FILED U.S. COURT OF AP P EALS E LEVEN T HC IRC U IT April 7, 2008 THOMAS K. KAH

N CLERK [ P U B L I S H ] I N THE UN I TE D STATE S C OU RT OF APPE ALS F O R T H E E L E V E N T H C IR C U IT

________________________ N os . 01- 17249, 01- 17251, 01- 17253 01- 17255, 01- 17256, 01- 17257, 0 7 - 1 2 8 6 6 , 0 7 - 1 2 8 6 7 , 0 7 - 1 2 8 6 8 , 07- 12869, 07- 12870, 07- 12871

________________________ T a x C ourtN os . 1984- 92, 22884- 93, 21616- 91, 16421- 90, 23743- 92, 20211- 91 C L A U D E M . B A L L A R D , M A R Y B . B A L L A R D , P e titio n e r s - A p p e lla n ts , v ersu s C O M M I S S I O N E R O F I N T E RN A L R E V E N U E , R e s p o n d e n t- A p p e lle e .

________________________ A ppe a l s f

r om aD e c i s i on of

the U ni t ed S t at es T ax C ou rt

_________________________ ( A p r i l7, 2008) B efo re H U L L , F A Y an d G IB S O N , * C i rcu i tJu d g es. F A Y , C i rc ui tJudg e:

_______________ *Honora ble J ohn R. Gibson, United States Circuit Judg e for the Eighth Circuit, sitting by designation.Rul e18 3( c ) o f t heTax Cour

t prov ide s in

re leva nt p art that “ du ere g ard

sh all b eg iven to 1 the circumstances that the Spec ial Trial Judge had the opportunity to evaluatethe credibility of witne sse s, and

thefinding s o f f

ac t re c omm ende d b y

theSpe c ial Tri al Judg esh all b epre sume d to be cor rect.” Mary B. B allard is a pa

rticipant in the dispute only beca use she f iled joint taxreturns 2 with her spouse. A ccordingly, unless otherwise spe cified, referenc es to “B allard”denote Claude M. B alla rd . A lso , th eB alla

rd s arede c e a se d a

nd proc e e d through th e ir

e state s. 2 T he que s t i on pr e s e nt e d i n thi s appe a l i s s i m pl y w he the rthe T a x C ourtJ udge r e vi e w i ng the r e portof

the S pe c i a l T r i a l J udge ga ve due r e ga r d t o the f a c t f i ndi ngs of the tri al j ud ge. T hati s the on l y thi ng si m pl e abo utthi s c as e. 1 I. O vervi ew C l aude M . B a l l a r d a nd hi s w i f e , M a ry B . B a l l a r d, appe a l the 2 j ud gm entof the U . S . T ax C ou rtthatthey f raud ul ent l y f

ai l ed t o d ec l ar e and pay in c o m e ta x o n ap p r o x im a te ly $ 3 .2 m illio n e a rn e d th r o u g h ak ic kb a c ks c h e m e . M o r e s p e c if

ic a lly , th e T a x C o u rt h e ld th a t B a lla r d a n d a n a c q u a in ta n c e s o ld th e ir i nf l ue nc e a tP rude nt i a l L i f e I ns ur a nc e C om pa ny of A m e r i c a( “ P rude nt i a l ” ) f or m on eyand then h i d thi s i ncom e f rom the Int ernal R evenue S ervi ce (“ IR S ”) . In r e a c hi ng the c onc l us i on tha tthe B a l l a r ds w e r e l i abl e f ort a x de f

i c i e nc i e s a nd pe na l t i e s f

orf r aud, the T a x C ourtJ udge r e j e c t e d the r e c om m e nda t i on of the S pe c i a l T r i a l J udge , w ho pr e s i de d ove rthe B a l l a r ds ’ s tr i a l a nd c onc l ude d tha tthe re cord di d n otdem on stra t e thatthey e arned p er sonal i ncom e throu gh a ki ckback s c he m e orc om m i tt e d f

r aud i n r e port i ng the i ri nc om e . T he T a x C ourtJ udge f oundThe B allards also argue that the TaxCourt Judg e violated their due proc ess rights by 3 reje ctingthe Special Trial Judg e’s f indings a nd deter minations on a “cold”rec ord. Given our c on c lus ion

that th eTax Cour

t f aile d tog ivetheSpe c ial Tri al Judg e ’srepo rt thea pp ropriate deferenc e, wefind it unnece ssary to addre ss the due proc ess argument. Although B allard w as joined in the scheme by others, only

the ca se as it per

tains to the 4 Ballards is before this Court. 3 thatthe S peci al T ri al Judg e’ s f ac tfi nd i ng s and cr edi bi l i ty det erm i nat i on s w er e i nc om pl e t e orm a ni f

e s t l y unr e a s onabl e . O n appe a l , the B a l l a r ds a r gue tha tthe re cord supp ort ed the S peci al T ri al Judg e’ s c on cl usi on s and thatthe T ax C ou rt J udge f a i l e d t o gi ve the S pe c i a l T r i a l J udge ’ s r e portthe de f e r e nc e due af

i nde rof f a c t . We a g r e e . Ac c o r d i n g l y , f o rth e r e a s o n s d i s c u s s e d m o r e f u l l y b e l o w, we v a c a te th e T a x C o u rt’s ju d g m e n t a s to th e B a lla r d s a n dr e m a n dw ith in s tru c tio n s to is s u e af in a l o r d e rap p r o v in g a n d a d o p tin g th e S p e c ia l T r ia l J u d g e ’s r e p o rt. 3 T he C om m i s s i one rof

I nt e rna l R e ve nue ( “ C om m i s s i one r ” ) a l l e ge d tha tf i ve se para t e busi ness m en or corporat i on s ( “ the F i ve”) pai d B urt on W . K ant er , an ex p ertt ax att o rn ey w i th ex t en si v e t i es t o th e b u si n ess w o rl d , t o g en erat e b u si n ess on thei r behal f. Iti s a l l eged thatK ant er , i n turn, pai d B al l ar d and R ob ertW . L i sl e, both of w hom w e r e hi gh- l e ve l e m pl oy e e s of P rude nt i a l , t o us e the i ri nf l ue nc e a tthe i nsurance c om pany t o d i re ctbu si ness t o the F i ve. T he go vernm entar gu es that 4 K a nt e ra rr a nge d f

orhi s , B a l l a r d’ s , a nd L i s l e ’ s s ha r e s of the pa y m e nt s t o be funn el ed throu gh corporat i on s and partners hi ps di sgui se d as c orpo ra t e i ncom e. It ur ge s tha tK a nt e r , B a l l a r d, a nd L i s l e , how e ve r , e a c h ul t i m a t e l y r e c e i ve d a nd m a de4

pe r s ona l us e of

the i rport i on of

the m one y . W hi l e the c orpor a t i ons a nd pa rtne r s hi ps pa i d i nc om e t a xe s on the m one y , K a nt e r , B a l l a r d, a nd L i s l e di d not decl ar e thi s m on eyon thei r i nd i vi du al t ax re turns. A cc ordi ng l y, i ti s c on t ended the y w e r e r e s pons i bl e f

ort a x de f

i c i e nc i e s , ha vi ng f

a i l e d t o pa y i nc om e t a x on the m one y , a nd pe na l t i e s f

orf r aud, ha vi ng di s gui s e d a nd r out e d the m one y thr ough co rp o rat i o n s an d p artn ersh i p s. I n c o n te n d in g th a t th e p a y m e n ts f r o m th e F iv e w e r e e a rn e d b y , a n d ta x ab le to , B a lla r d , th e C o m m is s io n e rr e lie d o n tw o m a in th e o r ie s : ( 1 ) B a lla r d a tte m p te d to i m prop er l y a ss i gn hi s i ncom e t o the corporat i on throu gh w hi ch the paym ent s w er e rout ed and w as pers on al l y r es po nsi bl e f or thi s m on eyas i t s true ow ner; and (2) a corporat i on t o w hi ch B al l ar d’ s a l l eged po rt i on of thi s m on eyw as transfe rr ed w as B al l ard ’ s al t er eg o , su ch th atB al l ard w as p erso n al l y resp o n si b l e fo r th i s m o n ey. Af t e rh e a r i n g e v i d e n c e i n s u p p o rto f th e s e a l l e g a t i o n s , S p e c i a l T r i a l J u d g e D. I rw i n C ouvi l l i on f

ound tha tthe e vi de nc e w a s i ns uf f i c i e ntt o s how the e xi s t e nc e of ak i c kb a c ks c h e me , s u c h th a th e c o u l d n o tc o n c l u d e th a tth e p a rt i e s e a rn e d i n c o me in th e m a n n e ra lle g e d o ra c te d f r au d u le n tly in n e g le c tin g to r e p o rt s u c h in c o m e . A ft er rev i ew i n g Ju d g e C o u v i l l i o n ’ s rep o rt , th e T ax C o u rtJu d g e, H arry A . H ai n es, di sa gree d. Judg e H ai nes f ou nd thatJudg e C ou vi l l i on ’ s r ec i t at i on of the fa ct s w as i ncom pl et e or m ani fe st l y unrea sonabl e. Judg e H ai nes c on cl ud ed thatthe evi denceF or a c omp leteac c ount o f t

hisc a se ’sc omp le x pro c e dural hi sto ry, w edire c t th ere ader to 5 our previous published opinions , Ballard v. Comm’r of Internal Revenue, 321 F .3d 1037, 1043- 44 (11 Cir. 2003), and B allard v. Comm’r of Internal Revenue, 429 F .3d 1026, 1030 (11 Cir. th th 2005) (“ Ballard II ”). 5 dem on stra t ed thatthe part i es had earned i ncom e f rom the F i ve and h ad f r audul e nt l y di s gui s e d i ta s c orpor a t e i nc om e t o a voi d the pe r s ona l i nc om e t a x re qu i re m ent s of the Int ernal R evenue C od e. 5 O n appe a l , the pa rt i e s do notdi s put e tha tthe pa y m e nt s f r om the F i ve re pres ent ed i ncom e or thatthe ent i t i es throu gh w hi ch K ant errout ed the m on ey de c l a r e d i ta s i nc om e on the i rt a x r e turns . H ow e ve r , the B a l l a r ds m a i nt a i n tha tthe m one y w a s c orpor a t e i nc om e onl y , s uc h tha tthe y w e r e notobl i ga t e d t o r e porti ton thei r per sonal t ax re turns. T he C om m i ss i on erm ai nt ai ns thatthe B al l ar ds earned a n d m a d e p e r s o n a l u s e o f th e m o n e y a n d c o m m itte d f r au d b y in te n tio n a lly s h ie ld in g it f

r o m th e I n te rn a l R e v e n u e S e rv ic e ( “I R S ” ) . T h e B a lla r d s a r g u e th a t, in s i di ng w i th the C om m i s s i one r , J udge H a i ne s di d notgi ve due de f e r e nc e t o J udge C ouvi l l i on’ s f

i ndi ngs a nd c onc l us i ons . T he B a l l a r ds a r gue tha tthe s e f i ndi ngs a nd c onc l us i ons s houl d c ontr ol , a s the y w e r e s upport e d by the r e c or d. T hus , the i s s ue n o w b e f o r e u s is w h e th e rJu d g e H a in e s ’s r e v ie w w a s ap p r o p r ia te ly d e f e r e n tia l. II . P roce d u ralH i st ory A s s e t f o rth in o u re a r lie ro p in io n , th is c a s e c o m e s to u s w ith th is ba c kgr ound:6

Pe t i t i o n e r s - A p p e l l a n t s r e c e i v e d N o t i c e s o f D e f i c i e n c y f r o m th e I RS pert ai ni ng t o years 19 75 throu gh 19 82 , 19 84 , and 1 98 7 al l egi ng thatthey ow ed addi t i on al t axes . A s t o eac h d ef i ci encyas se rt ed by the IR S , the B al l ar ds fi l ed pe t i t i ons f

orr e de t e rm i na t i on i n the T a x C ourt . P ur s ua ntt o I . R . C . § 7443A a nd R ul e s 180, 181 a nd 183, the C hi e f J udge of the T a x C ourta s s i gne d the c o n s o lid a te d c a s e to S p e c ia l T r ia l J u d g e D . I rw in C o u v illio n f o rtr ia l. A tthe concl usi on of the fi ve-w ee k tri al du ri ng the sum m erof 19 94 , S peci al T r i a l J udge C ouvi l l i on, i n a c c or da nc e w i th R ul e 183( b) , pr e pa r e d a nd s ubm i tt e d a w r i tt e n r e portc ont a i ni ng hi s f i ndi ngs of

f a c t s a nd opi ni ons t o the C hi e f J udge f or s ubs e que ntr e vi e w by aT a x C ourtJ udge . I n a c c or da nc e w i th R ul e 183, none of th e litig a n ts r e c e iv e d ac o p y o f S p e c ia l T r ia l J u d g e C o u v illio n ’s r e p o rt a t th a t tim e . T here af t er , pu rs uantt o R ul e 183 (b), the C hi ef Judg e a ss i gn ed the ca se t o T ax C ou rtJudg e H . A . D aw son, Jr . for hi s r evi ew and fi nal di sposi t i on . O n D ec em ber 15 , 19 99 , Judg e D aw son i ss ued the op i ni on of the T ax C ou rti n w hi ch the T ax Co u rtb o th ap p r o v e d o f a n d a d o p t e d Sp e c i a l Tr i a l J u d g e Co u v i l l i o n ’ s r e p o rt( T. C. M e m o 1999- 407, s e e I nve s tm e ntR e s e a r c h A s s oc . I nc . v. C om m i s s i one r , 78 T .C .M . ( C C H ) 9 5 1 ( 1 9 9 9 ) ) , ac o p y o f w h ic h w a s p r o v id e d to th e p a rtie s . O n J u ly 2 4 , 2 0 0 1 , Ju d g e D aw so n en t ered th e fi n al o rd er o f th e T ax C o u rtag ai n st P e titio n e r s - A p p e lla n ts , a s s e s s in g ta x d e f ic ie n c ie s o f

$ 1 ,3 1 8 ,6 4 8 . O f

th a t a m o u n t,7

$4 22 , 81 2 i s penal t i es agai nstB al l ar d p ursuantt o I. R . C . § 6 65 3(b). O n A pr i l 20, 2000, pr i ort o the T a x C ourt ’ s f i na l or de rof

a s s e s s m e nt , the B a lla r d s , jo in e d b y th e o th e rp e titio n e r s , f ile d am o tio n r e q u e s tin g a c c e s s to “a ll r e port s , dr a f

topi ni ons ors i m i l a rdoc um e nt s , pr e pa r e d a nd de l i ve r e d t o the [ T a x] C ou rtpu rs uantt o R ul e 183 (b), ” or, i n the al t ernat i ve, thatthe T ax C ou rtei ther ce rt i fythe i ss ue for i nt er l ocut ory app ea l pu rs uantt o R ul e 193 or m ake the i ni t i al f i ndi ngs pa rtof

the r e c or d f

ors ubs e que ntappe a l t o the c i r c ui tc ourt . O n A pr i l 26, 2000, J udge D a w s on i s s ue d a n or de rde ny i ng the m ot i on. I n the or de r , J udge D a w s on not e d tha t“ [ he ] ga ve due r e ga r d t o the f a c ttha tS pe c i a l T r i a l J udge C ou vi l l i on eval uat ed the cr edi bi l i ty of w i tness es . . . and tre at ed the fi nd i ng s of f ac t re com m ended b y the S peci al T ri al Judg e a s bei ng pres um pt i vel y c orre ct . ” O n M ay 2 6 , 2 0 0 0 , th e B a lla r d s a lo n g w ith th e o th e rp e titio n e r s , f ile d as e c o n d m o tio n w ith th e T ax C o u rt. T h e s ec o n d m o ti o n re q u es ted th at S p ec ial T rial Ju d g e C o u v il li o n ’s or i gi na l r e portorothe rdoc um e nt a t i on be pl a c e d unde rs e a l a nd m a de pa rtof the r e c or d f ors ubs e que ntappe l l a t e r e vi e w . T ha tm ot i on w a s de ni e d on M a y 30, 2000. O n A u g u st2 2 , 2 0 0 0 , th e B al l ard s o n ce ag ai n j o i n ed b y th e o th er p et i t i o n ers, f ile d am o tio n r e q u e s tin g th a t th e T a x C o u rt r e c o n s id e rits d e n ia l o f a c c e s s to S peci al T ri al Judg e C ou vi l l i on ’ s ori gi nal re po rtor, al t ernat i vel y, thatthe T ax C ou rt gr a ntthe pe t i t i one r s ane w tr i a l . I n s upportof thi s m ot i on, a n a f

f i da vi tf r om8

R a nda l l G . D i c k ( “ D i c k” ) , a tt orne y f orI R A a nd f

orK a nt e r , w a s f

i l e d. I n the a f f id a v it, D ic kin d ic a te d th a t tw o u n id e n tif ie d T a x C o u rt J u d g e s ap p r o a c h e d h im and st at ed thati n the ori gi nal re po rtsubm i tt ed t o the C hi ef Judg e i n acc ordance w i th R ul e 183( b) , S pe c i a l T r i a l J udge C ouvi l l i on c onc l ude d tha tpa y m e nt s m a de by “th e F iv e ” w e r e n o t ta x ab le to th e in d iv id u a l p e titio n e r s a n d th a t th e f r au d p e n a lty w as no tappl i cabl e. F urtherm ore, D i ck i nd i ca t ed thatthe tw o u ni dent i fi ed T ax C ou rtJudg es expres se d that“ subst ant i al se ct i on s of the op i ni on w er e notw ri tt en by J udge C ouvi l l i on, a nd tha tthos e s e c t i ons c ont a i ni ng f i ndi ngs r e l a t e d t o the c r e di bi l i ty of

w i tne s s e s a nd f

i ndi ngs r e l a t e d t o f

r aud w e r e w hol l y c ontr a ry t o the fi nd i ng s m ade by Jud ge C ou vi l l i on i n h i s r eport . ” A cc ordi ng t o D i ck, the tw o T ax C ourtJ udge s s t a t e d tha tthe c ha nge s t o S pe c i a l T r i a l J udge C ouvi l l i on’ s f i ndi ngs re l at i ng t o cre di bi l i ty and fr aud w er e m ade by Jud ge D aw son. F i nal l y, D i ck i nd i ca t ed thathe confi rm ed w hathe w as t ol d b y the tw o u ni dent i fi ed T ax C ou rt Judg es w i th yetanother uni dent i fi ed T ax C ou rtJudg e. A pp ar ent l y, the thi rd u n id en ti fied T ax C o u rt Ju d g e c o n firm ed th at S p ec ial T rial Ju d g e C o u v il li o n ’s op i ni on had b ee n “ changed. ” O n A ug ust30 , 20 00 , the T ax C ou rti ss ued an o rder s i gne d by S pe c i a l T r i a l J udge C ouvi l l i on, J udge D a w s on a nd the C hi e f J udge of the T a x C ourtde ny i ng the m ot i on a nd c onf i rm i ng tha t , c ontr a ry t o the c ont e nt s of the af fi davi t , the un derl yi ng re po rtadop t ed by the T ax C ou rti s, i n fac t , S peci al9

T r ia l J u d g e C o u v illio n ’s r e p o rt. S ubs e que nt l y , the B a l l a r ds pe t i t i one d thi s c ourtf oraw r i tof

m a nda m us s e e ki ng a n or de rdi r e c t i ng the T a x C ourtt o pr ovi de the B a l l a r ds w i th ac opy of the ori gi nal S peci al T ri al Judg e C ou vi l l i on re po rt , or, al t ernat i vel y, se eki ng an order r e qui r i ng tha tthe T a x C ourtpr ovi de a ny c ha nge s m a de by J udge D a w s on t o the ori gi nal S peci al T ri al Judg e C ou vi l l i on re po rt . T he pet i t i on w as deni ed on O ct ob er 23, 2000. B a l l a r d v. C om m ’ rof I nt e rna l R e ve nue , 321 F . 3d a t1037, 1040- 41 ( 11 th C i r. 20 03 ). T he r e a f t e r , w e a f

f i rm e d the rul i ng of

the T a x C ourt . B a l l a r d, 321 F . 3d 1037 ( 11 C i r . 2003) . F ol l ow i ng thi s , the S upr e m e C ourtgr a nt e d c e rt i or a r i a nd th r e ve r s e d. B a l l a r d v. C om m ’ rof I nt e rna l R e ve nue , 125 S . C t . 1270 ( 2005) . T he C ourtdi s appr ove d the pr oc e dur e us e d by the T a x C ourti n r e f us i ng t o m a ke a va i l abl e the or i gi na l r e portof the S pe c i a l T r i a l J udge , di s appr ove d of the procedure used t o cre at e the col l aborat i ve re po rtadop t ed by the T ax C ou rt , vaca t ed th e earl i er j u d g m en t s an d rem an d ed w i th i n stru ct i o n s. S u b s e q u e n tly , w e r e m a n d e d th e m a tte rto th e T a x C o u rt w ith in s tru c tio n s to : (1) S tri ke the col l aborat i ve re po rt ; (2) R ei nst at e the re po rtof the S peci al T ri al J u d g e ; ( 3 ) A s s ig n th e c a s e to ar e g u la rT a x C o u rt J u d g e w ith n o p r io rin v o lv e m e n t; ( 4) R e vi e w the c a s e i n a c c or d w i th i t s r e vi s e d R ul e s 182 a nd 183. B a l l a r d v.10

C o m m ’ ro f

I n t e rn a l R e v e n u e , 4 2 9 F . 3 d 1 0 2 6 ( 1 1 C i r . 2 0 0 5 ) . I n th a to p i n i o n we th di s c us s e d the de f

e r e nc e due the S pe c i a l T r i a l J udge ’ s f i ndi ngs of

f a c t . I d. a t1029- 3 2 . W e i n stru ct ed th atth o se fi n d i n g s sh o u l d n o tb e i g n o red o r ch an g ed u n l ess

“ m a ni f e s t l y unr e a s onabl e . ” I d. a t1031. T hi s w a s i n a c c or d w i th the l a ngua ge of th e S u p r e m e C o u rt w h ic h n o te d : “T h e o f f ic e rw h o h e a r s w itn e s s e s a n d s if ts th ro u g h ev i d en ce i n th e fi rsti n st an ce w i l l h av e a co m p reh en si v e v i ew o f th e case tha tc a nnotbe c onve y e d f ul l s tr e ngth by apape rr e c or d. ” I tc ont i nue d: “ F r aud c a s e s , i n pa rt i c ul a r , m a y i nvol ve c r i t i c a l c r e di bi l i ty a s s e s s m e nt s , r e nde r i ng the ap p r a is a ls o f

th e ju d g e w h o p r e s id e d a t tr ia l v ita l to th e T a x C o u rt’s u ltim a te d e te rm in a tio n s . T h is c a s e is illu s tr a tiv e . T h e T a x C o u rt’s d e c is io n r e p e a te d ly dr a w s out c om e – i nf

l ue nc i ng c onc l us i ons r e ga r di ng the c r e di bi l i ty of B a l l a r d, K a nt e r , a nd s e ve r a l othe rw i tne s s e s . ” I d. a t43. F ol l ow i ng ourr e m a nd the c a s e w a s a s s i gne d t o r e gul a rT a x C ourtJ udge H a rry A . H a i ne s w ho e nt e r e d the c urr e ntopi ni on of the T a x C ourt . A f

t e re xt e ns i ve r e vi e w of

the r e c or d a nd the opi ni on of J udge H a i ne s , w e c onc l ude tha tthe c urr e nt opi ni on m us tbe s tr i ke n a nd the or i gi na l r e portof S pe c i a l T r i a l J udge C ouvi l l i on r e in s ta te d a s th e ru lin g o f th e T a x C o u rt. II I. S tan d ard of R evi ew T he C om m i s s i one r ’ s de t e rm i na t i on of at a x de f i c i e nc y i s e nt i t l e d t o a11

p r e s u m p tio n o f

c o rr e c tn e s s , a n d th e ta x p a y e r s h a v e th e b u r d e n o f r e b u ttin g th is pres um pt i on by a pre po nd er ance of the evi dence. B on e v. C om m ’ r of I nt ernal R e ve nue , 324 F . 3d 1289, 1293 ( 11th C i r . 2003) . T he C om m i s s i one rha s the bur de n of

pr ovi ng a l l e ga t i ons of

f r aud by c l e a ra nd c onvi nc i ng e vi de nc e . H e ns on v . C o m m ’ro f

I n te rn a l R e v e n u e , 8 8 7 F .2 d 1 5 2 0 , 1 5 2 5 ( 1 1 th C ir . 1 9 8 9 ) . W h en th e C o m m i ssi o n er an d t ax p ayer p resen tth ei r ev i d en ce o n th ese m a tte r s to aS p e c ia l T r ia l J u d g e , T a x C o u rt R u le 1 8 3 g o v e rn s . S e e T a x C o u rt R u le 183. R ul e 183 pr ovi de s tha t , a f t e rhe a r i ng the e vi de nc e a nd c ons i de r i ng the pa rt i e s ’ a r gum e nt s , the S pe c i a l T r i a l J udge s houl d f i l e r e c om m e nde d f

i ndi ngs of fa ctand con cl usi on s of l aw w i th the T ax C ou rt . T ax C ou rtR ul e 183 (b). T he T ax C ou rtthen ass i gn s the re po rtt o a T ax C ou rtJudg e f or fi nal re vi ew . S ee T ax C ou rt R ul e 183 (d). R ul e 183 m andat es that , i n con du ct i ng thi s r evi ew , the T ax C ou rt J udge “ [ s ha l l gi ve ] [ d] ue r e ga r d . . . t o the c i r c um s t a nc e tha tthe S pe c i a l T r i a l J udge h a d th e o p p o rtu n ity to e v a lu a te th e c r e d ib ility o f w itn e s s e s ” a n d m u s t “[ p r e s u m e to be corre ct ] the fi nd i ng s of f ac tre com m ended b y the S peci al T ri al Judg e. ” T ax C ou rtR ul e 183 (d). U l t i m at el y, the T ax C ou rtJudg e m ayadop t , m od i fy , or re j ec t i n w ho l e or i n p artthe re po rt , or m ayre qu es taddi t i on al bri ef s, evi dence or oral a r g u m e n t. I d . O urs i s t e rc i r c ui t s ha ve e xpl a i ne d tha tthe de f e r e nc e m a nda t e d by R ul e 183 re qu i re s the T ax C ou rtJudg e t o revi ew the S peci al T ri al Judg e’ s r eportfor c l ear12

error. S ee S t on e v. C om m ’ r of I nt ernal R evenue, 86 5 F . 2d 34 2, 34 5-47 (D . C . C i r. 1989) . L i ke w i s e , w e ha ve e xpl a i ne d tha tthe T a x C ourtJ udge m a y di s turb the S peci al T ri al Judg e’ s f

i nd i ng s of f

ac tand credi bi l i ty det erm i nat i on s onl y i f they are

“ m a ni f e s t l y unr e a s onabl e . ” B a l l a r d I I , 429 F . 3d a t1031, 1032. T o f urthe rde f

i ne th e d e f e r e n c e d u e th e Sp e c i a l Tr i a l J u d g e ’ s d e t e rmi n a t i o n s , w e f i n d th e Su p r e me C o u rt’s e x p la n a tio n o f

th e c le a re rr o rs ta n d a r d , in th e c o n te x t o f aC o u rt o f

A p p e a ls r e v ie w in g th e d is tr ic t c o u rt’s f in d in g s o f

f a c t in ac a s e tr ie d w ith o u t aju ry , h e lp f u l. S e e A n d e r s o n v . C ity o f B e s s e m e rC ity , N .C ., 4 7 0 U .S . 5 6 4 , 5 7 3 - 7 4 , 1 0 5 S .C t. 1 5 0 4 , 1 5 1 1 - 1 2 , 8 5 L .E d .2 d 5 1 8 ( 1 9 8 5 ) . T h e S u p r e m e C o u rt e x p la in e d : [ T h e c le a re rr o r ] s ta n d a r d p la in ly d o e s n o t e n title ar e v ie w in g c o u rt to re vers e the fi nd i ng of the tri erof fa ctsi m pl y bec ause i ti s c on vi nced thati tw ou l d h ave deci ded the ca se di ff er ent l y. T he re vi ew i ng court ove r s t e ps the bounds of i t s duty . . . i f

i tunde rt a ke s t o dupl i c a t e the r o le o f th e lo w e rc o u rt. I n ap p ly in g th e c le a r ly e rr o n e o u s s ta n d a r d to th e f in d in g s o f

ad is tr ic t c o u rt s ittin g w ith o u t aju ry , ap p e lla te c o u rts m us tc ons t a nt l y ha ve i n m i nd tha tthe i rf unc t i on i s nott o de c i de fa ctual i ss ues de nov o. If the di stri ctcourt ’ s a cc ou ntof the evi dence i s pl aus i bl e i n l i ghtof

the r e c or d vi e w e d i n i t s e nt i r e ty , the c ourtof appeal s m ayno tre vers e i teven tho ug h con vi nced thathad i tbeen si tt i ng as the tri erof fa ct , i tw ou l d h ave w ei gh ed the evi dence di ff er ent l y. W here there ar e tw o p erm i ss i bl e vi ew s of the evi dence, th e fact fi n d er’ s ch o i ce b etw een th em can n o tb e cl earl y erro n eo u s. I d . ( in te rn a l q u o ta tio n a n d c ita tio n o m itte d ) . S p e c if ic a lly r e g a r d in g c r e d ib ility d e te rm in a tio n s , th e S u p r e m e C o u rt d ir e c te d th a t w he n atr i a l j udge ’ s f

i ndi ng i s ba s e d on hi s de c i s i on t o c r e di tthe t e s t i m ony of

one of tw o orm or e w i tne s s e s , e a c h of w hom ha s t ol d a c ohe r e nta nd f

a c i a l l y pl aus i bl e s t ory tha ti s notc ontr a di c t e d byThe g overnment seems to argue that weareonly reviewingthe Tax Court opini on 6 (Ju dge H ai n es ) f

o r c l ear e rro r a s opp o s edt o re v i ew in g th e S p ec i alTri alJu dge’ s (Ju dge Couvill ion) rec ommendations for c lear error. We agreeto the extent that we arenow reviewing the rulingof the TaxCourt (Judg e Haines) for clea r er ror. Our conclusion in reviewingthe Tax Court opinion is that Judg e Haines committed clea r er ror when he failed to acc ord the original finding s of fact, credibility of witnesses a

nd conclusions of Judge Couvillion the due def erence 13 extri nsi c e vi dence, thatfi nd i ng , i f noti nt ernal l y i ncon si st ent , can vi rtual l y neverbe cl ear e rr or. I d . a t 5 7 5 , 1 0 5 S .C t. a t 1 5 1 2 . T h e S u p r e m e C o u rt e x p la in e d th a t c r e d ib ility de t e rm i na t i ons a r e due thi s e xtr ade f e r e nc e be c aus e “ onl y the tr i a l j udge c a n be a w a r e of the va r i a t i ons i n de m e a nora nd t one of voi c e tha tbe a rs o he a vi l y on the lis te n e r ’s u n d e r s ta n d in g o f a n d b e lie f

in w h a t is s a id .” I d . A ft erthe T ax C ou rtJudg e has cond uct ed hi s r evi ew and i ss ued a fi nal op i ni on , w e genera l l y r evi ew thi s opi ni on for c l ear e rr or. S ee S t on e, 86 5 F . 2d at 34 4; 26 U . S . C . § 7 48 2(a) (1) ( i nstruct i ng C ou rt s of A pp ea l s t o revi ew T ax C ou rt de c i s i ons i n the s a m e m a nne ra s di s tr i c tc ourtde c i s i ons on c i vi l c a s e s tr i e d w i thout aj ury ) ; F e d. R . C i v. P . 52( a ) ( 6) ( i ns truc t i ng tha tC ourt s of A ppe a l s c a n s e ta s i de the d is tr ic t c o u rt’s f

in d in g s o n c a s e s tr ie d w ith o u t aju ry if th e y a r e c le a r ly e rr o n e o u s ) . H ow e ve r , w he n the T a x C ourtJ udge r e j e c t s the S pe c i a l T r i a l J udge ’ s f i ndi ngs a nd w e are fa ce d w i th a confl i ct i ng re po rtand o pi ni on , w e det erm i ne w hether the T ax C ourtJ udge c om m i tt e d c l e a re rr orby r e j e c t i ng the S pe c i a l T r i a l J udge ’ s f i ndi ngs a s c le a r ly e rr o n e o u s b y r e v ie w in g th e S p e c ia l T r ia l J u d g e ’s r e p o rt to d e te rm in e if h is f in d in g s w e r e , in d e e d , w ith o u t r e c o r ds u p p o rt. M a tte ro f M u ltip o n ic s , I n c ., 6require d under thelaw.

See B onner v. Pricha

rd, 661 F .2d 1206, 1209 (11 Cir. 1981) (en ba nc) ( adoptingas 7 th binding prece dent in the Eleventh Circuit, all decisions of the for mer F ifth Circuit announce d prior to October 1, 1981). 14 62 2 F . 2d 70 9, 71 2-13 , 72 2 (5th C i r. 19 80 ) (app l yi ng R ul e 52(a) t o b ankrup t cy 7 pr oc e e di ngs , w he r e i n the di s tr i c tc ourtr e j e c t e d the S pe c i a l M a s t e r ’ s f i ndi ngs , a nd ho l di ng that“ w e m ustre vi ew the fi nd i ng s of the S peci al M as t erand m ayaf fi rm th e [ d ]is tr ic t [ c ]o u rt’s r e v e r s a l o n ly if w e a ls o d e e m th e M a s te r ’s f in d in g s c le a r ly erroneou s” ). IV . F acts W e w ill b e g in w ith as u m m a ry o f th e c a s e . W e th e n w ill d iv id e th e s p e c if ic f a c t s of the c a s e i nt o s e c t i ons . F ore a c h s e c t i on, w e w i l l ( 1) s t a t e the r e l e va nt fi nd i ng s, det erm i nat i on s, and reas on i ng fr om Judg e C ou vi l l i on ’ s r eport ; (2) w here n ecessary, exp l ai n th e g ro u n d s o n w h i ch Ju d g e H ai n es co n cl u d ed th ese fi n d i n g s i nc om pl e t e orm a ni f

e s t l y unr e a s onabl e ; a nd ( 3) pr ovi de a ny f a c t s f r om the r e c or d ne c e s s a ry t o de t e rm i ne w he the rJ udge H a i ne s c orr e c t l y c onc l ude d tha tJ udge C o u v illio n ’s d e te rm in a tio n s w e r e m a n if e s tly u n r e a s o n ab le . A . T h e P arti es Judg e C ou vi l l i on foun d thatB al l ar d w as a s eni or vi ce pres i denti n the re al es t at e departm entof P rudent i al ’ s c orpo ra t e hea dq uart er s. H i s posi t i on ent ai l ed pur c ha s i ng, de ve l opi ng, m a na gi ng, a nd s e l l i ng P rude nt i a l pr ope rt i e s . I n 1982,15

B a lla r d le f

t P ru d e n tia l a n d b e g a n w o rk in g a t G o ld m a n S a c h s . S e p a r a te f r o m h is e mp l o y me n ta tPru d e n t i a l a n d Go l d man Sa c h s , Ba l l a r d man a g e d TM T, I n c o rp o r a te d ( “T M T ” ) . T M T ’s p r e f e rr e d s to c kw a s o w n e d b y th e O r ie n t T ru s t, w hi c h be ne f

i tt e d B a l l a r d’ s f

a m i l y . T M T ’ s c om m on s t oc k w a s ow ne d by I nve s tm e ntR e s e a r c h A s s oc i a t e s , L i m i t e d ( “ I R A ” ) , as ubc hapt e rC c orpor a t i on. L isle w as a v ice p re sid en t i n th e r ea l estate d ep ar tm en t at P ru d en ti al’s corporat e hea dq uart er s and pres i dentof a r ea l es t at e s ub si di ary of P rudent i al . In 1982, L i s l e l e f

tP rude nt i a l a nd be ga n w orki ng f orT r a ve l e r s I ns ur a nc e C om pa ny ( “T r a v e le r s ” ) . S e p a r a te f r o m h is e m p lo y m e n t a t P ru d e n tia l a n d T r a v e le r s , L is le m a na ge d C a r l c o, I nc orpor a t e d ( “ C a r l c o” ) . C a r l c o’ s pr e f e rr e d s t oc k w a s ow ne d by the C hri st i e T rust , w hi ch benefi tt ed L i sl e’ s f am i l y. C ar l co’ s c om m on st ock w as o w n e d b y I R A . As i d e f r o m b e i n g at a x e x p e rta n d b u s i n e s s m a n , Kan t e rm a n a g e d B WK, In co rp o ra ted (“B W K ”) . B W K ’s p re fe rr ed sto ck w as o w n ed b y th e B K C h il d re n ’s T rus t , w hi c h be ne f

i tt e d K a nt e r ’ s f

a m i l y . B W K ’ s c om m on s t oc k w a s ow ne d by IR A . G ener al l y, T M T , C ar l co, and B W K w er e i ncl ud ed i n IR A ’ s c on sol i dat ed g r o u p o f c o rp o r a tio n s f

o rta x p u rp o s e s . B a l l a r d a nd L i s l e m e tK a nt e ri n c onne c t i on w i th P rude nt i a l ’ s de ve l opm e nt of the H ous t on H y a ttH ot e l be tw e e n 1968 a nd 1970. K a nt e rw a s a n e m pl oy e e a nd bus i ne s s a c qua i nt a nc e of the P r i t z ke rf

a m i l y , w ho w e r e m a

j or i ty ow ne r s of

the16

H y a ttC orpor a t i on ( “ H y a tt ” ) , a nd ape r s ona l f r i e nd of A . N . P r i t z ke r , the he a d of the f a m ily . B . P ay m e n t s B y T h e F i ve i . H y att Judg e C ou vi l l i on foun d that , i n the earl y 197 0s, P rudent i alw as i nv ol ved i n b ui l di ng the E m barc ader o H ot el i n S an F ranci sc o. L i sl e and B al l ar d w er e c ha r ge d w i th f

i ndi ng ac om pa ny t o m a na ge the hot e l . T w o c om pa ni e s , D e l W e bb a nd I nt e r c ont i ne nt a l C om pa ny ( “ I nt e r c ont i ne nt a l ” ) , w e r e i nt e r e s t e d i n the m a n a g e m e n t c o n tr a c t. W h ile P r itz k e ra ls o w a s in te r e s te d in th e c o n tr a c t, L is le i ni t i al l y w ou l d n otac ce pta bi d from H ya tt . H ow ever , J. D . W ea ver, a hi gh -l evel e m pl oy e e of

ac om pa ny tha tw orke d w i th P rude nt i a l i n de ve l opi ng the H ous t on H y a tt H o te l, c o n v in c e d L is le to a c c e p t ab id f r o m H y a tt. O n th e d a y in w h ic h th e th r e e m a n a g e m e n t c o m p a n ie s w e r e to e n te rth e ir bi ds, Int er cont i nent al di d n otappear, and D el W ebb’ s e xecut i ve re fuse d t o ent era bi d, st at i ng thathe had al re ady bee n p rom i se d the contra ctbu tre fusi ng further e l abor a t i on. A c c or di ngl y , a s H y a ttha d e nt e r e d the onl y bi d, i tw a s a w a r de d the h o te l m a n a g e m e n t c o n tr a c t. T h e r e a f te r , H y a tt e n te r e d in to a n a g r e e m e n t w ith W e a v e rw h e r e b y H y a tt pa i d W e a ve r ’ s c orpor a t i on, K W J C orpor a t i on, 10% of i t s f e e s f r om m a na gi ng the E m b a r c a d e r o H o te l. S o m e tim e a f te r1 9 7 2 , P r itz k e rin f

o rm e d B a lla r d th a t H y a tt17

w a s p a y in g W e a v e rth is “f in d e r ’s f e e .” B a lla r d in f

o rm e d P r itz k e rth a t if

H y a tt c o u ld a f f o r d to p a y af

in d e r ’s f e e , P ru d e n tia l lik e ly w o u ld r e d u c e its p a y m e n ts unde ra ny f

utur e hot e l m a na ge m e ntc ontr a c t s . P r i t z ke ra s s ur e d B a l l a r d tha tthe fi nd er ’ s f ee t o W ea ver w as a uni qu e occ urre nce. In 19 73 , P ri t zkeral so i nform ed K a n te ro f

th e a g r e e m e n t, a s k in g h im to r e v ie w its te rm s . S om et i m e bef

ore M ar ch of 19 76 , K ant erand W ea ver a gree d thatW ea ver w oul d tr a ns f

e rt o I R A a n opt i on t o pur c ha s e a l l of K W J C orpor a t i on’ s s ha r e s , a nd th e a tt en d an t rig h t t o th e 1 0 % fin d er ’s fe e, inex ch an g e f o r $ 1 5 0 ,0 0 0 an d W ea v er ’s c o n t i n u e d r i g h tt o r e c e i v e 3 0 % o f th e Hy a ttp a y m e n t s . Atth e t i m e , KWJ C orpo ra t i on al so had $ 14 9, 00 0 i n acc um ul at ed as se t s. A pp roxi m at el y three ye ar s la te r , in 1 9 7 9 , I R A e x e r c is e d its o p tio n . I n 1 9 8 3 , KW J Co rp o r a t i o n wa s l i q u i d a t e d a n d I RA’ s s u b s i d i a r i e s , TM T, C a r l c o, a nd B W K , r e c e i ve d i t s a s s e t s . T he s e s ubs i di a r i e s f orm e d apa rtne r s hi p, K W J C om pa ny , t o w hi c h the y c ontr i but e d the a s s e t s . T M T a nd C a r l c o e a c h ha d a 4 5 % in te r e s t in K W J C o m p a n y , a n d B W K h a d a1 0 % in te r e s t. In fi nd i ng thatthe H ya tttransac t i on w as no tpartof a ki ckback scheme, Judg e C ou vi l l i on re as on ed thatH ya tt ’ s pay m ent s t o W ea ver c ou l d n othave been k i ckb ack s t o B al l ard an d L i sl e fo r al l o w i n g , an d accep t i n g , H yatt ’ s b i d b ecau se K a nt e r , B a l l a r d, a nd L i s l e di d notknow of the pa y m e nt s unt i l m onths a f t e rthe H ya tt/W ea ver f

ee -s hari ng agre em entw as m ade. M oreover, B al l ar d’ s di spl ea sure18

upon l e a rni ng of

the pa y m e nt s , a nd P r i t z ke r ’ s a s s ur a nc e tha the w oul d notm a ke s i m i l a rarr a nge m e nt s i n the f utur e , “ di s pe l [ l e d] the not i on tha tthe r e w a s c ol l us i on b e tw e e n ” th e p a rtie s . Judg e H ai nes s t at ed thatJudg e C ou vi l l i on ’ s a cc ou ntof the transac t i on w as in c o m p le te a n d a d d e d th e f o llo w in g . A t tr ia l, B a lla r d d e n ie d e v e rm e e tin g W e a v e r . P ri t zkerdi d n oti nform any other H ya ttexec ut i ves, sa ve hi s tw o son s, of hi s f ee s h a r in g a g r e e m e n t w ith W e a v e r . R egar di ng the nego t i at i on of IR A ’ s purchas e of K W J C orpo ra t i on , K ant er t e s t i f i e d tha tW e a ve ra gr e e d t o s e l l f orthe l ow a m ountof

$150, 00 be c aus e he n e e d e d th e m o n e y . H o w e v e r , W e a v e rd id n o t r e c e iv e a n y m o n e y f r o m th e s a le unt i l f oury e a r s l a t e r , i n the m i d- 1980s . O nc e the s a l e w a s c om pl e t e , W e a ve ra nd K a n te rd id n o t in f

o rm H y a tt o f

th e c h a n g e in o w n e r s h ip . R a th e r , W e a v e rs im p ly forw ar ded future H ya ttpaym ent s t o K ant er , and K ant erre turned 3 0% of the fe e a m o u n t to W e a v e r . A lo n g w ith o n e o f th e c h e c k s th a t W e a v e rf o rw a r d e d to K a n te r , h e s e n t ale tte ra s k in g K a n te rto “p le a s e d e p o s it a n dis s u e ap p r o p r ia te chec ks t o the part i ci pant s. ” A ga i n, w he n K W J C orpor a t i on w a s l i qui da t e d a nd K W J C om pa ny f orm e d, n o o n e in f

o rm e d H y a tt o f

th e c h a n g e . W e a v e rc o n tin u e d to f o rw a r d th e c h e c k s to K a nt e r , a nd K a nt e rf

orw a r de d the m one y t o T M T , C a r l c o, a nd B W K . O n one occa si on , K ant erpai d T M T ’ s and C ar l co’ s port i on s i n checks m ade outt o B al l ar d19

a n d L is le . L a te rle d g e re n tr ie s in d ic a te d th a t th e s e c h e c k s w e r e v o id e d . In concl ud i ng thatthe H ya tttransac t i on w as i nd i ca t i ve of a ki ckback sc hem e, Judg e H ai nes r ea soned thatJudg e C ou vi l l i on cl earl y e rr ed i n fi nd i ng that th e r e c o r d d id n o t d e m o n s tr a te h o w W e a v e rp e r s u a d e d L is le to a llo w aH y a tt b id . S pe c i f i c a l l y , J udge H a i ne s “ i nf e r [ r e d] ” tha tL i s l e a l l ow e d the bi d, a nd tha the a nd B allard u lt im ately a cc ep ted th e b id , b ec au se W ea v erin fo rm ed th em o f P ritzk er ’s pr om i s e t o s ha r e 10% of H y a tt ’ s m a na ge m e ntf

e e s a nd pr om i s e d the m aport i on of these fe es i f they aw ar ded H ya ttthe contra ct . L at er , W ea ver a l so prom i se d K ant er ap o rt i o n o f

th e f e e s i f h e ma d e a rr a n g e me n t s t o h i d e th e k i c kb a c kp a y me n t s . To do s o, K a nt e rde vi s e d apl a n w he r e by W e a ve rw oul d s e l l t o I R A K W J C orpor a t i on a n d th e r ig h t to ap o rtio n o f th e H y a tt p a y m e n ts f

o ran o m in a l f

e e a n d I R A w o u ld th e n l i q u i d a t e KW J Co rp o r a t i o n a n d f o rm KW J Co mp a n y , wi th Ba l l a r d ’ s TM T, L isle’s C ar lco , an d K an ter’s B W K as p ar tn er s. Ju d g e H ain es stated th at K an ter’s i ss uance of chec ks t o B al l ar d and L i sl e dem on stra t ed thatthe H ya ttpaym ent s w er e ea rn ed b y B allard an d L isle p er so n ally. Ju d g e H ain es also stated th at W ea v er ’s le tte rr e f e rr in g to th e “p a rtic ip a n ts ” d e m o n s tr a te d th a t I R A w a s n o t th e s o le r e c ip ie n t o f

th e H y a tt p a y m e n ts . J udge H a i ne s f

urthe rr e a s one d tha tJ udge C ouvi l l i on e rr e d i n c r e di t i ng B allard ’s an d K an ter’s tes ti m o n y. S p ec ifically, Ju d g e H ain es stated th at B allard ’s t es t i m on y thathe w as di spl ea se d u po n l earni ng of the fe e- shar i ng agre em entw as20

no tcr edi bl e, as i tw as “ se l f- se rvi ng on i t s f ac e and un corr ob orat ed by other w i tne s s e s ” a nd a s P r i t z ke rw i s he d t o ke e p the pa y m e nt s s e c r e ta nd w oul d notha ve v o lu n teer ed th eir e x isten ce to B allard . Ju d g e H ain es also stated th at “B allard ’s i ndi gna t i on [ tha tP r i t z ke rw oul d s ha r e hi s f e e s ] w a s f

e i gne d. ” L i ke w i s e , J udge H a in e s p o in te d o u t th a t B a lla r d ’s d e n ia l o f m e e tin g W e a v e rc a s t d o u b t o n h is cr edi bi l i ty, as even Judg e C ou vi l l i on ac kn ow l edged thatB al l ar d and W ea ver m et du ri ng the H ou st on H ya ttH ot el proj ec t . R egar di ng K ant er , Judg e H ai nes s t at ed tha tthe f a c ttha tW e a ve rr e c e i ve d no m one y f r om hi s s a l e of

K W J C orpor a t i on f

or f o u ry e a r s “ c a s ts e r i o u s d o u b to n ” Kan t e r ’ s t e s t i m o n y th a tWe a v e rs o l d KWJ C o rp o r a tio n b e c au s e h e n e e d e d m o n e y . C ontr a ry t o J udge H a i ne s ’ s a c c ountof w ha tl e d L i s l e t o a l l ow H y a tt ’ s bi d, B a lla r d te s tif

ie d a t tr ia l th a t, a lth o u g h L is le in itia lly d id n o t w a n t to a c c e p t aH y a tt bi d be c aus e he ha d he a r d tha tP r i t z ke rw a s pl a nni ng t o bui l d a nothe rhot e l i n the S an F ranci sc o are a, he changed h i s m i nd w hen W ea ver s ug gest ed thatP ri t zker m ig h t n o t b u ild th is o th e rc o m p e tin g h o te l if h e c o u ld b id o n a n d p o te n tia lly w in the E m ba r c a de r o H ot e l c ontr a c t . A l s o, the port i on of the r e c or d c i t e d by J udge H ai nes t o i l l ustra t e B al l ar d’ s l ac k o f c re di bi l i ty w i th regard t o k no w i ng W ea ver show s thatw hen an att orney a sked B al l ar d i f he knew w hether K ant erand W ea ver w er e a cquai nt ance s, B al l ar d res po nd ed i n the negat i ve. A s an asi de, B al l ar d then as ked the att orney i f he had ever metW ea ver, t o w hi ch the qu es t i on i ng att orney21

r e pl i e d “ N o. ” B a l l a r d di d notde ny m e e t i ng W e a ve r , i tw a s the a tt orne y m a ki ng thi s de ni a l . F urthe rm or e , c ontr a ry t o J udge H a i ne s ’ s a c c ountof K a nt e r ’ s t e s t i m ony o n W e a v e r ’s s a le o f

K W J C o rp o r a tio n , K a n te rte s tif ie d th a t W e a v e rw a n te d to s e ll K W J C orpor a t i on be c aus e he ne e de d m one y a nd w a s unhappy w i th the out c om e of ar e c e ntdi s put e w i th P r i t z ke rr e ga r di ng the f e e - s ha r i ng a gr e e m e nt . J udge C ou vi l l i on foun d thi s t es t i m on y c re di bl e. i i . F re y Judg e C ou vi l l i on foun d the fol l ow i ng . A tsom e poi nti n 1 97 8, B ruce F re y f o rm e d ap a rtn e r s h ip , B J F D e v e lo p m e n t, to c o n v e rt ap a rtm e n t c o m p le x e s in to c ondom i ni um s f

ors a l e t o i ndi vi dua l pur c ha s e r s . F r e y e xpe c t e d t o r e c e i ve de ve l opm e nta nd m a na ge m e ntf e e s f r om the s e c onve r s i on pr oj e c t s . H e m e tw i th K a n te rf o rta x a d v ic e o n th e p r o je c ts . In the course of thei r m ee t i ng , K ant eri nd i ca t ed that“ K ant erand/ or ent i t i es a s s o c ia te d w ith K a n te r ” c o u ld h e lp r a is e th e c ap ita l n e c e s s a ry f o rF r e y ’s p r o

je c ts . In re turn, K ant erexpect ed a s hare of any devel op m entand m anagem entfe es e a rn e d . F re y bec am e i nv ol ved w i th P rudent i al i n 1 97 9, w hen h e app roac hed an e xe c ut i ve i n P rude nt i a l ’ s M i a m i r e gi ona l of f i c e a nd of

f e r e d t o pur c ha s e f

or$20 m illio n a n ap a rtm e n t c o m p le x o w n e d b y ap e n s io n f u n d th a t P ru d e n tia l m a n a g e d . A s P rudent i al al re ady had consi dere d sel l i ng the com pl ex and $ 20 m i l l i on w as22

m o r e th a n its ap p r a is e d m a rk e t v a lu e , th e r e g io n a l e x e c u tiv e c o n s u lte d B a lla r d . B a lla r d a d v is e d s e llin g , n o tin g e s p e c ia lly th a t r e f u s in g th e o f

f e rm ig h t v io la te P rude nt i a l ’ s f

i duc i a ry duty t o the pe ns i on f und. H a vi ng pur c ha s e d the c om pl e x, F r e y s e taboutc onve rt i ng i t . K a nt e ra rr a nge d f ors e ve r a l e nt i t i e s t o i nve s ti n the p r o je c t, in c lu d in g Z e u s V e n tu r e s , I n c o rp o r a te d ( “Z e u s ” ) , as u b s id ia ry o f I R A . G i ven the succ es s of thi s proj ec t , the re gi on al exec ut i ve as ked F re y t o w ork w i th P rude nt i a l i n c onve rt i ng s e ve r a l othe rapa rtm e ntc om pl e xe s ow ne d by P ru d en t i al . K an t er ag ai n arran g ed fo r sev eral en t i t i es t o i n v esti n th ese p ro j ect s, in c lu d in g Z e u s . I n 1981, F r e y a nd K a nt e r ’ s f e e - s har i ng a gr e e m e ntw a s f orm a l i z e d i n a w ri tt en agree m entbetw ee n B JF D evel op m entand Z eus. P erthe agree m ent , F re y w ou l d p ayZ eus 5% of i t s devel op m entfe es and 2 0% of i t s profi t s f rom P rudent i al p r o je c ts . I n k e e p in g w ith th is a g r e e m e n t, F r e y ’s p a rtn e r s h ip m a d e p a y m e n ts to Z e u s f o rs e v e r a l o f

its p r o je c ts . In concl ud i ng thatthe paym ent s f rom F re y t o Z eus w er e notpartof a ki c kba c k s c he m e , J udge C ouvi l l i on f ound tha tP rude nt i a l i ni t i a l l y a gr e e d t o do bu si ness w i th F re y bec ause he offe re d m ore than the m arketval ue of the com pl ex i n q uest i on . Judg e C ou vi l l i on further f ou nd thatany f

uture deal i ng s betw ee n F re y and P rudent i al w er e the do i ng of an un -i nv ol ved P rudent i al re gi on al exec ut i ve. It w as a so u n d b u si n ess arran g em en tfo r b o th p art i es.23

J udge H a i ne s s t a t e d tha tJ udge C ouvi l l i on’ s f i ndi ngs w e r e i nc om pl e t e a nd added thatF re y pai d K ant er ’ s s hare of the fe es t o Z eus onl y bec ause K ant er i nstruct ed hi m t o d o so. O n o ne occas i on , F re y m ade achec k p ay abl e t o K ant er , b u t la te rv o id e d th e c h e c ka n d r e is s u e d it to Z e u s . I n c o n c lu d in g th a t th e F r e y p a y m e n ts w e r e e v id e n c e o f ak ic kb a c ks c h e m e , Judg e H ai nes r ea soned thatJudg e C ou vi l l i on cl earl y e rr ed i n fi nd i ng thatK ant er di d n otpers on al l y e arn the F re y pay m ent s. S peci fi ca l l y, Judg e H ai nes s t at ed that Judg e C ou vi l l i on ’ s f

i nd i ng thatK ant ert ol d F re y that“ K ant erand/ or ent i t i es a s s o c ia te d w ith h im ” c o u ld h e lp r a is e th e n e c e s s a ry c ap ita l w a s m a n if e s tly u n r e a s o n ab le . J u d g e H a in e s s ta te d th a t F r e y w a s r e ly in g s o le ly o n K a n te rto h e lp r a i s e c api t a l a nd tha t , a s i de f r om the i nve s tm e nt s m a de by Z e us , no one a c t i ng on be ha l f of aK a nt e r - r e l a t e d e nt i ty a s s i s t e d F r e y i n a ny m a nne r . I tw a s onl y on K a nt e r ’ s i ns truc t i ons tha tF r e y m a de the pa y m e nt s t o K a nt e r - r e l a t e d e nt i t i e s . J udge H ai nes f urther s t at ed thatthe fa ctthatF re y m ade achec k p ay abl e t o K ant er , ra ther th a n Z e u s , in d ic a te d th a t it w a s K a n te rw h o e a rn e d th e m o n e y . Judg e H ai nes a l so re as on ed that , w hi l e there w as no di re ctdo cum ent ary e v id e n c e th a t K a n te ra g r e e d to s h a r e th is m o n e y w ith B a lla r d a n d L is le , h e c o u ld “in f e r ” f r o m th e c ir c u m s ta n c e s th a t K a n te rto ld B a lla r d a n d L is le th a t if th e y c o u ld i nf l ue nc e P rude nt i a l t o do bus i ne s s w i th F r e y , he w oul d s ha r e w i th the m aport i on of the fe es pai d b y F re y. T he ci rc um st ance s thatJudg e H ai nes poi nt ed t o w er e24

B al l ar d’ s r ol e i n app rovi ng the sa l e of the pensi on -f un d-ow ned apartm entcom pl ex a n d P ru d e n tia l’s e x te n s iv e f u tu r e d e a lin g s w ith F r e y . S uc h ac onc l us i on s i m pl y i gnor e s the f a c t s tha tw e r e f

ound by J udge C ou vi l l i on and sup po rt ed i n the re cord thatthe F re y dea l s w i th P rudent i al or i gi na t e d w i th aP rude nt i a l e xe c ut i ve l oc a t e d i n M i a m i , F l or i da , w e r e s ound bus i ne s s de a l s f

ora l l c onc e rne d, a nd a l l m oni e s pa i d w e r e f ul l y r e port e d on the ap p ro p ri at e t ax retu rn s. i i i . S chaf fe l J udge C ouvi l l i on f

ound the f

ol l ow i ng. W i l l i a m S c ha f f e l w a s am ort ga ge b r o k e r . I n 1 9 7 9 , Kan t e ri n v i t e d S c h a f f e l , B a l l a r d , a n d L i s l e t o d i n n e r . He in d ic a te d th a t h e h a d ab u s in e s s o p p o rtu n ity to d is c u s s w ith S c h a f f e l. S c h a f

f e l, e a g e rf o rp o te n tia l b u s in e s s a n d to m e e t tw o s e n io rP ru d e n tia l r e a l e s ta te e x e c u tiv e s , a c c e p te d th e in v ita tio n . A tthe di nn er , the foursom e di d n otdi sc uss P rudent i al bu si ness . R ather, K a n te rto ld S c h a f

f e l o f ap r o p o s e d c a s in o in n e e d o f f in a n c in g . K a n te rto ld S chaf fe l thathe “ and/ or another e nt i ty a ss oci at ed w i th” hi m coul d h elp S chaf fe l o b tain th e c o n trac t t o ar ra n g e th e c as in o ’s fin an cin g in re tu rn fo r 5 0 % o f S ch af fe l’ s e a rn e d f e e s . S o m e t i m e a f

t e rth e d i n n e rm e e t i n g , i n al e tt e ra d d r e s s e d t o I R A, S chaf fe l agre ed t o p ayIR A 50 % of hi s f ee s e arned from any busi ness deal s that I R A o rits a s s o c ia te s w e r e in s tru m e n ta l in s e ttin g u p . T h e c a s in o p r o je c t u ltim a te ly25

f e l l thr ough. I n the y e a rtha tf

ol l ow e d, how e ve r , S c ha f f e l w a s abl e t o a rr a nge f

i na nc i ng w i th P rudent i al for s ever al of hi s c l i ent s. C i t i ng the af orem ent i on ed l ett er , S chaf fe l s h a r e d w i th I RA ap o rt i o n o f h i s b r o k e r ’ s f

e e s f r o m e a c h o f

th e s e p r o

j e c t s . So me o f th e p r o je c ts o c c u rr e d a f

te rB a lla r d a n d L is le q u it w o rk in g a t P ru d e n tia l. L at er , af t erL i sl e l ef

tP rudent i al and b egan w orki ng atT ra vel er s, S chaf fe l had sub st ant i al bu si ness deal i ng s w i th T ra vel er s. Ini t i al l y, S chaf fe l di d n otshar e w i th K ant erhi s f

ee s e arned from these proj ec t s, t aki ng the po si t i on thatthei r f ee shar i ng agre em entl apse d w hen B al l ar d and L i sl e l ef tP rudent i al . K ant erre fut ed thi s posi t i on and, i n a l ett ert o S chaf fe l , st at ed thathe fe l tthe agree m entext ended t o T r a ve l e r s pr oj e c t s be c aus e of the c ont i nui ty “ of

the ve ry pe r s onne l t o w hom [ S c ha f f e l w a s ] f i r s ti ntr oduc e d. ” U l t i m a t e l y , S c ha f f e l a nd K a nt e ra gr e e d tha tthe f e e - s h a r in g a rr a n g e m e n t e x te n d e d to T r a v e le r s p r o je c ts . I n c onc l udi ng tha tthe S c ha f f e l pa y m e nt s w e r e notki c kba c ks t o B a l l a r d a nd L isle, Ju d g e C o u v il li o n fo u n d th at th e p ay m en ts to IR A w er e s im p ly S ch af fe l’ s w a y of r e pa y i ng K a nt e rf

orha vi ng i ntr oduc e d hi m t o B a l l a r d a nd L i s l e . J udge C o u v illio n a c k n o w le d g e d th a t S c h a f f e l’s le tte rto I R A in d ic a te d th a t th e p a y m e n ts w er e c on di t i on ed up on IR A as soci at es hel pi ng t o arr ange deal s and thatB al l ar d a nd L i s l e both kne w tha tS c ha f f e l a nd K a nt e rha d af

e e - s ha r i ng a gr e e m e nt , but foun d thatthi s e vi dence w as i nsuffi ci entt o p rove thatB al l ar d and L i sl e di re ct ed26

f in a n c in g to S c h a f

f e l’s c lie n ts in r e tu rn f

o rm o n e y . J udge H a i ne s s t a t e d tha tJ udge C ouvi l l i on’ s f i ndi ngs w e r e i nc om pl e t e a nd a dde d the f

ol l ow i ng. L i s l e t e s t i f

i e d tha the unde r s t ood tha tK a nt e ra rr a nge d the d in n e rin p a rt to s e e w h e th e rS c h a f f e l m ig h t b e ab le to d o b u s in e s s w ith P ru d e n tia l. W hen S chaf

fe l agre ed t o spl i tw i th K ant era per ce nt age of hi s e arned fees , S chaf fe l in s is te d th a t K a n te r ’s p o rtio n b e p a id to a n in d iv id u a l o re n tity w ith ar e a l e s ta te brok er ’ s l i ce nse. S chaf fe l w as concerned w i th the l egal i ty of s hari ng brok er ’ s f ee s w ith an o n - b r o k e r . S ho rt l y a ft erthe di nn erm ee t i ng , a r epre se nt at i ve of IB M , Incorporat ed ( “I B M ” ) , ap p r o a c h e d S c h a f f e l ab o u t s e llin g I B M ’s h e a d q u a rte r s to P ru d e n tia l. S c h a f f e l a rr a n g e d am e e tin g b e tw e e n h im s e lf , th e r e p r e s e n ta tiv e , a n d B a lla r d . A f te rth is m e e tin g , B a lla r d r e f e rr e d th e m a tte rto aP ru d e n tia l f ie ld o f f ic e w h ic h d id c o m p le te th e p u r c h a s e . S c h a f f e l s p lit p a rt o f

h is f e e f o ra rr a n g in g th e s a le w ith K a n te r . J u d g e H a in e s c o n c lu d e d th a t th e e v id e n c e s h o w e d th a t K a n te ra g r e e d w ith B a l l a r d a nd L i s l e t o s ha r e a ny f e e s he m i ghtr e c e i ve f

r om S c ha f

f e l i f B a l l a r d a nd L i sl e i nfl uenced P rudent i al t o d i re ctcontra ct s t o S chaf fe l ’ s c l i ent s. Judg e H ai nes re as on ed thatJudg e C ou vi l l i on cl earl y e rr ed i n thi nk i ng thatIR A , ra ther than K ant er , earned the paym ent s. S peci fi ca l l y, Judg e H ai nes s t at ed thatS chaf fe l expect ed K ant eral on e t o h elp h i m ob t ai n con tra ct s and thatno on e a tIR A hel ped27

a rr a n g e s u c h c o n tr a c ts . J u d g e H a in e s s ta te d th a t th e o n ly r e a s o n th a t th e p a y m e n ts w er e m ade t o IR A w as S chaf fe l ’ s f ear thatdi re ct l y pay i ng K ant er , a non -broker, w a s ille g a l. J u d g e H a in e s lik e w is e r e a s o n e d th a t J u d g e C o u v illio n c le a r ly e rr e d in f i ndi ng tha tthe r e w a s i ns uf f i c i e nte vi de nc e t o s how tha tK a nt e ra gr e e d t o s ha r e the fe es w i th B al l ar d and L i sl e i n exchang e f or thei r i nfl uence. W hi l e Jud ge H ai nes ad m i tt ed th atth ere w as n o d i rectev i d en ce o f th i s, h e st at ed th ata n u m b er o f fact s, n am ely th e jo in t d in n erm ee ti n g , B allard ’s “i m m ed iate ro le” in P ru d en ti al’s pu rc hase of IB M ’ s hea dq uart er s, B al l ar d’ s and L i sl e’ s abi l i t i es t o exerti nfl uence at P rudent i al , and K ant er ’ s posi t i on du ri ng hi s di sput e w i th S chaf fe l thatthe fe eshar i ng agre em entw as i nextri cabl y l i nk ed t o L i sl e’ s a ss i st ance , prov i ded

“ com pel l i ng ci rc um st ant i al evi dence” of aki ckback arr angem ent . F urtherm ore, al tho ug h Jud ge H ai nes a ckno w l edged thatsom e of S chaf fe l ’ s proj ec t s w er e i ni t i at ed af

t erB al l ar d and L i sl e l ef tP rudent i al , he st at ed that“ the i nfer ence m ay fa irly b e d ra w n ” th at th o se p rojects w er e a n “o u tg ro w th ” o f B allard ’s an d L isle’s e a r lie rd e c is io n s to d o b u s in e s s w ith S c h a f f e l, w h ic h g a v e S c h a f

f e l af a v o r ab le r e p u ta tio n a t P ru d e n tia l. J udge H a i ne s dr a w s i nf e r e nc e s f r om the r e l a t i ons hi ps of K a nt e r , B a l l a r d, L i sl e an d S ch affel w i th n o h ard fact s t o su p p o rth i s co n cl u si o n s. O b v i o u sl y, K a nt e rc oul d a c ton be ha l f of I R A w i th orw i thoutknow l e dge on the pa rtof28

B a l l a r d a nd L i s l e . C r e di bi l i ty w a s the ke y f a c t ori n the f

a c t s f ound by J udge C ouvi l l i on a nd he a l one he a r d a nd s a w the w i tne s s e s . T he f i ndi ngs dr a w n by Judg e C ou vi l l i on ar e j ustas pl ausi bl e a s tho se of Judg e H ai nes and thu s they are n o tcl earl y erro n eo u s.

i v. P r op e r t y M an age m e n t S y s t e m s , I n c or p or at e d ( “P M S ”) J u d g e C o u v illio n f

o u n d th e f

o llo w in g . K e n n e th S c h n itz e rw a s ar e a l e s ta te de ve l ope r . I n the c our s e of hi s de ve l opm e ntbus i ne s s , he m e tB a l l a r d. I n 1974, he a c q u i r e d f

o r$ 1 . 3 m i l l i o n as m a l l r e a l e s t a t e m a n a g e m e n tc o m p a n y , P MS . He im m e d ia te ly s e t ab o u t e x p a n d in g P M S ’s m a n a g e m e n t b u s in e s s . A t th e tim e, P M S m an ag ed a r elativ ely s m all n u m b ero f P ru d en ti al’s prop ert i es . In an ef

fortt o i ncre as e hi s P rudent i al bu si ness , S chni t ze r app roac hed B al l ar d and offe re d t o g i ve P rudent i al a 50% i nt er es ti n P M S , bel i evi ng that P ru d e n tia l w o u ld a w a r d P M S a d d itio n a l m a n a g e m e n t c o n tr a c ts if it h a d as ta k e in P M S ’s p r o f

itab ility . B a lla r d ’s s u p e r io r s s e r io u s ly c o n s id e r e d , b u t u ltim a te ly r e je c te d , S c h n itz e r ’s o f

f e r . I n th e c o u r s e o f

S c h n itz e r ’s ta lk s w ith P ru d e n tia l e x e c u tiv e s , th e y to ld h im of the i ri nt e r e s ti n s t a nda r di z i ng the ope r a t i ng r e port s pr e pa r e d by m a na ge m e nt com pani es on prop ert i es . A l tho ug h h i s propo sa l had b ee n rej ec t ed, S chni t ze r appl i ed thi s kno w l edge and st andardi ze d h i s opera t i ng re po rt s f or the P rudent i al prop ert i es he al re ady m anaged. T here af t er , hi s busi ness w i th P rudent i al i ncre as ed29

su b st an t i al l y. I n 1 9 7 7 , K a n te rto ld S c h n itz e rth a t h e a n d /o rI R A c o u ld h e lp P M S o b ta in m o r e m a n a g e m e n t b u s in e s s , p o s s ib ly w ith th e P r itz k e rf a m ily . I n o r d e rto o b ta in K a nt e r ’ s a nd I R A ’ s a s s i s t a nc e , S c hni t z e rs ol d I R A a47. 5% i nt e r e s ti n P M S f or $ 1 5 0 ,0 0 0 . B y 1 9 7 9 , h o w e v e r , S c h n itz e rc o n c lu d e d th a t K a n te ra n d /o rI R A h a d f a ile d to pr oduc e the a ddi t i ona l bus i ne s s pr om i s e d. A c c or di ngl y , S c hni t z e rpur c ha s e d f r om I R A the 47. 5% i nt e r e s ti n P M S f or$3. 1 m i l l i on, t o be pa i d ove ra10- y e a rpe r i od w ith in te r e s t. In concl ud i ng thatthe P M S transac t i on s w er e notdem on stra t i ve of a k i ckb acksch em e, Ju d g e C o u v i l l i o n fo u n d th atS ch n i t zer d i d n o tn eed K an t er’ s, B a lla r d ’s , o rL is le ’s h e lp o b ta in in g P ru d e n tia l b u s in e s s , a s h is c o n tr a c ts w ith P ru d e n tia l h a d in c r e a s e d s u b s ta n tia lly a f te rh e s ta n d a r d iz e d h is o p e r a tin g r e p o rts . J udge C ouvi l l i on f

ound tha tS c hni t z e rs ol d aport i on of P M S t o I R A be c aus e he n e e d e d h e lp g e ttin g b u s in e s s f r o m s o u r c e s o th e rth a n P ru d e n tia l. J udge H a i ne s s t a t e d tha tJ udge C ouvi l l i on’ s f i ndi ngs w e r e i nc om pl e t e a nd a d d e d th a t S c h n itz e rc o n f e rr e d w ith B a lla r d b e f

o r e s e llin g a n in te r e s t in P M S to IR A . Ju d g e H ain es also n o ted th at, afterIR A ac q u ired an in tere st in P M S , P M S ’s bu si ness w i th P rudent i al cont i nu ed t o g row and i t s gross i ncom e i ncre as ed s u b s ta n tia lly .30

In concl ud i ng thatJudg e C ou vi l l i on erre d i n fi nd i ng thatthe P M S deal w as n o t p ar t o f a k ickb ac ksc h em e, Ju d g e H ain es re as o n ed th at Ju d g e C o u v il li o n ’s f in d in g th a t P M S c o n tr a c te d f o rK a n te r ’s a n d I R A ’s s e rv ic e s w a s m a n if e s tly u n r e a s o n ab le . S p e c if

ic a lly , J u d g e H a in e s s ta te d th a t S c h n itz e rw a s r e ly in g s o le ly on K ant erand that“ there [w as ] no cr edi bl e e vi dence” thatanyone other than K a n te rb r o u g h t b u s in e s s to P M S . Judg e H ai nes a l so re as on ed thatK ant er , B al l ar d, and L i sl e r ea l i ze d thatthey c oul d e a rn a n e a s y pr of

i tby a c qui r i ng P M S s t oc k a nd the n us i ng B a l l a r d’ s a nd L is le ’s in f

lu e n c e a t P ru d e n tia l to d ir e c t P ru d e n tia l m a n a g e m e n t c o n tr a c ts to P M S . T h e s u b s ta n tia l ap p r e c ia tio n b e tw e e n th e ir$ 1 5 0 ,0 0 0 p u r c h a s e p r ic e a n d $ 3 .1 m i l l i on s a l e pr i c e r e pr e s e nt e d i nc om e t o B a l l a r d, K a nt e r , a nd L i s l e , r out e d thr ough IR A . W hi l e Jud ge H ai nes a ckno w l edged thatthere w as no di re ctevi dence of s uch a n a rr a n g e m e n t, h e a r g u e d th a t th e “s u rr o u n d in g c ir c u m s ta n c e s s tr o n g ly s u p p o rt[ e d ] a n in f

e r e n c e ” o f

s u c h . S p e c if

ic a lly , J u d g e H a in e s p o in te d to th e f a c ts th atB al l ard an d L i sl e k n ew th atS ch n i t zer w as so an x i o u s t o ex p an d P M S b u si n ess thathe w as w i l l i ng t o p artw i th n earl y hal f of P M S ’ s s t ock for no thi ng , S chni t ze r c o n f e rr e d w ith B a lla r d b e f

o r e s e llin g p a rt o f

P M S to I R A , a n d B a lla r d a n d L is le w e r e in p o s itio n s to in c r e a s e P M S ’ p o rtf o lio o f P ru d e n tia l c o n tr a c ts . In keepi ng w i th Jud ge C ou vi l l i on ’ s f i nd i ng thatS chni t ze r di d n otneed K ant er ’ s a ss i st ance i n b ri ng i ng i n m ore P rudent i al bu si ness , S chni t ze r t es t i fi ed at31

tri al thathe di d n othave any i nt er es ti n K ant erbri ng i ng i n m ore P rudent i al bu si ness , as P M S “ al re ady had thatre l at i on shi p. ” R ather, S chni t ze r hop ed that K a n te rc o u ld b r in g in H y a tt b u s in e s s . S c h n itz e rw a s w illin g to s e ll a n in te r e s t in P M S f o r“s o m e th in g n o rth o f

n o th in g ” to b r in g in th is e x tr ab u s in e s s . A g ain , cre d ib il ity is th e k ey fa cto r. Ju d g e C o u v il li o n h ea rd S ch n it ze r’s te s tim o n y , e v a lu a te d it a n d f o u n d a c c o r d in g ly . v . E s s e x P a r t n e r s h ip J u d g e C o u v illio n f

o u n d th e f

o llo w in g . J o h n E u lic h w a s ar e a l e s ta te de ve l ope ra nd bus i ne s s a c qua i nt a nc e of B a l l a r d, L i s l e , a nd K a nt e r . I n 1975, he s t a rt e d M ot orH ot e l s M ana ge m e nt , I nc orpor a t e d ( “ M H M ” ) . M H M be ga n by ope r a t i ng s m a l l hot e l s , butE ul i c h a l s o w i s he d t o a c qui r e m a na ge m e ntc ontr a c t s f or l arg er h o t el s. H e b el i ev ed th atK an t er co u l d b e o f serv i ce i n th i s en d eav o r b ecau se o f h i s ex t en si v e co n t act s i n th e h o t el i n d u stry, n am el y w i th th e P ri t zk er fam i l y. John C on no l l y w as em pl oyed by a s epar at e hot el m anagem entcom pany as th e o n - s ite m a n a g e ro f

P ru d e n tia l’s G a te w a y H ilto n H o te l ( “G a te w a y ” ) . C o n n o lly ha d be e n i ns trum e nt a l i n r e va m pi ng the onc e - s e e dy G a t e w a y . I n 1981, he in f o rm e d P ru d e n tia l th a t h e w a s c o n s id e r in g le a v in g h is p o s itio n a t th e G a te w a y . N o t w ish in g to lo se C o n n o ll y, P ru d en ti al term in ated it s c o n trac t w ith C o n n o ll y’s e m p lo y e ra n d a im e d to a w a r d th e m a n a g e m e n t c o n tr a c t to C o n n o lly h im s e lf . P rude nt i a l a dvi s e d C onnol l y , how e ve r , tha the e s t abl i s h ahot e l m a na ge m e nt32

com pany of hi s ow n. A cc ordi ng l y, C on no l l y e st abl i shed G at ew ayH ot el M a na ge m e ntC orpor a t i on ( “ G H M ” ) . P rude nt i a l a w a r de d G H M the m a na ge m e nt contra ct s f

or the G at ew ayand M i dl and H i l t on H ot el (“ M i dl and”). E ul i ch and K ant erca m e t o rea l i ze thatC on no l l y c ou l d u se as si st ance runn i ng G H M , as i tw ou l d b e unecono m i ca l for C on no l l y t o em pl oy the neces sary f u ll- tim e f

in a n c ia l m a n a g e ra n d a c c o u n tin g s ta f f w h e n h e m a n a g e d o n ly tw o h o te ls . T h e y a ls o r e a liz e d th a t E u lic h ’s M H M c o u ld p r o v id e th e n e e d e d s e rv ic e s . T he r e f or e , E ul i c h, K a nt e r , a nd C onnol l y f orm e d the E s s e x P a rtne r s hi p t o pr ovi de c ons ul t i ng a nd l i a i s on s e rvi c e s t o i t s pa rtne r s . M H M ha d a47. 5% i nt e r e s ti n the partners hi p, and IR A had a 26 . 12 5% i nt er es t . T he H ol di ng C om pany, Incorporat ed ( “ T H C ” ) , of

w hi c h K a nt e r ’ s f

a m i l y trus t s ow ne d s ubs t a nt i a l s t oc k, ha d a21. 375% in te r e s t. C o n n o lly h a d a5 % in te r e s t. T h e p a rtn e r s h ip r e c e iv e d in c o m e b y w a y o f f e e - s h a r in g a g r e e m e n ts w ith M H M and G H M , w here by ea ch contri bu t ed a c ert ai n p er ce nt age of the fe es earned o n its m a n a g e m e n t c o n tr a c ts . T h e s e f e e - s h a r in g a g r e e m e n ts w e r e c o n tin u a lly a dj us t e d s o tha tM H M a nd G H M c ontr i but e d r oughl y the s a m e a m ount s . A l s o, the t ot a l f e e s tha tM H M c ontr i but e d r oughl ye qua l e d i t s di s tr i but i ve s ha r e of the p a rtn e r s h ip ’s in c o m e . A s pl anned, em pl oyee s of M H M prov i ded m ostof the hel p C on no l l y nee ded t o ru n G H M . M H M w a s n o td i r e c t l y p a i d f o rth e s e s e rv i c e s . M o r e o v e r , w h i l e I RA33

and T H C re ce i ved a com bi ned 4 7. 5% of the partners hi p’ s i ncom e, they provi ded n o s im ila ra s s is ta n c e to C o n n o lly . H o w e v e r , E u lic h c o n s id e r e d h is p a rtic ip a tio n in the E s s e x P a rtne r s hi p t o be at ool by w hi c h M H M m i ghtobt a i n c ontr a c t s f orl a r ge ho t el s throu gh K ant erand g ai n exp er i ence and exp ert i se i n o pera t i ng a l ar ge ho t el th r o u g h a id in g C o n n o lly . I n 1 9 8 6 , E u lic h s o ld M H M to A ir c o a , a n u n r e la te d c o m p a n y . D e s p ite th is c h a n g e in o w n e r s h ip , M H M r e m a in e d ap a rtic ip a n t in th e E s s e x P a rtn e r s h ip a rr a nge m e nt s unt i l appr oxi m a t e l y 1990. J udge C ouvi l l i on f

ound tha tthe E s s e x P a rtne r s hi p a rr ange m e nt s w e r e not in d ic a tiv e o f

ak ic kb a c ks c h e m e . H e f o u n d th a t E u lic h a n d M H M p a rtic ip a te d in the pa rtne r s hi p s ol e l y i n hope s of r e c e i vi ng K a nt e r ’ s a i d i n obt a i ni ng c ontr a c t s f or l ar ge ho t el s. H e a l so no t ed thatan un re l at ed com pany cont i nu ed t o con tri bu t e a p e r c e n ta g e o f

M H M ’s f

e e s to th e E s s e x P a rtn e r s h ip u n til ap p r o x im a te ly 1 9 9 0 . Judg e H ai nes s t at ed thatJudg e C ou vi l l i on ’ s a cc ou ntof the fa ct s w as i ncom pl et e or i nacc urat e and added the fol l ow i ng . B al l ar d and L i sl e w er e i ns trum e nt a l i n P rude nt i a l ’ s de c i s i on t o of f e rC onnol l y the G a t e w a y m a na ge m e nt c o n tr a c t. W h e n P ru d e n tia l r e la y e d th is o f f e r , b u t c o n d itio n e d it o n C o n n o lly e s tab lis h in g h is o w n m a n a g e m e n t c o m p a n y , B a lla r d r e a liz e d th a t C o n n o lly w o u ld ne e d a s s i s t a nc e . A c c or di ngl y , B a l l a r d i ntr oduc e d E ul i c h t o C onnol l y a s s om e one w h o co u l d p ro v i d e th e su p p o rtserv i ces C o n n o l l y n eed ed . T h ereafter, E u l i ch , m o st34

lik e ly w ith K a n te r ’s a s s is ta n c e , o r g a n iz e d G H M f o rC o n n o lly . B a lla r d a n d L is le a l s o w e r e i ns trum e nt a l i n P rude nt i a l ’ s a w a r di ng G H M the M i dl a nd m a na ge m e nt c o n tr a c t. A tapprox i m at el y the sa m e t i m e a s e st abl i shi ng G H M for C on no l l y, E ul i ch a nd K a nt e rf

orm e d the E s s e x P a rtne r s hi p. A l though C onnol l y w a s apa rtne r , he w a s noti nvol ve d i n i t s f orm a t i on a nd r e m a i ne d l a r ge l y i gnor a ntof i t s ope r a t i ons a nd f unc t i ons . A ttr i a l , he di d notknow the i de nt i ty of the pa rtne r s , be l i e ve d he w a s of f e r e d a5% i nt e r e s ti n the pa rtne r s hi p i n e xc ha nge f orr e f e rr i ng t o M H M a ny c ontr a c t s tha tG H M c oul d notha ndl e , a nd di d notr e m e m be rtha taport i on of G H M ’s f e e s w e r e p a id to th e p a rtn e r s h ip . I n th e y e a r s th a t f

o llo w e d , M H M p r o v id e d m o s t o f th e s e rv ic e s n e e d e d to run the G a t e w a y a nd M i dl a nd. C onnol l y ’ s pa rt i c i pa t i on w a s a ki n t o tha tof a n onsi t e m anager. C on no l l y e ven rece i ved a sa l ary f rom the G at ew ay . Indeed, E ul i ch c ons i de r e d the G a t e w a y apa rtof M H M ’ s m a na ge m e ntport f ol i o, e ve n though the c o n tr a c t f

o rth is h o te l te c h n ic a lly w a s a w a r d e d to C o n n o lly a n d G H M . I n 1 9 8 4 , I R A tr a n s f

e rr e d to C a r lc o , T M T , a n d B W K its 2 6 .1 2 5 % in te r e s t in the E s s e x P a rtne r s hi p. C a r l c o a nd T M T e a c h r e c e i ve d a n 11. 75% i nt e r e s t , a nd B W K r e c e iv e d a2 .6 1 2 5 % in te r e s t. In concl ud i ng thatthe af orem ent i on ed arrang em ent s w er e partof a ki ckback s c he m e , J udge H a i ne s r e a s one d tha tthe E s s e x P a rtne r s hi p w a s ac ondui tthr ough35

w hi c h B a l l a r d, L i s l e , a nd K a nt e rr e c e i ve d port i ons of the m a na ge m e ntf

e e s pa i d by P rude nt i a l f

orthe G a t e w a y a nd M i dl a nd. J udge H a i ne s e xpl a i ne d the f ol l ow i ng. B a l l a r d a nd L i s l e a rr a nge d f orP rude nt i a l t o a w a r d C onnol l y the G a t e w a y a nd M i dl and m anagem entcontra ct s and for E ul i ch t o setup G H M t o “ m ake i tappear as i f C on no l l y w as the ow ner of aho t el m anagem entcom pany. ” G H M , ho w ever , w a s as ha m c orpor a t i on a nd C onnol l y m e r e l y apa w n. M H M e m pl oy e e s di d a l l the w ork, w hi c h s ui t e d E ul i c h be c aus e he w a nt e d the c ont a c t s a nd e xpe r i e nc e . A nd w hi l e M H M ’ s c ontr i but i on t o the pa rtne r s hi p e qua l e d i t s di s tr i but i ve s ha r e a nd C onnol l y ha d onl y am i nordi s tr i but i ve s ha r e , K a nt e r ’ s e nt i t i e s t ook ne a r l y ha l f of th e p a rtn e r s h ip ’s in c o m e . F in a lly , K a n te rla te rtr a n s f e rr e d p a rt o f

h is in te r e s t to B a lla r d ’s T M T , L is le ’s C a r lc o , a n d h is o w n B W K , s o th a t B a lla r d a n d L is le c o u ld recei v e p arto f th e fees. C on traryt o Jud ge H ai nes’ s a cc ou ntof the m att er , E ul i ch t es t i fi ed attri al that the E ss ex P artners hi p w as hi s and K ant er ’ s i dea. K ant erw ant ed t o g eti nv ol ved w i th h ot el m anagem ent , and E ul i ch w ant ed t o d evel op a r el at i on shi p w i th K ant er b e c au s e K a n te rk n e w th e o w n e r s o f s e v e r a l m a

jo rh o te ls . T h e y in v ite d C o n n o lly to b e c o m e i n v o l v e d b e c au s e h e h a d th e e x p e rt i s e t o m a n a g e b i g h o t e l s , wh i c h MHM la c k e d . E u lic h b e lie v e d th a t K a n te rh e lp e d arr a n g e f o rth e E s s e x P a rtn e r s h ip pa rtne r s t o ge tthe G a t e w a y H ot e l m a na ge m e ntc ontr a c t . E ul i c h de s c r i be d the G a te w a y H o te l a s th e b ig g e s t h o te l w ith w h ic h E s s e x P a rtn e r s h ip w a s in v o lv e d .36

S uc h t e s t i m ony , i f

be l i e ve d, i s c e rt a i nl y pl aus i bl e . A ga i n, J udge C ouvi l l i on is th e o n e w h o s a w a n d h e a r d th e w itn e s s a n d f o u n d th e te s tim o n y c r e d ib le . v i . G e ne r a lR e a s o ni ng Judg e C ou vi l l i on general l y r ea soned thatthe C om m i ss i on erhad n otprov ed the exi st ence of a ki ckback scheme because no ne of the w i tness es attri al st at ed tha ts uc h as c he m e e xi s t e d a nd va r i ous w i tne s s e s a s s oc i a t e d w i th the F i ve expres sl y deni ed payi ng ki ckbacks. M oreover, B al l ar d and K ant erhad t es t i fi ed th a t th e y w e r e n o t e n g a g e d in ak ic kb a c ks c h e m e . Ju d g e H ain es co n clu d ed th at Ju d g e C o u v il li o n ’s re li an ce o n th e F iv e’s de ni a l s of

pa y i ng ki c kba c ks t o B a l l a r d, L i s l e , a nd K a nt e rw a s m i s pl a c e d. J udge H ai nes r ea soned thatthe C om m i ss i on erhad argued thatB al l ar d, L i sl e, and K ant er di d n otdi sc l ose thei r s chem e t o the F i ve, such thatthei r deni al s of i t s e xi st ence w as notdi s pos i t i ve of

the m a tt e r . J udge H a i ne s s t a t e d, the r e f or e , tha tJ udge C ouvi l l i on c le a r ly e rr e d b y g iv in g to o m u c h w e ig h t to th e s e d e n ia ls in r e a c h in g h is u ltim a te co n cl u si o n . H o w m u ch w ei g h tw as t o b e g i v en th e t est i m o n y o f w i tn esses, how e ve r , w a s notup t o J udge H a i ne s . T ha tw a s the f unc t i on of

J udge C ouvi l l i on. C . D i st ri b u ti on of P ay m en ts fr om th e F i ve to th e P arti es

i . L oa n s an d C on su l ti n g F ee s J udge C ouvi l l i on not e d the C om m i s s i one r ’ s a r gum e nttha tK a nt e rus e d l oa ns a nd c ons ul t i ng pa y m e nt s t o di s tr i but e t o B a l l a r d a nd L i s l e the f unds tha tthe F i ve37

pa i d t o I R A . R e ga r di ng l oa ns , J udge C ouvi l l i on f ound the f

ol l ow i ng. B a l l a r d a nd L i sl e e ac h est abl i shed tw o g rant or trust s f or the pu rpose of i nv es t i ng as l i m i t ed p a rtn e r s in m o v ie s h e lte rp a rtn e r s h ip s . E a c h tru s t f in a n c e d th e a c q u is itio n o f its p a rtn e r s h ip in te r e s t w ith alo a n f r o m I R A . E a c h tru s t g a v e I R A ap r o m is s o ry n o te i n return. IR A transfe rr ed these no t es t o Int ernat i on al F i l m s, Incorporat ed (“ IF I” ), ac o rp o r a t i o n o f

w h i c h I RA w a s th e ma j o r i ty s h a r e h o l d e r . I FI g a v e I RA p r o m is s o ry n o te s in r e tu rn . A lth o u g h K a n te rla te rc la im e d th a t h e h e lp e d th e tru s ts obt a i n the i rpa rtne r s hi p i nt e r e s t s be c aus e the i nve s tm e nt s s e e m e d pr om i s i ng, the m ov i e ventures ul t i m at el y proved u nsucce ss ful . B ec ause B al l ar d and L i sl e w er e no tpers on al l y l i abl e f

or the trust s’ l oans, and b ec ause the trust s had no other as se ts, th e n o tes f

ro m th e lo an s w er e n o n -c o ll ec ti b le in li g h t o f th e v en tu re ’s f a ilu r e . A tsom e poi nt , IF I l oaned B al l ar d and L i sl e m on eyas i nd i vi du al s. B al l ar d a n d L is le g a v e I F I p e r s o n a l p r o m is s o ry n o te s in r e tu rn . In 19 87 , IR A att em pt ed t o col l ec ton IF I’ s prom i ss ory not es . IF I l ac ked s u f f ic ie n t m o n e y to p a y th e n o te s , a n d I R A a g r e e d to a c c e p t a ll o f I F I ’s a s s e ts i n st ead . T h ese asset s m ai n l y co n si st ed o f IF I’ s st o ck , th e tru st s’ p ro m i sso ry n o t es, a n d B a lla r d ’s a n d L is le ’s p e r s o n a l p r o m is s o ry n o te s . I R A s o ld th e tru s ts ’ n o te s to an un re l at ed corporat i on for $1 each. T hatcorporat i on ’ s pre si dentl at ert es t i fi ed th ath e w as a l o n g t i m e fri en d o f K an t er’ s an d ag reed t o p u rch ase th e tru st ’ s n o t es,38

w h i ch w ere essen t i al l y w o rth l ess b ecau se th e m o v i e v en tu res h ad fai l ed , as a “f a v o r ” to K a n te r . I R A f

o r g a v e B a lla r d ’s a n d L is le ’s p e r s o n a l n o te s . I R A s o ld I F I ’ s s t oc k t o a n i ndi vi dua l f or$1 pe rs ha r e . T he n, on i t s t a x r e turn, I R A c l a i m e d a l os s w i th r e s pe c tt o i t s s a l e of the trus t s ’ not e s t o the unr e l a t e d c orpor a t i on, de duc t i ons w i th r e s pe c tt o B a l l a r d’ s a nd L i s l e ’ s pe r s ona l not e s , a nd ade duc t i on w i th r e s pe c tt o I F I ’ s s t oc k. A f t e rK a nt e rha d be c om e I R A ’ s pr e s i de nti n 1989, a nd the I R S ha d be gun i nve s t i ga t i ng B a l l a r d, L i s l e , a nd K a nt e r , K a nt e rs oughtt o c ol l e c ton B a l l a r d’ s a nd L is le ’s p e r s o n a l p r o m is s o ry n o te s . B a lla r d ’s n o te s to ta le d ap p r o x im a te ly $ 1 9 6 ,0 0 0 . I n 1 9 9 2 , B a lla r d a g r e e d to p a y $ 1 2 0 ,0 0 0 in s e ttle m e n t o f th is d e b t. R e ga r di ng c ons ul t i ng f

e e s , J udge C ouvi l l i on f

ound tha t , be gi nni ng i n 1983, K W J C orpor a t i on a nd, l a t e r , K W J C om pa ny , pa i d m onthl y “ c ons ul t i ng f e e s ” of $1, 000 e a c h t o B a l l a r d’ s tw o daught e r s a nd L i s l e ’ s s on a nd daught e r . I n 1988, K W J C o m p a n y te rm in a te d th e f e e a rr a n g e m e n t a s to o n e o f B a lla r d ’s d au g h te r s . A f t e rK a nt e rha d be c om e I R A ’ s pr e s i de nti n 1989, a nd the I R S ha d be gun i nv es t i gat i ng B al l ar d, L i sl e, and K ant er , K ant ert erm i nat ed the fe e arr angem entas to th e r e m a in in g c h ild r e n . H e s e n t th e m le tte r s e x p la in in g th a t th e a rr a n g e m e n ts had b ee n m ade by adi ff er entIR A pres i dent , L aw re nce F re em an, ata t i m e w hen K W J C orpo ra t i on exi st ed as IR A ’ s s ub si di ary, and sho ul d h ave been t erm i nat ed l ong a go, a s the c hi l dr e n ha d done nothi ng t o e a rn the f e e s f orm a ny y e a r s . J udge39

C ouvi l l i on a l s o not e d tha tB a l l a r d a nd L i s l e di d notr e c e i ve s a l a r i e s f orm a na gi ng the a s s e t s of

T M T a nd C a r l c o, r e s pe c t i ve l y , unt i l 1990, w he n K a nt e ra rr a nge d f or T M T to p a y B a lla r d as a la ry a n d C a r lc o to p a y L is le as a la ry . Judg e C ou vi l l i on foun d thatthe evi dence pres ent ed attri al di d n otprov e that th e lo a n s a n d c o n s u ltin g p a y m e n ts w e r e ad is g u is e d m e a n s o f tr a n s f e rr in g to B a l l a r d a nd L i s l e the i rport i ons of the F i ve ’ s pa y m e nt s . J udge C ouvi l l i on a c know l e dge d tha tthe l oa ns t o the trus t s w e r e “ e xc e pt i ona l l y f a vor abl e . ” J udge C ouvi l l i on a l s o s t a t e d tha the di d nota c c e ptK a nt e r ’ s t e s t i m ony tha tI R A m a de th ese l o an s b ecau se th e m o v i e v en tu res seem ed p ro m i si n g , reaso n i n g th atan arm ’ sle n g th le n d e rw o u ld h a v e a t le a s t r e q u ir e d th a t B a lla r d a n d L is le p e r s o n a lly gu ar ant ee the l oans. Judg e C ou vi l l i on foun d, ho w ever , thatK ant erconsi dere d B a l l a r d a nd L i s l e e xtr e m e l y va l uabl e bus i ne s s c ont a c t s a nd m a y ha ve a rr a nge d the f a vor abl e l oa ns i n r e c ogni t i on of thi s a dva nt a ge a nd the i rf r i e nds hi p. J udge C ouvi l l i on r e a s one d tha tthe c ons ul t i ng pa y m e nt s a l s o m a y ha ve be e n a rr a nge d by K a n te ra s f

a v o r s to B a lla r d a n d L is le o ra s c o m p e n s a tio n to B a lla r d a n d L is le in l i eu o f sal ari es. J udge H a i ne s c onc l ude d tha tJ udge C ouvi l l i on’ s di s c us s i on of the l oa ns a nd c o n s u ltin g f

e e s w a s in c o m p le te . I n d e e d , J u d g e H a in e s s ta te d th a t “th e r e is little i ndi c a t i on [ tha t ] a ny c ons i de r a t i on w a s gi ve n t o [ the C om m i s s i one r ’ s ] a r gum e nt th a t th e s e lo a n s w e r e s h a m s .” A c c o r d in g ly , J u d g e H a in e s a d d e d th e f o llo w in g .40

R e g a r d in g lo a n s , n e ith e rB a lla r d , L is le , n o rth e irg r a n to rtru s ts w e r e r e q u ir e d to pay i nt er es tt o IF I or I R A on thei r l oans. A l so, i n 1 98 7, B al l ar d report ed m ore than $2 . 4 m i l l i on i n i ncom e on h i s t ax re turn, such thathe had the re source s t o repay e ith e rI F I o rI R A f

o rh is p e r s o n a l lo a n s a n d th e lo a n s g iv e n h is tru s ts . L is le l i ke w i s e ha d the r e s our c e s t o r e pa y hi s a nd hi s gr a nt ortrus t s ’ de bt s . R e ga r di ng co n su lt in g fe es , th e m o n ey th at K W J C o m p an y p aid to B allard ’s an d L isle’s c hi l dr e n c a m e f

r om l oa ns f

r om I R A t ot a l i ng $250, 000. F urthe rm or e , i n 1982, B al l ar d rec ei ved from IR A a $12 , 50 0 d i re ct or’ s f ee , even tho ug h, as B al l ar d h ad te s tif ie d a t tr ia l, h e n e v e rs e rv e d a s ad ir e c to ro f I R A . Ju d g e H ain es stated th at th es e lo an s a n d p ay m en ts w er e o n e o f K an ter’s m e th o d s o f

g e ttin g th e m o n e y e a rn e d b y B a lla r d , L is le , a n d K a n te rto th o s e p a rtie s . Judg e H ai nes r ea soned thatthe fa ct s thatB al l ar d and L i sl e w er e notchar ged i nt e r e s ton the i rl oa ns ore ve rf or c e d t o r e pa y the m , e ve n though the y ha d the fi nanci al abi l i ty t o d o so, dem on stra t ed thatthe l oans w er e s ham s. Judg e H ai nes r e a s one d tha tK a nt e r ’ s a tt e m pt s t o c ol l e c tthe l oa ns a nd l e tt e r s t e rm i na t i ng the c ons ul t i ng f

e e s w e r e m e r e l y pos t - i nve s t i ga t i on “ w i ndow dr e s s i ng. ” R e ga r di ng H a i ne s ’ s s ugge s t i on tha tB a l l a r d r e c e i ve d aport i on of the ki c kba c k m one y thr ough adi r e c t or ’ s f

e e , B a l l a r d t e s t i f

i e d a ttr i a l tha the r e c e i ve d the $12, 500 pa y m e ntf or consul t i ng se rvi ce s, ra ther than as adi re ct or’ s f ee . O nc e a ga i n, the r e i s ac l e a rdi f f e r e nc e i n the r ol e s of

J udge C ouvi l l i on a ndSpecifically , Hyatt’s pay ments to IRA’s subsidiary, KWJCorporation, equaled 8 $6 70 ,1 68 a fter 3 0%wa s remitte d toWea ver. F rey ’spa

y mentsto Z euse quale d $ 88 2, 04 2. This money was tra nsfer red to IRA from Z eus by

way of $51,000 paid to IRA alleg edly in repa y ment of an e arlier

loan, $774,000 paid to IRA in ex chang e for a note rece ivable from THC that never was paid, and $13,000 paid to IRA in ex chang e for another note re ceiva

ble from TH C that never wa s repaid. Sc haff

e l’ s p ay mentsto IRAe quale d $ 1, 39 8, 62 6. Sc hnitzer’ s p ay mentstow ard s it s $3 .1 mil lio n purc ha sepric efo r P MS e quale d $ 1, 94 1, 50 5. F inally, IRA ’sdis tributiv esh arefrom Es se x Par tners hipe quale d $ 16 4, 58 8. A review o f t hee xhibits in th ere c ord s ho wsthat th e se 41 J udge H a i ne s . J udge C ouvi l l i on m a de c e rt a i n f i ndi ngs ba s e d upon the t e s t i m ony of liv e w itn e s s e s ; J u d g e H a in e s d r e w ad if f e r e n t c o n c lu s io n b a s e d u p o n ac o ld r e c o r d . A cc ept i ng the w i tness es st at em ent s r egar di ng “ consul t i ng fe es ” and the l oans at i s s ue , the r e i s nothi ng m a ni f e s t l y unr e a s onabl e aboutthe f i ndi ngs of

J udge C ouvi l l i on. i i . T r a n s f e r s o f I RA ’ s I n c o me A s id e f r o m th e ab o v e d is c u s s io n o f lo a n s a n d c o n s u ltin g f

e e s p a id to B a l l a r d, L i s l e , the i rtrus t s , a nd the i rc hi l dr e n, J udge C ouvi l l i on di d nota ddr e s s the C om m i s s i one r ’ s s o- c a l l e d “ f l ow of f unds ” a r gum e nt . I n thi s a r gum e nt , the C o m m is s io n e ra n a ly z e d I R A ’s d is tr ib u tio n o f its in c o m e a n d tr a n s f

e r s o f its i nt e r e s t s i n K W J C orpor a t i on a nd E s s e x P a rtne r s hi p a nd a r gue d tha t , by w a y of the s e di s tr i but i ons a nd tr a ns f e r s , the m one y f

r om the F i ve m a de i t s w a y t o B a l l a r d, L i sl e, and K ant er . J u d g e H a in e s c o n c lu d e d th a t it w a s e rr o rn o t to a d d r e s s th is a r g u m e n t. A cc ordi ng l y, Judg e H ai nes a dd ed the fol l ow i ng fa ct s. B y 198 3, IR A had a c c um ul a t e d $5, 056, 929 i n pa y m e nt s f r om the F i ve . I R A r e port e d thi s i nc om e on

8numbersarec or re c t. 42 i t s co n so l i d at ed t ax retu rn s. In 19 84 , K ant erre com m ended thatT M T , C ar l co, and B W K be re m ov ed fr om IR A ’ s c on sol i dat ed grou p o f c orpo ra t i on s. K ant ert es t i fi ed thathe w as c onc e rne d tha tC a r l c o’ s i nve s tm e nt s m i ghti nt e r f e r e w i th c e rt a i n de duc t i ons no rm al l y c l ai m ed by IR A . K ant eral so t es t i fi ed thathe w ant ed t o shel t erB al l ar d a n d L is le f

r o m a n y “s e c o n d - g u e s s in g ” b y I R A o f f ic e r s . A ls o in 1 9 8 4 , K a n te rd ir e c te d th a t I R A ’s “f r e e c a s h f lo w ,” in c lu d in g its a c c u m u la te d a s s e ts a n d f u tu r e in c o m e , b e d is tr ib u te d in th e r a tio o f 4 5 % e a c h to T M T and C a r l c o a nd 10% t o B W K . A c c or di ngl y , appr oxi m a t e l y $4. 2 m i l l i on of th e mo r e th a n $ 5 mi l l i o n th a tI RA h a d a c c u mu l a t e d wa s tr a n s f e rr e d t o TM T, C a r l c o, a nd B W K . T he s e s ubs i di a r i e s c a l l e d the m one y “ c api t a l c ontr i but i ons ” a nd r e port e d i ton the i rt a x r e turns . D ur i ng thi s pe r i od, I R A a l s o he l d l a r ge a m ount s of c a s h th a twe r e i n v e s t e d i n c e rt i f i c a t e s o f d e p o s i t , r a th e rth a n a l l o c a t e d t o TM T, C a r lc o , a n d K a n te r . A t tr ia l, K a n te rte s tif

ie d th a t th e a llo c a tio n o f I R A ’s f r e e c a s h f lo w w o u ld al l ow for di vers i fi ca t i on of IR A ’ s i nv es tm ent s. S peci fi ca l l y, he t es t i fi ed that B al l ard w as t o i n v estT M T ’ s m o n ey p ri m ari l y i n real est at e, L i sl e w as t o i n v est C ar l co’ s m on eypri m ar i l y i n m un i ci pal bo nd s, and K ant erw as t o m ake a ss ort ed in v e s tm e n ts w ith B W K ’s m o n e y .Specifically , by this ti me, KWJCorporation had be en liquidated and K WJCompany 9 formed, with TMT and Carlco ha ving 45%interests and B WK having a 10% intere st, so that these c orporations spli t Hyatt’s post-1983 pay ments acc ordingto this ratio. By 1989, the amount split between the c orporations equaled $1,103,721. TMT, Carlco, and B WK reported this money on their individual taxreturns. F rey continued to pay

Z eus as be fore . This amount totaled $2 32 ,2 63 . Z eus ’sle dg ersindic ate d th at rather t ha n trans ferringthi s mo ney to IRAa s b e fo re , it us e d th emon ey

to purc ha sethesto c k o f a n unre la te d c or po ra tio n. IRArepo rte d this inc ome from F rey on its taxreturn. B eca

use B allard a

nd Lisle left Prudential at a pproxi mately

this ti me, Schaff el made onefinal pay

ment of $213,750 to IRA. It is not clear whether IRA transferre d this money

to TMT, Carlco, a

nd BWK ac cordingto the ratio. IRA repor ted this money

on its tax retur n. Sc hnitzer c ontin

ue d tomakepa

y mentsto IRA . B y

19 89 , th e setotale d $ 2, 28 7, 19 1. IRA trans ferre d this m on ey

to T MT , Ca

rl c o, and B WK ac c ordingto t

heratio . IRArepo rte d this money on its taxreturn. F inally, by this ti me, IRA had transf erred its interest in Essex Part ners hipto T MT , Ca

rl c o, and B WK, with C arl c o a

nd TM T e ac h re c e ivingan 1 1. 75 % intere st, and B WK rece iving a

2.6125% intere st. Thus, these cor porations split IRA’s 26% distributive shareof the pa

rtnership’s inc ome. B y

1989, the amount split equaled $623,867. TMT, Carlco, and B allard reporte d this money on their individual taxreturns. Areview of the exhibits i n the rec ord shows that these numbers are cor rect. 43 A l on g w i th thi s $4. 2 m i l l i on i nfl ux of m on ey , T M T , C ar l co, and B W K ea ch a l s o r e c e i v e d ap o rt i o n o f th e f u tu r e p a y me n t s ma d e b y th e Fi v e . Th i s i n c o me t ot a l e d m or e tha n $4 m i l l i on. 9 O n c e th e m o n e y w a s in T M T s u b s ta n tia l p o rtio n s w e r e in v e s te d in c e rt i f i c a t e s of de pos i t , s a vi ngs a nd m one y m a rke ta c c ount s , a nd abr oke r a ge a c c o u n t. T h e B a lla r d s h a d s ig n a to ry au th o r ity o v e ro n e o f th e s e s a v in g s a c c o u n ts . T M T d id m a k e lo a n s to , a n d in v e s tm e n ts th a t b e n e f itte d , B a lla r d a n d h is f a m ily . F r o m 1 9 8 4 to 1 9 8 9 , T M T m a d e lo an s to B a lla r d e q u a lin g $ 1 4 6 ,9 4 3 a n d to M a ry B a l l a r d e qua l i ng $160, 000. W hi l e the B a l l a r ds a gr e e d i n 1986 t o r e pa y the $160, 000 l oa ne d t o M a ry B a l l a r d, the r e i s s om e que s t i on c onc e rni ng w he the ror n o ti tw as rep ai d i n acco rd an ce w i th th e ag reem en t . D u ri n g th ese years, T M T al so44

l oa ne d $135, 155 t o S e abr i ghtT rus t , w hi c h be ne f i tt e d B a l l a r d’ s c hi l dr e n, a nd $4 1, 52 0 t o S eabri gh tC orpo ra t i on , w hi ch w as ow ned b y atrustthatal so benefi tt ed B al l ar d’ s f

am i l y. A s of tri al , these l oans t o S eabri gh tT rustand C orpo ra t i on had n o t b e e n r e p a id . In 19 86 , T M T al so l oaned $ 4, 00 0 t o F i com Int ernat i on al , Incorporat ed ( “ F i c o m ” ) , ac o rp o r a t i o n o r g a n i z e d b y Me l i n d aB a l l a r d . L a t e r , i n 1 9 8 8 , T MT i nve s t e d $15, 000 i n F i c om . T M T l a t e rc l a i m e d al os s on i t s t a x r e turn f orthe $ 1 5 ,0 0 0 in v e s tm e n t. T M T l i ke w i s e tr a ns f

e rr e d t o B a l l a r d s ha r e s of s t oc k i n F a i r f

i e l d P l a nt i ng C om pany (“ F ai rf

i el d”). In re turn for these shar es , B al l ar d execut ed a prom i ss ory n o te to T M T f

o r$ 1 0 0 ,0 0 0 a n d th e r ig h t to r e c e iv e 9 0 % o f F a ir f ie ld ’s d iv id e n d s . B a lla r d s e c u r e d th is n o te b y p le d g in g 1 ,0 0 0 s h a r e s o f F a ir f ie ld c o m m o n s to c k . T h e r e is s o m e q u e s tio n a s to w h e th e ro rn o t T M T r e c e iv e d a n y p a y m e n ts w ith r e s p e c t to th is n o te . A f te rB a lla r d b e g a n w o rk in g a t G o ld m a n S a c h s , h e w a s r e q u ir e d to s u b m it di s c l os ur e s t a t e m e nt s i nf orm i ng the f

i rm of out s i de bus i ne s s i nvol ve m e nt . I n a 1988 di s c l os ur e s t a t e m e nt , B a l l a r d i ndi c a t e d tha the w a s i nvol ve d i n f a rm i ng o p e r a t i o n s i n d i v i d u a l l y a n d th r o u g h two c o rp o r a t i o n s o wn e d b y f a m i l y tru s t s . At tr i a l , B a l l a r d t e s t i f

i e d tha tthe c orpor a t i ons t o w hi c h he r e f e rr e d w e r e T M T a nd F ai rf i el d. B al l ar d al so i nd i ca t ed thathe se rved as di re ct or for afr i end’ s unrel at ed45

c o rp o r a tio n . J u d g e Ha i n e s c o n c l u d e d th a tth e tr a n s f e r s o f I RA’ s c a s h f

l o w t o TM T, C a r lc o , a n d B W K w e r e a n o th e ro f K a n te r ’s m e th o d s o f

g e ttin g th e p a y m e n ts e a rne d by B a l l a r d, L i s l e , a nd K a nt e rt o thos e pa rt i e s f orthe i rpe r s ona l us e a nd enj oym ent . In re ac hi ng thi s c on cl usi on , Judg e H ai nes r ea soned thatK ant er r e m ove d T M T , C a r l c o, a nd B W K f r om I R A ’ s c ons ol i da t e d gr oup of c orpor a t i ons t o “ refl ectth e real i ty th atth o se co rp o rat i o n s w ere o w n ed an d co n tro l l ed b y” B al l ar d, L i sl e, and K ant er . Judg e H ai nes s t at ed thatB al l ar d’ s use of T M T m on ey t o m a ke l oa ns t o B a l l a r d a nd hi s f a m i l y , trus t s , a nd c orpor a t i ons , a nd s ubs e que nt f a i l ur e t o r e pa y the s e l oa ns , de m ons tr a t e d s e l f - de a l i ng a nd B a l l a r d’ s tr e a tm e ntof T M T as a per sonal po cketbo ok , or al t erego. Judg e H ai nes a l so st at ed that B al l ar d’ s f

ai l ure t o d i sc l ose t o G ol dm an S ac hs thathe m anaged T M T dem on stra t ed tha the w a s notm a na gi ng T M T f orI R A , butr a the rw a s c om pl e t e l y i n c ontr ol of T M T . J udge H a i ne s a l s o r e a s one d tha tK a nt e r ’ s t e s t i m ony on the s e m a tt e r s w a s not c r e di bl e . S pe c i f

i c a l l y , J udge H a i ne s s t a t e d tha tK a nt e r ’ s e xpl a na t i on tha the d ec o n so li d ated IR A b ec au se ce rtain o f C ar lco ’s in v es tm en ts m ig h t i m p er il IR A ’s de duc t i ons w a s notc r e di bl e be c aus e i tdi d notappl y t o T M T a nd B W K . J udge H a in e s n o te d th a t th e r e w a s n o in d ic a tio n th a t T M T ’s o rB W K ’s in v e s tm e n ts i m pe r i l e d I R A ’ s de duc t i ons . A l s o, J udge H a i ne s s t a t e d tha tK a nt e r ’ s e xpl a na t i on46

th a t h e d e c o n s o lid a te d I R A b e c au s e h e w is h e d to s a v e B a lla r d , L is le , a n d h im s e lf f r om s e c ond- gue s s i ng by I R A of f i c e r s w a s notc r e di bl e be c aus e T M T , C a r l c o, a nd B W K r e m a in e d s u b

je c t to th e s e o f

f ic e r s ’ d ir e c tio n s a s I R A s u b s id ia r ie s . J udge H a i ne s f

urthe rs t a t e d tha tK a nt e r ’ s e xpl a na t i on tha tthe 45% - 45% - 1 0 % s p lit w a s a n e f

f o rt a t d iv e r s if

ic a tio n w a s n o t c r e d ib le b e c au s e th e o n ly a s s e ts tr a n s f e rr e d to T M T , C a r lc o , a n d B W K w e r e tr a c e ab le to th e F iv e a n d I R A h e ld other l ar ge sum s of m on eythati ti nv es t ed i n cert i fi ca t es of depo si tra ther than di s tr i but e . J udge H a i ne s r e a s one d tha tthe 45% - 45% - 10% tr a ns f e rt o T M T , C a r l c o, a n d B W K w a s p a rt o f

p r e e x is tin g a g r e e m e n t b e tw e e n K a n te r , B a lla r d , a n d L is le . Judg e H ai nes f

urther r ea soned thatB al l ar d’ s t es t i m on y on these m att er s w as no tcr edi bl e. S peci fi ca l l y, Judg e H ai nes s t at ed thatB al l ar d’ s t es t i m on y that F a ir f ie ld w a s af

a m ily - tru s t o w n e d c o rp o r a tio n th r o u g h w h ic h h e w a s in v o lv e d in farm i ng op er at i on s l ac ked credi bi l i ty, as B al l ar d, ra ther than a fami l y trust , ow ned F a i r f i e l d. W ith r e g a r d to J u d g e H a in e s ’s s ta te m e n ts th a t B a lla r d h a d n o t r e p a id h is F a i r f i e l d l oa n, B a l l a r d t e s t i f

i e d a ttr i a l tha the borr ow e d appr oxi m a t e l y $200, 000 fr om T M T t o p urchas e F ai rf i el d. H e a ckno w l edged thatthe l oan rem ai ned ou t st andi ng , bu tst at ed thatK ant erre fuse d t o acc eptre paym ent . B al l ar d exp l ai ned th a t th e lo a n w a s w o rth m o r e to T M T s o lo n g a s it r e m a in e d u n p a id , g iv e n th a t it w a s a c c om pa ni e d by ar i ghtt o r e c e i ve 90% of B a l l a r d’ s di s tr i but i ons f r om47

F a i r f i e l d. I nde e d, B a l l a r d s t a t e d tha tthe de a l turne d outba d f orhi m , butgood f

or T M T .O nl y one fa m i l i arw i th the use of c orpo ra t i on s, partners hi ps and trust s, as w e ll a s th e c o m p le x itie s o f o u rta x la w s c o u ld e v a lu a te th e tr a n s a c tio n s in v o lv e d . J u d g e C o u v illio n d id ju s t th a t k n o w in g th e b a c k g r o u n d o f K a n te ra n d th e le g a lity ori l l e ga l i ty of

the s e m ove s . W hi l e e i the rf i ndi ng m a y be pl aus i bl e , w e c onc l ude nothi ng i s c l e a r l y e rr one ous aboutthe f i ndi ngs m a de by J udge C ouvi l l i on.

D . J udg e C o uv i l l i o n’ s a nd J udg e H a i ne s ’ s C o nc l us i o ns J udge C ouvi l l i on f

ound tha tB a l l a r d ha d note a rne d m one y f r om the F i ve throu gh a ki ckback scheme and h ad no tatt em pt ed t o ski rtthe IR S ’ s per sonal i nc om e t a x pa y i ng r e qui r e m e nt s by a s s i gni ng thi s i nc om e t o T M T . Judge C o u v illio n lik e w is e f

o u n d th a t B a lla r d w a s n o t liab le f o ra d d itio n s to ta x a s ar e s u lt o f f r au d . T o th is e n d , J u d g e C o u v illio n e s p e c ia lly n o te d th a t ta x e s w e r e p a id o n a ll of the i ncom e i n q uest i on and thatno ne of the exam i ni ng IR S agent s had r e c om m e nde d thi s a ddi t i on t o t a x, de s pi t e ha vi ng c onduc t e d al e ngthy e xa m i na t i on o f th e c a s e w ith f

u ll a c c e s s to a ll o f

th e e v id e n c e la te rp r e s e n te d a t tr ia l. J u d g e H a in e s c o n c lu d e d th a t B a lla r d h a d u s e d h is p o s itio n a t P ru d e n tia l to earn ki ckbacks fr om the F i ve. Judg e H ai nes a l so concl ud ed thatB al l ar d att em pt ed t o ass i gn thi s i ncom e t o ei ther I R A or T M T . Judg e H ai nes f urther c on cl ud ed that48

T M T w as B al l ar d’ s a l t erego, as B al l ar d h ad m ade pers on al use of i t s a ss et s, so that B a lla r d w a s r e s p o n s ib le f o rth e in c o m e ta x o n th is m o n e y . J u d g e H a in e s f in a lly c o n c lu d e d th a t B a lla r d w a s liab le f o ra d d itio n s to ta x f

o rf r au d b e c au s e h e f

a ile d to r e portthi s m one y , de s pi t e know i ng tha ti tw a s pe r s ona l i nc om e f r om the F i ve , a nd agre ed w i th K ant ert o d i sgui se the i ncom e by f un nel i ng i tthrou gh sham co rp o rat i o n s as l o an s an d o th er p aym en t s. V . F in a l A n a ly s is A ga i n, the i s s ue now be f or e us i s w he the rJ udge H a i ne s ’ s ga ve the appr opr i a t e de f

e r e nc e t o J udge C ouvi l l i on’ s r e portorc l e a r l y e rr e d i n c onc l udi ng th a t J u d g e C o u v illio n ’s f in d in g s w e r e m a n if

e s tly u n r e a s o n ab le . A f

te rc a r e f u lly r e vi e w i ng both Judge C ouvi l l i on’ s r e porta nd J udge H a i ne s ’ s opi ni on, w e c onc l ude thatJudg e C ou vi l l i on ’ s f i nd i ng s w er e notcl earl y e rr on eous. R ather, Judg e H ai nes s im p ly f a ile d to g iv e J u d g e C o u v illio n ’s f in d in g s o f

f a c t a n d c r e d ib ility de t e rm i na t i ons the de f

e r e nc e r e qui r e d unde rR ul e 183 a nd ouri ns truc t i ons on r e m a n d . S e e M a tte ro f

M u ltip o n ic s , I n c ., 6 2 2 F .2 d a t 7 1 2 - 1 3 , 7 2 2 ; T a x C o u rt R u le 183( d) ; B a l l a r d I I , 429 F . 3d a t1031, 1032. A . K i ckb ackS ch em es W e c on cl ud e thatJudg e C ou vi l l i on ’ s f i nd i ng s thatB al l ar d d i d n otearn m o n e y b y g iv in g th e F iv e b u s in e s s in e x c h a n g e f o rk ic kb a c k s a n d , th e r e f o r e , d id nota tt e m ptt o f

r audul e nt l y a s s i gn hi s i nc om e t o I R A orT M T , w a s s upport e d by49

th e e v id en ce an d n o t m an ifes tl y u n re as o n ab le. S p ec ifically, Ju d g e C o u v il li o n ’s fi nd i ng thatthe H ya ttpaym ent s w er e noti nd i ca t i ve of a ki ckback scheme w as pl ausi bl e gi ven the fa ctthatH ya ttre ce i ved the E m barc ader o H ot el contra ct be c aus e P r i t z ke rm a de the onl y bi d a nd, the r e f or e , di d notne e d B a l l a r d’ s a nd L i sl e’ s help. F or Judg e C ou vi l l i on ’ s f i nd i ng t o b e c l earl y e rr on eous, the re cord w ou l d n ee d t o sho w thatB al l ar d and L i sl e s om ehow conv i nced Int er cont i nent al and D el W ebb n ott o b i d. T he C om m i ss i on erdi d n otar gu e thi s and Judg e H ai nes di d n oti ncl ud e i ti n h i s f i nd i ng s and the evi dence does notsugg es ti t . R ather, D el W eb b ’ s ex ecu t i v e st at ed atth e b i d d i n g th ath e w o u l d n o tp art i ci p at e b ecau se s o m e o n e p r e m a tu r e ly p r o m is e d h im th e c o n tr a c t. I t s e e m s u n lik e ly th a t h e w o u ld att end the bi dd i ng and then con coctthi s s t ory, w hen h e s i m pl y c ou l d h ave decl i ned to s h o w lik e I n te r c o n tin e n ta l’s r e p r e s e n ta tiv e s . A ls o , J u d g e C o u v illio n ’s f in d in g is pl aus i bl e gi ve n tha tB a l l a r d t e s t i f i e d a ttr i a l tha tL i s l e a l l ow e d H y a tt ’ s bi d, not b e c au s e o f

s o m e p r o m is e to r e c e iv e ak ic kb a c k , b u t b e c au s e W e a v e re x p la in e d to hi m the a dva nt a ge of

doi ng s o, na m e l y tha tha vi ng the E m ba r c a de r o H ot e l m i ght d is s u a d e H y a tt f

r o m b u ild in g ac o m p e tin g h o te l n e a rb y . T he fa ctthatW ea ver s entK ant eron e of H ya tt ’ s pay m ent s w i th a l ett er re fe rr i ng t o “ the part i ci pant s” do es no tpers uade us thatJudg e C ou vi l l i on w as r e qui r e d t o f

i nd tha tB a l l a r d a nd L i s l e a l w a y s w e r e m e a ntt o r e c e i ve pa rtof the pa y m e nt s . T he r e c or d s how s tha t , by thi s poi nt , I R A ow ne d K W J C orpor a t i on a nd50

r e m i tt e d aport i on of

the pa y m e nt s t o W e a ve r , s o tha t“ the pa rt i c i pa nt s ” c oul d ha ve b een K W J C o rp o rat i o n an d W eav er. W eav er m ay n o th av e n am ed th ese part i ci pant s outri gh tbecause he a nd K ant erhad n otdi sc l osed t o H ya ttthatW ea ver s ol d K W J C orpor a t i on. L i ke w i s e , the f a c ttha tK a nt e rs e ntaK W J C om pa ny di s tr i but i on t o B a l l a r d a nd L i s l e , r a the rtha n T M T a nd C a r l c o, doe s notpe r s ua de us thatB al l ar d and L i sl e e arned the H ya ttpaym ent s or thatT M T and C ar l co w er e th eir a lt ereg o s. K an ter v iew ed B allard an d L isle as T M T ’s an d C ar lco ’s m an ag er s. A s s u ch , th ey w o u ldh av e b ee n th e g atek ee p er s o f T M T ’s an d C ar lco ’s m o n e y . A ls o , K a n te rap p a r e n tly c o rr e c te d th e e rr o rb y v o id in g th o s e c h e c k s . F urthe rm or e , J udge H a i ne s ’ s r e j e c t i ons of

B a l l a r d’ s a nd L i s l e ’ s t e s t i m ony on thi s m a tt e rw e r e e i the rbe y ond hi s pow e ra s ar e vi e w e r , r a the rtha n f a c t - f i nde r , or w er e b as ed o n in ac cu ra te fa cts. F o r in stan ce , Ju d g e H ain es stated th at B allard ’s te s tim o n y w a s n o t c r e d ib le b e c au s e it w a s s e lf - s e rv in g , u n c o rr o b o r a te d , o rs im p ly

“ f e i gne d. ” H ow e ve r , de f

e nda ntt e s t i m ony i s m os tof t e n s e l f - s e rvi ng a nd unc orr obor a t e d a nd, w i thoutha vi ng he a r d i t , J udge H a i ne s c oul d nots a y tha ta ny te s tim o n y w a s “f

e ig n e d ,” e s p e c ia lly w h e n th e f a c tf in d e rr e a c h e d a n o p p o s ite f in d in g . J u d g e H a in e s a ls o s ta te d th a t B a lla r d ’s te s tim o n y w a s n o t c r e d ib le because he gave contra di ct ory a cc ou nt s of w hether he had m etW ea ver. T he re cord s how s , how e ve r , tha tB a l l a r d ne ve rde ni e d m e e t i ng W e a ve ra nd tha ti tw a s the q u es ti o n in g atto rn ey w h o d idso . Ju d g e H ain es li k ew ise s tated th at K an ter’s51

t e s t i m o n y wa s n o tc r e d i b l e b e c au s e Kan t e rc l a i m e d th a tWe a v e rs o l d KWJ C orpor a t i on f

orthe m one y w he n W e a ve ra c tua l l y di d notr e c e i ve a ny m one y f r om th e s a le f o rf o u ry e a r s . T h e r e c o r d s h o w s , h o w e v e r , th a t K a n te rd id n o t in d ic a te thatW ea ver needed m on eyi m m edi at el y and expl ai ned thatW ea ver’ s other im p e tu s f

o rs e llin g w a s ad is p u te w ith P r itz k e r . Judg e C ou vi l l i on ’ s f

i nd i ng thatthe F re y pay m ent s w er e noti nd i ca t i ve of a ki ckback scheme w as pl ausi bl e and , there fore , no tcl earl y e rr on eous, gi ven that F r e y ’ s of f e rt o pur c ha s e the f

i r s tapa rtm e ntc om pl e x i n que s t i on w a s a c c e pt e d by P ru d e n tia l b e c au s e h e o f f e r e d m o r e th a n its ap p r a is e d v a lu e . B a lla r d ’s o n ly i nv ol vem entw i th the sa l e w as advi si ng P rudent i al t o acc eptthe offerw hen P ru d e n tia l’s f

id u c ia ry d u ty a lr e a d y a r g u ab ly r e q u ir e d a c c e p tin g th e o f f e r . M oreover, thi s s al e, l i ke al l of F re y’ s f uture deal i ng s, w as do ne w i th an u nrel at ed M ia m i P ru d e n tia l e m p lo y e e , r a th e rth a n B a lla r d o rL is le . In re ac hi ng the concl usi on thatthe transac t i on w as i nd i ca t i ve of a ki ckback sc h em e, Ju d g e H ain es m er ely c it ed B allard ’s ad v ice to ac ce p t th e d ea l an d F re y’s a n d P ru d e n tia l’s f

u tu r e r e la tio n s h ip . J u d g e H a in e s ’s r e a s o n in g is in s u f f ic ie n t to pers uade us thatJudg e C ou vi l l i on com m i tt ed cl ear e rr or. B as i ca l l y, Judg e H ai nes s t a t e d tha tbe c aus e B a l l a r d di d hi s j ob a nd F r e y c ont i nue d t o do bus i ne s s w i th one o f th e la r g e s t f

in a n c ie r s in th e c o u n try , B a lla r d a n d L is le m u s t h a v e a g r e e d w ith K ant ert o d i re ctbu si ness t o F re y i n exchang e f or ki ckbacks. Judg e H ai nes52

c ons i de r e d the s a m e f

a c t s a s J udge C ouvi l l i on, butr e a c he d a n e nt i r e l y di f f e r e nt ou t com e, w i tho utdem on stra t i ng w hy Judg e C ou vi l l i on ’ s f i nd i ng m usthave been w rong . T hi s w as beyond Judg e H ai nes’ s pow erw hen revi ew i ng the fi nd i ng s of a S p e c ia l T r ia l J u d g e . J udge C ouvi l l i on’ s f

i ndi ng tha tthe S c ha f

f e l pa y m e nt s w e r e noti ndi c a t i ve of a ki ckback scheme w as no tcl earl y e rr on eous. N othi ng i n the re cord show s that S chaf fe l ’ s and K ant er ’ s f

ee -s hari ng agre em entw as anythi ng beyond S chaf fe l payi ng K ant erfor i ntrodu ci ng hi m t o B al l ar d and L i sl e, w hi ch gave S chaf fe l an e n tr e e to o b ta in in g b u s in e s s w ith P ru d e n tia l. A ls o , n o th in g in th e r e c o r d s u g g e s ts thatS chaf

fe l ’ s e ntre e w as anythi ng beyond thatw hi ch no rm al l y a cc om pani es an in tr o d u c tio n . T h e f a c t th a t B a lla r d m e t w ith S c h a f f e l a n d a n I B M r e p r e s e n ta tiv e s h o rtly af t erthi s i ntrodu ct i on and then adv i se d P rudent i al t o p urchas e I B M ’ s hea dq uart er s d o e s n o t p e r s u a d e u s th a t J u d g e C o u v illio n ’s f in d in g w a s m a n if

e s tly u n r e a s o n ab le . B a l l a r d s i m pl y c oul d ha ve be e n doi ng hi s j ob. L i ke w i s e , the f a c ttha tB a l l a r d a nd L i s l e ha d the pow e rt o i nf l ue nc e P rude nt i a l i s i ns uf f i c i e ntt o pe r s ua de us tha tJ udge C o u v illio n w a s r e q u ir e d to f in d th a t th e y d id , in f

a c t, e x e r c is e th is p o w e r . F urtherm ore, al tho ug h K ant ersugg es t ed i n h i s l ett ert o S chaf fe l thatthei r f

ee s h a r in g a g r e e m e n t e x te n d e d to T r a v e le r s d e a ls b e c au s e it w a s in e x tr ic ab ly lin k e d to L i sl e, these ar gu m ent s are i nsuffi ci entt o p rove som ethi ng un t ow ar d. If S chaf fe l53

w a s pa y i ng K a nt e ra s tha nks f orha vi ng m a de the i ntr oduc t i on, the n the f e e - s ha r i ng agre em entun ders t andabl y m i gh text end t o L i sl e’ s f uture e m pl oyer . M oreover, Judg e H ai nes’ s r ea soni ng thatS chaf fe l ’ s proj ec t s w i th P rudent i al af t erB al l ar d and L i sl e l ef tthe com pany w er e an “ ou t grow th” of the ea rl i er i ntrodu ct i on ac tual l y s up po rt s Jud ge C ou vi l l i on ’ s f i nd i ng . If

the paym ent s w er e ki ckbacks for Bal l ar d and L i sl e di re ct i ng P rudent i al bu si ness t o S chaf fe l , then they w o u ld h a v e s to p p e d w h e n B a lla r d a n d L is le c o u ld n o lo n g e rd o s o . J udge C ouvi l l i on’ s f

i ndi ng tha tthe P M S tr a ns a c t i ons w e r e noti ndi c a t i ve of ak ic kb a c ks c h e m e is s u p p o rte d b y th e r e c o r d . S c h n itz e rd id n o t n e e d h e lp o b t ai n i n g P ru d en t i al co n v ersi o n b u si n ess, b u tso l d 4 7 . 5 % o f P M S t o IR A b ecau se he ne e de d he l p obt a i ni ng bus i ne s s f r om othe rc om pa ni e s . T he r e c or d uphol ds J u d g e C o u v illio n ’s r e a s o n in g . S c h n iz te rte s tif ie d a t tr ia l th a t h e h a d n o in te r e s t in K a nt e rbr i ngi ng i n m or e P rude nt i a l bus i ne s s be c aus e he a l r e a dy ha d de ve l ope d a r e l a t i ons hi p w i th P rude nt i a l . T ha tS c hni t z e rde ve l ope d thi s r e l a t i ons hi p by p r e p a r in g s ta n d a r d iz e d o p e r a tin g r e p o rts , w h ic h h e k n e w w o u ld p le a s e P ru d e n tia l, de m ons tr a t e s tha tS c hni t z e r ’ s P rude nt i a l bus i ne s s di d noti nvol ve B a l l a r d’ s or L i s l e ’ s m a ne uve r i ng. T he fa ctthatS chni t ze r’ s busi ness w i th P rudent i al cont i nu ed t o i ncre as e a ft er I R A pur c ha s e d aport i on of P M S i s i ns uf

f i c i e ntt o pe r s ua de us tha tJ udge C o u v illio n ’s a c c o u n t o f th e m a tte rw a s e rr o n e o u s . T h is c o n tin u e d g r o w th c o u ld54

have been an ext ensi on of the previ ou s grow th. A l so, the fa ctthatS chni t ze r c o n f e rr e d w ith B a lla r d b e f

o r e s e llin g ap o rtio n o f

P M S to I R A is in s u f

f ic ie n t to s h o w th a t B a lla r d a g r e e d to g iv e P M S m o r e b u s in e s s in e x c h a n g e f o rk ic kb a c k s . S chni t ze r t es t i fi ed thathe conferr ed w i th B al l ar d o nl y t o d et erm i ne w hether K ant er c oul d de l i ve ron hi s pr om i s e of br i ngi ng i n m or e bus i ne s s . J udge C ouvi l l i on evi dent l y f

ou nd thi s t es t i m on y c re di bl e, and the t es t i m on y i s nei ther c on tra di ct ed by e xtr i ns i c e vi de nc e nori nt e rna l l y i nc ons i s t e nt . S e e A nde r s on, 470 U . S . a t573- 7 4 , 1 0 5 S .C t. a t 1 5 1 1 - 1 2 . F i na l l y , J udge C ouvi l l i on’ s f i ndi ng tha tthe E s s e x P a rtne r s hi p tr a ns a c t i ons w e r e noti ndi c a t i ve of

aki c kba c k s c he m e w a s notc l e a r l y e rr one ous . A r e vi e w of the fa ct s s ug gest s thatbo th Jud ge C ou vi l l i on ’ s and Judg e H ai nes’ s a cc ou nt s w er e p lau s ib le . A s J u d g e C o u v illio n c o n c lu d e d , K a n te rm a y h a v e b e c o m e in v o lv e d w ith the E s s e x P a rtne r s hi p s i m pl y a s ahot e l m a na ge m e ntve ntur e . E ul i c h m a y ha ve be c om e i nvol ve d w i th the pa rtne r s hi p, a nd be e n w i l l i ng t o do m os tof the w ork, f

or the pr oxi m i ty t o K a nt e ra nd the e xpe r i e nc e . I nde e d, E ul i c h t e s t i f i e d tha the got i nv ol ved b ec ause he w ant ed t o g ai n K ant er ’ s i nfl uence i n the ho t el i nd ustry . In lig h t o f th is , th e f

a c t th a t K a n te r ’s o r g a n iz a tio n s c o n tr ib u te d little to th e p a rtn e r s h ip a nd tha tE ul i c h’ s M H M r e a l i z e d l i tt l e pr of i tf r om the pa rtne r s hi p doe s not n e c e s s a r ily s h o w th a t it w a s aw a y o f d is g u is in g k ic kb a c k s . L a s tly , C o n n o lly s im p ly m a y h a v e b e e n h ap p y to r e c e iv e th e a s s is ta n c e in ru n n in g G H M .55

A s J udge H a i ne s c onc l ude d, the pa rtne r s hi p m a y ha ve be e n de s i gne d by B a l l a r d, L i s l e , a nd K a nt e ra s aw a y of poc ke t i ng P rude nt i a l ’ s m a na ge m e ntf e e s on the G at ew ayand M i dl and. B al l ar d and L i sl e m ayhave di re ct ed P rudent i al contra ct s t o C on no l l y, w ho m P rudent i al al re ady l i ked and w ho had exp er i ence w orki ng atl ar ge ho t el s, and then u se d E ul i ch t o d o al l of the w ork. H ow ever , w hen b oth sce nari os ar e pl ausi bl e, the sc enar i o d es cr i bed b y the fa ct fi nd erdese rves de f e r e nc e . S e e i d. a t575, 105 S . C t . a t1512. A c c or di ngl y , a l though w e f i nd Judg e H ai nes’ s c on cl usi on on thi s m att erpo ss i bl e, thi s i s i nsuffi ci entt o sho w that Judg e C ou vi l l i on ’ s f

i nd i ng w as m ani fe st l y unrea sonabl e. In general , w e f

i nd thatJudg e H ai nes overs t epped the bo un ds of hi s r evi ew i n c onc l udi ng tha tJ udge C ouvi l l i on ga ve t oo m uc h w e i ghtt o the F i ve ’ s t e s t i m ony thatthey w er e notpayi ng ki ckbacks. Judg e H ai nes di d n otst at e, and the re cord d o e s n o t illu s tr a te , th a t th is te s tim o n y w a s n o t c r e d ib le . T h e w e ig h t g iv e n to c r e di bl e t e s t i m ony w a s e nt i r e l y w i thi n J udge C ouvi l l i on’ s di s c r e t i on a s the f a c tf in d e r . S e e id . A ls o , w e g e n e r a lly n o te th a t J u d g e H a in e s r a r e ly c o u ld p o in t to c o n c r e te e v id e n c e p r o v in g h is a c c o u n t o f th e tr a n s a c tio n s a n d f

r e q u e n tly s ta te d th a t h is c onc l us i ons w e r e ba s e d on onl y i nf e r e nc e s f r om the c i r c um s t a nc e s . F orJ udge H a in e s to h a v e p r o p e r ly f o u n d th a t J u d g e C o u v illio n ’s f in d in g s w e r e c le a r ly e rr o n e o u s , h e w o u ld h a v e n e e d e d to c ite , a n d th e r e c o r d w o u ld h a v e n e e d e d toWe also note that corporations only operate through employees, ag ents, or 10 representatives. The samecan besaid for pa rtnerships, trusts and other leg al entities. 56 p r o v id e , e v id e n c e th a t th e s e f in d in g s w e r e n o t p lau s ib le . I n f e r e n c e s , b a s e d la r g e ly on the s a m e f

a c t s c ons i de r e d by J udge C ouvi l l i on bute nt i r e l y oppos i t e of J udge C o u v illio n ’s f

in d in g s , w e r e in s u f

f ic ie n t. W e l i ke w i s e not e J udge H a i ne s ’ s c onf l i c tw i th J udge C ouvi l l i on’ s us e of p h r a s e s s u c h a s “K a n te ra n d /o re n titie s a s s o c ia te d w ith h im ” w h e n d e s c r ib in g w ith w ho m the F i ve agree d t o d o b usi ness . Judg e H ai nes r epea t edl y e m ph as i ze d that th e F iv e a g r e e d to d o b u s in e s s s o le ly w ith K a n te ra n d th a t n o o n e a t I R A d id a n y th in g . J u d g e H a in e s u s e d th is f in d in g to a r g u e th a t K a n te r , B a lla r d , a n d L is le w e r e th e tru e e a rn e r s o f th e m o n e y a n d f

r au d u le n tly a tte m p te d to a s s ig n th e ir i nc om e t o I R A a nd the othe re nt i t i e s . W e a c know l e dge tha tJ udge H a i ne s ’ s f i ndi ng th a t K a n te rd id th e w o rkm a y d e m o n s tr a te th a t K a n te re a rn e d , a n d a tte m p te d to a s s i gn, the m one y . H ow e ve r , thi s f i ndi ng doe s notpr ove the s a m e of B a l l a r d, abse ntevi dence thatB al l ar d h elped K ant erdo the w ork t o earn the m on ey . S i nce 10 Judg e C ou vi l l i on ’ s f

i nd i ng thatB al l ar d d i d n otse l l hi s i nfl uence for ki ckbacks w as n o t c le a r ly e rr o n e o u s , a s d is c u s s e d ab o v e , w e c an n o t r e a c h th is c o n c lu s io n . B. Fl o w o f

Funds W e f i nd tha tJ udge C ouvi l l i on di d notc l e a r l y e rri n f i ndi ng tha tthe l oa ns a nd c ons ul t i ng f

e e s pa i d t o B a l l a r d a nd hi s f a m i l y w e r e notam e a ns of di s gui s i ng57

i ncom e. Iti s pl ausi bl e thatIR A l entB al l ar d’ s and L i sl e’ s trust s the neces sary f u n d s to in v e s t in m o v ie s h e lte rp a rtn e r s h ip s u n d e rs u c h f a v o r ab le te rm s s im p ly because K ant erhi gh l y val ued, and w i shed t o m ai nt ai n, hi s f ri endshi p w i th B al l ar d a nd L i s l e . T hi s f

r i e nds hi p ha d br oughtI R A as i gni f i c a ntm one t a ry a dva nt a ge . F or e x a m p le , S c h a f

f e l p a id I R A ap e r c e n ta g e o f h is m o rtg a g e b r o k e rf

e e s s im p ly b e c au s e K a n te rh a d in tr o d u c e d h im to B a lla r d a n d L is le . T h e factth atB al l ard ’ s an d L i sl e’ s tru st s w ere n o tch arg ed i n t eresto n th ese lo a n s , o rth a t B a lla r d a n d L is le w e r e n o t c h a r g e d in te r e s t o n th e irp e r s o n a l lo a n s , is i ns uf f i c i e ntt o pe r s ua de us tha tJ udge C ouvi l l i on w a s r e qui r e d t o f i nd tha tthe l oa ns w er e s ham s. R ather, thi s f ac tm ayhave been on e of the fa vo rabl e c on di t i on s that B al l ar d’ s and L i sl e’ s val uabl e i nfl uence broug htthem . L i kew i se , the fa ctthat B a l l a r d a nd L i s l e w e r e ne ve rf or c e d t o r e pa y the i rtrus t ’ s l oa ns doe s notpe r s ua de u s th a t J u d g e C o u v illio n c le a r ly e rr e d , a s B a lla r d a n d L is le h a d n o t p e r s o n a lly gu ar ant ee d the l oans. R egar di ng B al l ar d’ s and L i sl e’ s per sonal l oans, B al l ar d l at er w a s a s k e d b y K a n te rto r e p a y th e s e lo a n s . J u d g e H a in e s ’s c o n c lu s io n th a t th is r e q u e s t w a s “w in d o w d r e s s in g ” w a s u n s u b s ta n tia te d . A ls o , it is p lau s ib le th a t K W J C o rp o r a tio n , a n d la te r , K W J C o m p a n y , p a id B a l l a r d’ s a nd L i s l e ’ s c hi l dr e n c ons ul t i ng f e e s a s a nothe rf

a vor , ori n l i e u of sal ari es, t o B al l ardan d L i sl e. N o th i n g i n th e reco rd co n trad i ct s th i s fi n d i n g . Ital so i s pl ausi bl e thatthe chi l dren ori gi nal l y di d w ork t o earn these paym ent s and that58

the pa y m e nt s c ont i nue d a f t e rthi s w ork l aps e d s i m pl y a s a n ove r s i ghtby F r e e m a n, as K an t er’ s t erm i n at i o n l ett ers su g g est ed . Ju d g e H ai n es’ s co n cl u si o n th atth ese l e tt e r s w e r e m e r e l y “ w i ndow dr e s s i ng” a l s o w a s uns ubs t a nt i a t e d. W e a ls o c o n c lu d e th a t J u d g e C o u v illio n d id n o t c le a r ly e rrin d e c lin in g to f urthe ra na l y z e the C om m i s s i one r ’ s f l ow - of - f unds a r gum e nt . B e c aus e he d e te rm in e d th a t B a lla r d h a d n o t e a rn e d in c o m e b ya c c e p tin g k ic kb a c k s , a n d th is f in d in g w a s n o t m a n if

e s tly u n r e a s o n ab le , J u d g e C o u v illio n h a d n o r e a s o n to d e te rm in e w h e th e rth e a lle g e d in c o m e m a d e its w a y to B a lla r d . W e non ethel es s not e thatJudg e H ai nes’ s tho roug h tre atm entof the fl ow -off unds a r gum e ntdoe s notc onvi nc e us tha tJ udge C ouvi l l i on’ s f i ndi ng c onc e rni ng th e s c h e me wa s man i f

e s t l y u n r e a s o n ab l e . Th e f a c tth a tKa n t e rtr a n s f

e rr e d t o TM T, C ar l co, and B W K m on eyre ce i ved from the F i ve do es no tnece ss ar i l y s ho w that B a l l a r d a nd L i s l e e a rne d tha tm one y . A f i ndi ng tha tB a l l a r d w a s the true e a rne rof 45% of the pa y m e nt s be c aus e hi s c orpor a t i on ul t i m a t e l y r e c e i ve d 45% of the pa y m e nt s i s c i r c ul a r . L i ke w i s e , J udge H a i ne s ’ s a tt a c k on K a nt e r ’ s e xpl a na t i on f or the al l ocat i on i nv ol ves l eaps of l og i c. A l tho ug h Jud ge H ai nes a cc urat el y s t at ed tha tK a nt e r ’ s r e a s oni ng tha tC a r l c o’ s i nve s tm e ntm i ghti m pe r i l I R A ’ s de duc t i ons d i d n o tap p l y t o TM T o rBW K, th i s d o e s n o tn e c e s s i t a t e ac o n c l u s i o n th a tTM T, C a r l c o, a nd B W K w e r e the pa rt i e s ’ a l t e re gos . R a the r , K a nt e rm a y ha ve w i s he d f or T M T , C ar l co, and B W K t o m ai nt ai n si m i l art ax st atus. H e w as an ac kn ow l edged59

e xpe rti n ourt a x l a w s . A l s o, a l though J udge H a i ne s a c c ur a t e l y not e d tha ta l l of the m on eyal l ocat ed per the 45 % -45% -10% spl i tw as tra ce abl e t o the F i ve and that IR A had o ther m on eythatw as no tal l ocat ed, thi s does notnece ss i t at e afi nd i ng that the al l ocat i on w as a m etho d o f gett i ng ki ckback i ncom e t o anyon e. R ather, K ant er si m pl y m ayhave chosen on e of i t s s ou rc es of i ncom e t o fun d the al l ocat i on . In s u m , J u d g e H a in e s a ttr ib u te d to o m u c h to th e s e f a c ts . A l s o, B a l l a r d’ s tr e a tm e ntof the m one y a l l oc a t e d t o T M T doe s not nece ss ar i l y s ho w thathe w as m aki ng pers on al use and enj oym entof m on eygai ned throu gh a ki ckback scheme. W hi l e T M T m ade l oans t o B al l ar d and hi s f am i l y that m ayno thave been repai d, thi s onl y dem on stra t es thatB al l ar d m ayhave been an irr e s p o n s ib le m a n a g e r . I t d o e s n o t s h o w th a t J u d g e C o u v illio n c le a r ly e rr e d in fi nd i ng thatB al l ar d d i d n otearn the m on eyor com m i tfr aud. M oreover, B al l ar d t e s t i f i e d tha the a tt e m pt e d t o r e pa y the l oa n m a de t o pur c ha s e F a i r f i e l d. A l s o, w h i l e B al l ard fai l ed t o d i scl o se h i s p o si t i o n as T M T ’ s m an ag er t o G o l d m an S ach s, th is o n ly d e m o n s tr a te s th a t h e c o m m itte d a n o v e r s ig h t. I t d o e s n o t d e m o n s tr a te th a t J u d g e C o u v illio n ’s f in d in g th a t T M T w a s n o t B a lla r d ’s a lte re g o w a s c le a r ly e rr one ous . F i na l l y , J udge H a i ne s ’ s s t a t e m e nttha tB a l l a r d’ s t e s t i m ony w a s not c r e di bl e be c aus e he t e s t i f i e d tha tF a i r f

i e l d w a s ow ne d by af

a m i l y trus tw he n he a c tu a lly o w n e d it p e r s o n a lly a g a in a s s ig n s to o m u c h s ig n if ic a n c e to ap o te n tia lly in n o c u o u s m is ta k e .60 V I . C on c l u s i on F o r th e r ea so n s d iscu ss ed ab o v e, w e c o n clu d e th at Ju d g e C o u v il li o n ’s f i ndi ngs of

f a c ta nd c r e di bi l i ty de t e rm i na t i ons w e r e s upport e d by the r e c or d a nd tha thi s f i ndi ng tha tB a l l a r d w a s notr e s pons i bl e f orade f i c i e nc y a nd ha d not c om m i tt e d f

r aud w e r e notm a ni f

e s t l y unr e a s onabl e . W e c onc l ude tha t , i n f i ndi ng otherw i se , Judg e H ai nes di d n otpres um e Jud ge C ou vi l l i on ’ s f i nd i ng s t o b e c orre ct or gi ve Judg e C ou vi l l i on ’ s c re di bi l i ty det erm i nat i on s thei r due defer ence . S ee T ax C ourtR ul e 183. R a the r , J udge H a i ne s c onduc t e d ane a r l y de novo r e vi e w of the f a c t s . T hi s r e vi e w vi ol a t e d R ul e 183’ s a nd ouri ns truc t i ons . S e e A nde r s on, 470 U . S . at57 3-74 , 10 5 S . C t . at15 11 -12. Iti s c l ear thatthi s c as e i s a“ cl ose c al l . ” H a d J udge H a i ne s be e n the or i gi na l tr i a l j udge , hi s rul i ngs w oul d pr obabl y be e nt i t l e d t o a n a f

f i rm a nc e . H ow e ve r , he w a s notthe tr i a l j udge a nd di d nots e e or h ear th e w i tn esses. Ju d g e C o u v i l l i o n d i d an d fo u n d th em cred i b l e. Iti s n o su rp ri se th ata k n o w l ed g eab l e t ax att o rn ey w o u l d u se n u m ero u s l eg al en t i t i es t o acco m p l i sh di ff er entobj ec t i ves. T hi s does notm ake them i l l egi t i m at e. U nfortun at el y s uch

“ m a ne uve r i ng” i s appa r e nt l y e nc our a ge d by ourpr e s e ntt a x l a w s a nd c ode . T he B a l l a r ds w e r e c ha r ge d w i th f r aud. J udge C ouvi l l i on he a r d the w i tne s s e s a nd re vi ew ed the exhi bi t s and concl ud ed the go vernm entsi m pl y f ai l ed t o p rove such by cl ear and conv i nci ng evi dence. T he re cord ful l y s up po rt s hi s f i nd i ng s of f

ac t a n d c o n c lu s io n s . A c c o r d in g ly , w e r e m a n d to th e T a x C o u rt w ith in s tru c tio n s toWe note that, in Lisle v.Comm’r of Internal Revenue, 341 F .3d 364, 367-68 (5th Cir. 11 20 03 ), theF if

th C ircuit c on sidere d whether t

heorig inal T ax Cour

t Judg e ’sop ini on

wa s c le arly erroneous as to Lisle. The F ifth Circuit held that the Tax Court had clearly erred in findingthat the g overnment proved that Lisle committed fraud by clea r and c onvincingevidenc e. Id. at 375- 84. The F ifth Circuit also held, though, that the Tax Court had not clearly erred in findingthat the g overnment had proven that Lisle was re sponsible for def iciencie s by

a prepondera

nce of the evidenc e. Id. at 384. However, a s this opini on was issued be foreJudg e Couvillion’s original rep o rtcam e t o l i ght , th e F i fthC irc ui t ’s an al ys i s wa s n o tb en ef i tt edb y th e kn o wl ed ge th atJu dge Couvill ion found that the par ties werenot responsible for defic iencies or

additions to taxfor fra ud. Acc ording ly, this analysis does not alter our own. 61 va c a t e J udge H a i ne s ’ opi ni on a nd e nt e ra n or de rappr ovi ng a nd a dopt i ng J udge C o u v illio n ’s o r ig in a l r e p o rt a s th e o p in io n o f th e T a x C o u rt. 11 R E V E R S E D , V A C A T E D an d R E M A N D E D w i th i n stru ct i o n s.