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EDC News

Latest Entries in EDC News:
  • Many Motions, Little Movement in Auffenberg Pretrial Hearing
  • Economic Development Head Suggests Strategies for Retaining Investors
  • Auffenberg case to be moved to Caribbean
  • Co-defendant wants Auffenberg case moved to Caribbean
  • Four charged with USVI tax evasion, conspiracy

January 18, 2008

Many Motions, Little Movement in Auffenberg Pretrial Hearing

The St. Thomas Source is reporting today:

Jan. 17, 2008 -- There was a flurry of motions but little movement Thursday in U.S. District Court on St. Croix as Judge Raymond L. Finch heard a laundry list of defense and prosecution motions in the case of James A. Auffenberg Jr. and three other men charged with evading federal taxes by misusing the V.I. Economic Development Commission program.

The U.S. Department of Justice is charging that the four men illegally claimed a 90 percent federal tax break on more than $300 million funneled through the St. Croix-based company Kapok Management, L.P. It alleges that Auffenberg, a prominent car dealer in Swansea, Ill., illegally avoided more than $74 million in taxes from 1999 to 2002 by joining Kapok as a partner and shipping money to Kapok, run by Peter G. Fagan of De Leon, Texas; James W. Ferguson III of Amarillo, Texas; and J. David Jackson of St. Croix. All four have pleaded innocent.

This is a very interesting case - a guilty conviction here could have a major impact on the territory.

July 26, 2007

Economic Development Head Suggests Strategies for Retaining Investors

Good article from The Source:

July 24, 2007 -- It's easy enough to attract potential investors to the territory, but keeping them here is a different story, representatives from the Economic Development Authority (EDA) told senators during the second round of budget hearings Tuesday.

For years, the territory has been caught up in a battle with the federal government. The V.I. government has sought clarification on and relief from new limitations placed on source income and residency requirements related to the authority's tax incentive benefits program. While these issues have still had a somewhat negative impact on investors coming into the territory, EDA officials said Tuesday that other factors -- such as developing the territory's infrastructure -- are key to making the local economy more attractive.

July 06, 2007

Auffenberg case to be moved to Caribbean

Interesting turn of events in the Auffenberg case:

EAST ST. LOUIS — A federal judge on Thursday ordered the conspiracy and tax evasion trial involving Metro East car dealer Jamie Auffenberg and others moved from East St. Louis to the Caribbean.

Federal prosecutors have alleged that Auffenberg and others illegally funneled millions through tax shelters by falsely claiming to be residents of the U.S. Virgin Islands and conducting business there.

Lawyers for Auffenberg and the others have denied that. They also asked U.S. District Judge Michael J. Reagan to move the trial to the U.S. Virgin Islands, saying the case should be tried there for a variety of reasons, including the expense of flying hundreds of possible witnesses from the islands to East St. Louis.

Archive link for this entry: Auffenberg case to be moved to Caribbean | |

June 06, 2007

Co-defendant wants Auffenberg case moved to Caribbean

From the St. Louis Post Dispatch:

Co-defendant wants Auffenberg case moved to Caribbean By Nicholas J.C. Pistor ST. LOUIS POST-DISPATCH 06/06/2007

EAST ST. LOUIS — A co-defendant of Metro East car dealer Jamie Auffenberg wants what is expected to be a four-month trial in the tax evasion case moved to the Caribbean.

J. David Jackson is asking a judge to hold the trial in a U.S. District Court in the Virgin Islands, a U.S. territory in the Caribbean where prosecutors say the alleged crimes occurred.

Prosecutors have yet to file a response. A judge is set to rule later this month.

The trial of Auffenberg, Jackson and others allegedly involved in the fraud scheme is set to begin next year in U.S. District Court in East St. Louis. According to court documents, it is expected to last four months.

Sort of sounds like this is a blocking/stalling tactic or designed to try to torpedo the feds case on a technicality. It will be interesting to see where it goes from here.

March 29, 2007

Four charged with USVI tax evasion, conspiracy

More of the EDC story, this time from Bloomberg:

Published on Wednesday, March 28, 2007 Email To Friend Print Version

By Ryan J. Donmoyer

WASHINGTON, USA (Bloomberg): A federal grand jury has charged a St Louis car dealer, two Texas men and a US Virgin Islands resident with using a US Virgin Islands economic development program to evade $74 million in taxes.

The East St Louis, Illinois grand jury indicted James A. Auffenberg Jr. of Swansea, Illinois, charging him with illegally sheltering $300 million through Kapok Management, L.P., a St Croix-based partnership that qualified for tax benefits from the US territory. James W. Ferguson III of Amarillo, Texas, Peter G. Fagan of De Leon, Texas, and J. David Jackson of St Croix were also charged with promoting the scheme.

"People tempted to file federal income tax returns based on falsehoods should be aware of the serious consequences of doing so," said Eileen J. O'Connor, assistant attorney general for the Justice Department's Tax Division in a statement Tuesday in Washington.

The indictments cap a four-year investigation that began with a federal raid of Kapok Management and touched off new federal scrutiny of the US Virgin Islands' tax incentives.

Approved by the US Congress, the program permits qualified taxpayers to cut their federal bill by 90 percent.

A 2004 federal law placed new restrictions on the tax program and chased off a burgeoning hedge fund industry attracted by the incentives, the Virgin Islands government says.

To qualify for the US Virgin Islands tax incentives, firms must invest at least $100,000 in the territory, buy products such as office supplies and computers in the US Virgin Islands, contribute to area charities and hire at least 10 people, 80 percent of whom must be natives of the islands.

Company owners must live in the territory for at least half of the year, under federal requirements. They have to undergo five examinations a year by the territory's Economic Development Authority.

Auffenberg, Fagan, Ferguson and Jackson are charged with income-tax evasion, conspiracy, wire fraud and filing, aiding and assisting in the filing of false individual and corporate income tax returns. The indictment seeks forfeiture of about $16.2 million in cash.

The indictment claims Auffenberg, a St Louis-area car dealer, and other partners in Kapok never actually became bona fide residents of the Virgin Islands and used the St Croix-based Kapok to launder funds they earned in the United States. They improperly filed tax returns with the Virgin Islands' Bureau of Internal Revenue instead of with the Internal Revenue Service, according to the indictment.

Jeffrey Demerath, a lawyer for Auffenberg, a St Louis-area car dealer, said his client only followed the advice of tax lawyers and accountants in deciding to invest in the Kapok partnership and file his tax returns with the territory.

"He did everything with the full intent of following the law, and that will be his defense," Demerath said. He said Auffenberg received an opinion letter from accounting firm KPMG LLP verifying he could participate in the program.

Demerath disputed charges in the indictment that Auffenberg never became a true resident of the US Virgin Islands, saying Auffenberg was in the territory at least once a month, owned real estate there and registered to vote.

Gordon Rhea, a lawyer for Jackson, similarly denied the charges. Jackson was an employee of Kapok, not a partner, Rhea said. He said he was "confident" Jackson would be exonerated.

Messages left for Ferguson and Fagan in Texas were not immediately returned. The indictments were issued three years after another Kapok partner, a Massachusetts life insurance executive named Gary Payne pleaded guilty to tax evasion in February 2004. He has not been sentenced.

If convicted, the men named face up to five years imprisonment on the conspiracy charge; up to five years imprisonment on each income tax evasion charge; up to five years on each wire fraud charge; and up to three years on each false tax return charge. The men face up to $32.5 million in fines.

The case has major ramifications for the territory's economic development program, which has struggled to regain legitimacy since the raids on Kapok four years ago and the subsequent law change, Virgin Islands Governor John deJongh said.

"Whatever steps need be taken by the local government to safeguard this program which is essential to our economic future will be taken, and wrongdoing will be investigated and prosecuted by the appropriate government, local or federal," DeJongh said.

The territory's government says the program is needed to boost the local economy. The three principal US Virgin Islands -- St Croix, St John and St Thomas -- have a population of 108,605. Per capita income in the territory is $18,652, less than half the average in the continental US and $7,000 less than in Mississippi, the poorest state.

In addition to pledging more oversight of companies that currently are collecting tax benefits, the territory also has been trying to lure technology companies to the islands by touting an abundance of Internet bandwidth off the coast of St Croix.

March 28, 2007

More Auffenberg indictment news

"Auffenberg indicted on tax charges
He denies Virgin Islands investment was mere tax shelter

Prominent St. Clair County car dealer Jamie Auffenberg and three promoters of a $300 million tax shelter in the U.S. Virgin Islands were indicted by a federal grand jury on tax evasion and wire fraud charges.

According to the 21-count indictment, returned by a federal grand jury in East St. Louis, Auffenberg illegally evaded more than $8.5 million in income taxes by becoming a partner in a tax shelter called Kapok Management, L.P.

Auffenberg, 55, of Swansea, is the owner of the St. Clair Auto Mall in O'Fallon and car dealerships in Belleville. He was unavailable for comment Monday. His attorney, Jeff Demerath of St. Louis, said Auffenberg will plead innocent to the charges at an April 9 arraignment before a federal magistrate judge in East St. Louis."

More here. PDF file of the indictment.

It will be interesting to see if this goes all the way to a trial. It was pretty much common knowledge that people were abusing the EDC program - to claim that your accountants and lawyers said it was okay doesn't seem to be much of a defense.

Archive link for this entry: More Auffenberg indictment news | |

March 27, 2007

Jamie Auffenberg Indicted

In EDC related news:

"EAST ST. LOUIS — One of the largest car dealers in the Metro East area was charged with several tax and wire fraud counts in a federal indictment made public Monday, the Justice Department and Internal Revenue Service announced.

Jamie Auffenberg, 56, and other individuals and businesses were named in the 21-count indictment, which includes charges of income tax evasion, false individual and corporate income tax returns, conspiracy and wire fraud. The indictment returned by an East St. Louis federal grand jury seeks the forfeiture of $16.2 million in cash, although it is not clear exactly from whom."

More here. You can discuss this story on the News & Relocation forum - or leave a comment here.

Archive link for this entry: Jamie Auffenberg Indicted | |

January 24, 2007

Priced-Out Buyers in the Virgin Islands

From the NY Times:

COLLEEN WILSON, a lawyer who relocated her family to St. Thomas for a job at a multinational insurance company this spring, has not rented a home since she was 21. Not in Britain, nor in Jamaica, nor in Florida. Here in the Virgin Islands, however, she has been renting a three-bedroom house for more than eight months. And she doesn’t like it.

“Renting seems like such a waste,” she said, of the modest house on a small lot in the eastern Red Hook section of the island that could be hers to own for slightly more than $1 million.

“But I’m just not comfortable with the range of prices here,” she said. “Based on the property values in Miami, where we lived before, I expected to purchase something nice for $500,000 or under within six to eight months of exploring the island. Everything I’m interested in is $1.2 million, and I can’t see myself mortgaging my entire lifestyle to incur that kind of debt.”

Archive link for this entry: Priced-Out Buyers in the Virgin Islands | |

September 21, 2004

EDC News

There has been a flurry of news stories about fraud in the EDC program. Real Estate values and the recent popularity of the program seem to have a direct link. Below we present an article from the NY Times, others to come.

Tax Break Bringing Businesses, and Fraud, to the Virgin Islands

ST. THOMAS, V.I. - Inside and outside the freshly stuccoed mansions that hug the hillsides here, the gardeners and cleaning women come and go.

No one else seems to, though. No one, that is, except the federal agents who have taken to questioning the workers and the neighbors about when the owners last took a dip in their glistening pools and when they might be expected back.

The questions are intended to ascertain whether the owners of the candy-colored homes are bona fide residents of the Virgin Islands or instead are pretending to live in these homes to dodge an estimated $400 million in federal income taxes.

Drawn by an economic development program that is blessed by Congress and confers a special tax rate that amounts effectively to just 3.5 percent of income, well-heeled Americans have migrated in droves to this United States territory in the last few years, kindling its first real economic boom.

At least until recently. Last year, Internal Revenue Service agents raided the offices of one of the program's beneficiaries, and the Justice Department has subpoenaed others in what one government official described as three criminal investigations.

The ensuing confusion about the islands' economic development program and fears of attracting the scrutiny of tax authorities have already scared away some of the new arrivals, both individuals and companies. And local officials are beginning to fret that people violating the spirit and perhaps the letter of the tax law could derail the program, which is vital to a territory where 30 percent of the residents were living below the poverty level in 1999.

One program beneficiary, the Consolidated National Corporation, closed its office in St. Thomas in July, saying that the tax laws governing the program are ambiguous, and executives at two other beneficiary companies said they were on the verge of pulling up stakes for the same reason.

"If something were to go wrong with this program, it would have the impact of a major hurricane," Lt. Gov. Vargrave A. Richards said in an interview. "This program is the best thing that ever happened to these islands."

In June, the I.R.S. fired a warning shot at participants, saying that lawyers and estate planners promoting the program were making false claims about what income qualified for the program's tax benefits and about its residency requirements.

Its notice, which hinted at a widespread problem, came a year after its agents stormed the office of Kapok Management, a financial services company that is a beneficiary of the program. Though Kapok and its principals and advisers have not been charged with wrongdoing, one of its partners, Gary J. Payne, pleaded guilty to tax fraud after federal investigators demonstrated that he lived in the islands less than one month a year and nonetheless claimed the program's tax benefits for income he generated selling insurance in Massachusetts.

Federal officials suspect there are dozens of other taxpayers taking advantage of the program, a group that includes a car dealer in southern Illinois, a board member of the Federal Reserve Bank of Richmond, Va., and asset managers and insurance agents.

The few people who agreed to talk about their moves said they followed the program's rules and were careful to pay proper taxes, but most of the beneficiaries declined to comment when contacted or did not respond to calls and e-mail messages.

Many here blame the federal government for failing to carefully define what constitutes residency and what income qualifies under the program. "Congress foresaw that these two areas would be a problem and ordered Treasury to come up with definitions in 1986," Mr. Richards said. "We have asked repeatedly for these definitions but have never gotten any."

Though the Treasury Department's work plan has called for creating more explicit definitions on four occasions since then, it has not followed through, nor did it respond to proposed definitions submitted by concerned parties after the Kapok raid.

Treasury officials insist that the rules are clear and that their goal is not to kill the program, as some here suspect. "Some people have purposefully chosen not to follow the existing rules," said Tara Bradshaw, a Treasury spokeswoman. "Those who promote this intentional disregard of the rules are typically the source of complaints about ambiguity.''

In all, about 100 companies with an unknown number of partners and participants are eligible for tax breaks under the program, and about 70 more have approval to begin claiming the benefits.

Participating companies are saving about $1 billion a year, said David Marshall Nissman, who just retired as United States attorney for the Virgin Islands district.

But one federal official estimated that 40 percent of those savings are being claimed fraudulently.

The program's beneficiaries, known as E.D.C. beneficiaries after the Economic Development Commission that confers the tax benefit, must meet various requirements. Individuals and companies must commit $100,000 of capital, employ 10 local residents, buy goods and services from local suppliers and promise to make charitable donations. They must also establish residency, although they do not have to spend a specific number of days in the islands. Instead, they are advised to buy or lease a house and car, obtain a local driver's license and join local clubs, among other things.

In exchange, participants receive what promotional materials describe as "incredible tax benefits," paying an effective tax rate of just 3.5 percent on eligible income compared with a top rate of more than 35 percent on the mainland.

A dispute between one of the beneficiaries and the Bureau of Internal Revenue, the islands' tax authority, reveals just how substantial the tax breaks can be.

According to papers filed in Federal District Court in St. Croix, James Auffenberg Jr., owner of the St. Clair Auto Mall in O'Fallon, Ill., had $6.4 million in income in 2000. The bureau calculated that his total federal tax liability for that income was $2.3 million.

But Mr. Auffenberg is a partner in an economic development company. He claimed that $5.4 million of that income was eligible for the accompanying tax benefits, and paid the Virgin Islands some $97,000 in taxes.

The bureau contends that he owes it $102,000 more, something he disputes. Through his lawyer, Mr. Auffenberg declined to comment or provide the name of the company in which he is a partner.

The program's benefits have been available for decades. In the 1960's, Congress gave United States territories like the Virgin Islands the ability to offer tax breaks to encourage economic development and build self-sufficiency. The islands used that tool mostly to attract manufacturers, hotel operators and tourism businesses.

About a decade ago, the local government expanded the program to attract service companies, hoping to draw highly educated, affluent workers to the islands. These businesses have kicked the program into high gear in the last few years, pumping up government revenues and leading to a boom in restaurants, boat building, dentistry and other professional services.

Among the newer arrivals who are beneficiaries of the program are Richard Driehaus, the Chicago money manager whose new house in St. Thomas is the talk of the town; Jeffrey Epstein, the elusive money manager who reportedly handles only clients with $1 billion or more in assets, and Steven Gluckstern, the former head of Zurich Re who now has his own asset management business.

Economic development companies paid nearly $75 million to the local government in the 2003 fiscal year, or almost 15 percent of the territory's total tax receipts, up from 12 percent just two years earlier.

The economic impact of the program goes far beyond tax receipts. Housing sales and construction have risen sharply, as reflected in the 150 percent jump in taxes collected when deeds are recorded from 2001 to 2003. The "sea goose," the pontoon plane that shuttles between St. Croix and St. Thomas, has hired more pilots to keep up with demand, and marinas that had stood empty since Hurricane Hugo in 1989 now have waiting lists for berths.

Charitable contributions have also improved the quality of life. Thefts of computers from a school on St. Croix stopped after Lewis Lester, the head of Global Capital Advisors L.L.C., an economic development company, paid to install security cameras, and the St. Croix police have bulletproof vests thanks to another beneficiary.

More than 2,000 employees have migrated off the bloated public payroll and into the private sector. But what locals prize most is the program's ability to reverse the brain drain and bring back to the islands people like Cesar A. Guerra.

Mr. Guerra, a native of St. Croix, did not even consider looking for a job here when he graduated from the University of Chicago with an economics degree. "My only choice would have probably been to come back as an algebra teacher," he said.

He was working at Blum Capital in San Francisco when he heard that several investment management companies were moving to his hometown, drawn by the economic development program. He quickly joined one, the Valance Company. "There was kind of stigma attached to coming back, frankly, like you couldn't make it anywhere else," Mr. Guerra said. "Now it's like you got one of the really good jobs here, there's a cachet to it."

Vetting and oversight of the program's beneficiaries seems weak, as several of them have run afoul of federal regulators in the past. For instance, Warren B. Mosler, the owner of Valance, is a principal in two mainland firms that the I.R.S. has cited for underpaying taxes in the past. Mr. Mosler did not respond to messages left by phone and e-mail.

Frank Schulterbrandt, the chief executive of the Economic Development Authority, the umbrella agency for the Economic Development Commission and other government agencies, did not know that one beneficiary had 99 partners - he said his records showed only three - and that two other economic development companies had apparently merged or were at least sharing an office across the street from his office in St. Thomas.

He said applicants are vetted by his staff, which occasionally seeks additional help from outside services, such as the Gaming Enforcement authorities. He is requesting $2.9 million more to beef up oversight, but he made it clear that determining participants' tax status is not his job. "Tax issues are the responsibility of the tax authorities," he said.

A reporter dropped by the offices of 17 economic development companies in St. Thomas, an exercise recently duplicated by I.R.S. agents. Most of the offices seemed empty but for support staff and receptionists, who said that their employers had just left, were off island or would otherwise be unavailable to comment.

So far, the I.R.S. and the Justice Department have focused on about a dozen companies apparently consisting of social and business acquaintances from the mainland who have banded together to share the program's tax benefits.

Kapok, for instance, appears to have had more than 60 partners whose businesses ranged from selling insurance to trading cattle futures. The partners established Virgin Islands residency and forwarded the income from their businesses through Kapok, thus capturing the tax benefits, according to investigators and a lawsuit filed against Kapok by two of the partners.

"We're concerned about whether these are real partnerships or whether they are essentially selling tax credits to disparate groups of businesses that have no real connection to each other," said Mr. Nissman before he completed his service as United States attorney in August. (He now works at Bridge Capital, a financial services company in St. Croix that is a new E.D.C. beneficiary.)

At least two other firms have lost partners since the raid. Gary J. Hirst, a Florida money manager, declined to explain why he dropped out of Margate Management in March but said he had not taken advantage of Margate's tax benefits. "I thought it sounded good when I joined, but then I decided it was inappropriate," he said.

Christopher Russell, a Maryland real estate developer who founded a charity that is now under the scrutiny of the Senate Finance Committee, said he had ended his partnership in International Asset Management Inc., in St. Croix. "My tax counsel advised me after the raid on Kapok that I should get out," he said.

But federal officials say the biggest threat to mainland tax coffers may be the emigration of highly compensated hedge fund managers who have begun claiming the program's tax benefits, executives like S. Donald Sussman, the founder of Paloma Partners of Greenwich, Conn., which manages nearly $3 billion in capital.

An avid yachtsman, Mr. Sussman has a home in St. John, where he spends most of his time, and he cruises between it and houses in Greenwich and Deer Isle, Me.

In 2000, he established Trust Asset Management under the E.D.C. program, and serves as chairman and chief executive of Paloma through it. Paloma pays Trust Asset to cover his compensation and the services of 10 other Trust Asset employees in St. Thomas.

As owner of Trust Asset, Mr. Sussman pays the Virgin Islands government the low tax rate on the share of income that Trust Asset gets from his funds and the full federal tax rate on the rest. "I live in St. John," he said in a telephone interview. "I follow the rules. I do what I'm supposed to do."

Mr. Sussman is confident that he is within the law and upset that others may be playing fast and loose. "If what has been alleged is true, those nonresidents who masquerade as residents are engaged in outrageous behavior and potentially endangering the E.D.C. program,'' he said.

Archive link for this entry: EDC News | |

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