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In the Courts

By Matthew J. Alexander and Christian E. Izaguirre
December 26, 2012

Second Circuit Reverses Convictions of Two Ernst & Young Tax Attorneys

On Nov. 29, 2012, the U.S. Court of Appeals for the Second Circuit, in a 2-1 decision, reversed the fraud conspiracy convictions of two Ernst & Young LLP (E&Y) tax attorneys ' Richard Shapiro and Martin Nissenbaum ' because of insufficient evidence. United States v. Coplan, — F.3d —, 2012 WL 5954654 (2d. Cir. Nov. 29, 2012). These convictions stemmed from actions related to the development and defense of five tax shelters that were sold or implemented by E&Y between 1999 and 2001. Id. at *1. After an IRS audit, several E&Y employees and an investment adviser were charged with, and eventually plead guilty to or were convicted of, a variety of tax-related crimes. Id. at *1-4. While the Second Circuit addressed a host of issues on appeal, the two principal issues discussed in detail below were: 1) The scope of criminal liability under 18 U.S.C. section 371; and 2) the sufficiency of the evidence with respect to the conspiracy convictions of Nissenbaum and Shapiro.

The Government's indictment char- ged several of the defendants, including Nissenbaum and Shapiro, in a conspiracy to commit three objectives: 1) to defraud the United States; 2) to evade taxes; and 3) to make false statements to the IRS. Id. at *5. “To defraud the United States” is commonly referred to as a Klein conspiracy after the Second Circuit's decision in United States v. Klein, 247 F.2d 908 (2d Cir. 1957); this was the main objective argued by the Government at trial, and in turn, was the focus of the defendants' arguments on appeal. The court's decision with respect to this issue hinged on its interpretation of the word “defraud” as used in section 371. In relevant part, section 371 prohibits all conspiracies to “defraud the United States, or any agency thereof in any manner or for any purpose.” As explained by the court, the word “defraud” within other statutes has historically meant to deprive another of his/her right to property. Coplan, 2012 WL 5954654 at *5-6. Within section 371, however, “defraud,” as applied to the government, has been interpreted by the Supreme Court, and subsequently by the Second Circuit, much more broadly; instead of requiring a deprivation of property, the obstruction of governmental function is all that is required. Id. at *6-7 (citing Hammerschmidt v. United States, 265 U.S. 182, 188 (1924) (holding that a conviction under section 371 “means primarily to cheat the government out of property or money, but it also means to interfere with or obstruct one of its lawful governmental functions ' .”), and Klein, 247 F.2d 908 at 916 (adopting the holding in Hammerrschmidt)). But the Coplan court noted that the broad interpretation of section 371 “appears to rest on a policy judgment ' that, in the nature of things, government interests justify broader protection than the interest of private parties ' rather than on any principle of statutory interpretation.” Id. at *7. Despite the “infirmities in the history and employment of the statute,” the court concluded that it was bound by Supreme Court precedent, and accordingly, rejected the defendants' challenge to the Government's Klein conspiracy theory under section 371. Id. at *8.

Nevertheless, the conspiracy convictions of Shapiro and Nissenbaum were vacated due to a lack of evidence. Id. at *15, 18. The crux of the court's decision rested on the lack of evidence demonstrating Shapiro and Nissenbaum's intent. The court, after an exhaustive discussion of each objective for the respective defendants, determined that the evidence was too equivocal to sustain a conviction. See id. at *8-18. For example, the Government argued that Shapiro coached an E&Y tax partner to lie to the IRS, but according to the trial record, the tax partner specifically testified that Shapiro “never told him to lie and did not suggest lying to the IRS ' .” Id. at *9-10. Similarly with respect to Nissenbaum, the court noted that the record belied the Government's arguments. For example, the Government argued that a three-line e-mail demonstrated that Nissenbaum knowingly participated in providing false information directly to the IRS; after reviewing the record, however, the court concluded that another witness testified to writing the letters that contained the false information. Id. at *15.

Due to the lack of evidence demonstrating their intent, the court also reversed Shapiro's conviction for tax evasion under 26 U.S.C. section 7201, and Nissenbaum's convictions for tax evasion and obstruction of the IRS under 26 U.S.C. section 7212(a). Id. at *18-22. The court affirmed the convictions of the other E&Y defendants. Id. at *39.


Business Crimes Hotline and In the Courts were written by Associate Editor Matthew J. Alexander and Christian E. Izaguirre, respectively. Both are associates at Kirkland & Ellis LLP, Washington, DC.

Second Circuit Reverses Convictions of Two Ernst & Young Tax Attorneys

On Nov. 29, 2012, the U.S. Court of Appeals for the Second Circuit, in a 2-1 decision, reversed the fraud conspiracy convictions of two Ernst & Young LLP (E&Y) tax attorneys ' Richard Shapiro and Martin Nissenbaum ' because of insufficient evidence. United States v. Coplan, — F.3d —, 2012 WL 5954654 (2d. Cir. Nov. 29, 2012). These convictions stemmed from actions related to the development and defense of five tax shelters that were sold or implemented by E&Y between 1999 and 2001. Id. at *1. After an IRS audit, several E&Y employees and an investment adviser were charged with, and eventually plead guilty to or were convicted of, a variety of tax-related crimes. Id. at *1-4. While the Second Circuit addressed a host of issues on appeal, the two principal issues discussed in detail below were: 1) The scope of criminal liability under 18 U.S.C. section 371; and 2) the sufficiency of the evidence with respect to the conspiracy convictions of Nissenbaum and Shapiro.

The Government's indictment char- ged several of the defendants, including Nissenbaum and Shapiro, in a conspiracy to commit three objectives: 1) to defraud the United States; 2) to evade taxes; and 3) to make false statements to the IRS. Id . at *5. “To defraud the United States” is commonly referred to as a Klein conspiracy after the Second Circuit's decision in United States v. Klein , 247 F.2d 908 (2d Cir. 1957); this was the main objective argued by the Government at trial, and in turn, was the focus of the defendants' arguments on appeal. The court's decision with respect to this issue hinged on its interpretation of the word “defraud” as used in section 371. In relevant part, section 371 prohibits all conspiracies to “defraud the United States, or any agency thereof in any manner or for any purpose.” As explained by the court, the word “defraud” within other statutes has historically meant to deprive another of his/her right to property. Coplan, 2012 WL 5954654 at *5-6. Within section 371, however, “defraud,” as applied to the government, has been interpreted by the Supreme Court, and subsequently by the Second Circuit, much more broadly; instead of requiring a deprivation of property, the obstruction of governmental function is all that is required. Id . at *6-7 (citing Hammerschmidt v. United States , 265 U.S. 182, 188 (1924) (holding that a conviction under section 371 “means primarily to cheat the government out of property or money, but it also means to interfere with or obstruct one of its lawful governmental functions ' .”), and Klein , 247 F.2d 908 at 916 (adopting the holding in Hammerrschmidt )). But the Coplan court noted that the broad interpretation of section 371 “appears to rest on a policy judgment ' that, in the nature of things, government interests justify broader protection than the interest of private parties ' rather than on any principle of statutory interpretation.” Id. at *7. Despite the “infirmities in the history and employment of the statute,” the court concluded that it was bound by Supreme Court precedent, and accordingly, rejected the defendants' challenge to the Government's Klein conspiracy theory under section 371. Id. at *8.

Nevertheless, the conspiracy convictions of Shapiro and Nissenbaum were vacated due to a lack of evidence. Id. at *15, 18. The crux of the court's decision rested on the lack of evidence demonstrating Shapiro and Nissenbaum's intent. The court, after an exhaustive discussion of each objective for the respective defendants, determined that the evidence was too equivocal to sustain a conviction. See id. at *8-18. For example, the Government argued that Shapiro coached an E&Y tax partner to lie to the IRS, but according to the trial record, the tax partner specifically testified that Shapiro “never told him to lie and did not suggest lying to the IRS ' .” Id. at *9-10. Similarly with respect to Nissenbaum, the court noted that the record belied the Government's arguments. For example, the Government argued that a three-line e-mail demonstrated that Nissenbaum knowingly participated in providing false information directly to the IRS; after reviewing the record, however, the court concluded that another witness testified to writing the letters that contained the false information. Id. at *15.

Due to the lack of evidence demonstrating their intent, the court also reversed Shapiro's conviction for tax evasion under 26 U.S.C. section 7201, and Nissenbaum's convictions for tax evasion and obstruction of the IRS under 26 U.S.C. section 7212(a). Id. at *18-22. The court affirmed the convictions of the other E&Y defendants. Id. at *39.


Business Crimes Hotline and In the Courts were written by Associate Editor Matthew J. Alexander and Christian E. Izaguirre, respectively. Both are associates at Kirkland & Ellis LLP, Washington, DC.

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