

also look at these clients that appear here today and ask yourself, 

did I really want to find out everything that would allow me to 

write an opinion which would really guide my clients in ways that 

would put them on a straight path instead of the ones that they 

now find themselves on, going head up, against the IRS? So I 

would hope that you folks would ask yourselves some questions, 

not just listen to our questions and try to answer, but ask yourselves some questions, and then I hope you would be troubled by 

the answers. Thank you. 

Chairman COLEMAN. Thanks, Senator Levin. 

The record in this hearing will remain open for 10 days. 

With that, again, this hearing is now adjourned. 

[Whereupon, at 2:16 p.m., the Subcommittee was adjourned.] 

(99)

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1626


297601.497
1627


297601.498
1628


297601.499
1629


297601.500
1630


297601.501
1631


297601.502
1632


297601.503
1633


297601.504
1634


297601.505
1636


297601.507
1637


297601.508
1638


297601.509
1639


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1640


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1641


297601.512
1642


297601.513
1643


297601.514
1644


297601.515
1645


297601.516
1646


297601.517
1647


297601.518
1648


297601.519
1649


297601.520
1650


297601.521
1651


297601.522
1652


297601.523
1653


297601.524
1654


297601.525
1655


297601.526
1656


297601.527
1657


297601.528
1658


297601.529
1659


297601.530
1660


297601.531
1661


297601.532
1662


297601.533
1663


297601.534
1664


297601.535
1665


297601.536
1666


297601.537
1667


297601.538
1668


297601.539
1669


297601.540
1670


297601.541
1671


297601.542
1672


297601.543
1673


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1674


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1675


297601.546
1676


297601.547
1677


297601.548
1678


297601.549
1679


297601.550
1680


297601.551
1681


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1682


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1683


297601.554
1684


297601.555
1685


297601.556
1686


297601.557
1687


297601.558
1688


297601.559
1689


297601.560
1690


297601.561
1691


297601.562
1692


297601.563
1693


297601.564
1694


297601.565
1695


297601.566
1696


297601.567
1697


297601.568
1698


297601.569
1699


297601.570
1700


297601.571
1701


297601.572
1702


297601.573
1703


297601.574
1704


297601.575
1705


297601.576
1706


297601.577
1707


297601.578
1708


297601.579
1709


297601.580
1710


297601.581
1711


297601.582
1712


297601.583
1713


297601.584
1714


297601.585
1715


297601.586
1716


297601.587
1717


297601.588
1718


297601.589
1719


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1720


297601.591
1721


297601.592
1722


297601.593
1723


297601.594
1724


297601.595
1725


297601.596
1726


297601.597
1727


297601.598
1728


297601.599
1729


297601.600
1730


297601.601
1731


297601.602
1732


297601.603
1733


297601.604
1734


297601.605
1735


297601.606
1736


297601.607
1737


297601.608
1738


297601.609
1739


297601.610
1740


297601.611
1741


297601.612
1742

Æ


297601.613