Jusitce Department Asks US Court in California To Halt Alleged Nationwide Tax Fraud Scheme – IRS

Financial Advisers Allegedly Helped Clients Understate Taxes

On Sales of Assets Worth More Than $1 Billion

WASHINGTON – LAWFUEL – The Legal Newswire – The Justice Department announced today that it has asked a federal court in San Francisco to stop three firms and four men from promoting a tax scheme that the government alleges has helped more than 1,700 customers across the country improperly avoid tax on gains from sales of a total of more than $1 billion in assets.

The four men named in the civil injunction suit, filed in the U.S. District Court for the Northern District of California, are Charles Cathcart of Santa Barbara; his son Scott Cathcart of Ross, Calif.; and Yurij Debevc and Robert Nagy, both of Charleston, S.C. The three firms named as defendants are all based in Charleston – Derivium Capital, LLC; Derivium Capital (USA) Inc.; and Veridia Solutions LLC. The complaint alleges that Derivium Capital LLC also had an office in San Francisco.

According to the government’s complaint the defendants promoted a scheme that helped customers disguise sales of appreciated stock or other assets (which would result in substantial income taxes on capital gains) as purported transfers of the assets as collateral for sham loans. The defendants are alleged to have falsely advised clients that because the transactions were in the form of a loan, instead of a sale, they were not obligated to report the transactions as sales on their income tax returns. The complaint further alleges that virtually all of the purported “loan” funds paid to customers were in fact derived from the sale of the customers’ appreciated assets.

The suit also alleges that some clients were unaware that their “loans” were funded by sales of their securities, and later asked defendants to return the securities. According to the complaint, this caused “massive problems” for the defendants because it “had the characteristics of a Ponzi scheme, in which the proceeds of new transactions were used to fund shortfalls in prior sham transactions.” Derivium Capital LLC is in a Chapter 7 bankruptcy proceeding in South Carolina, but the suit alleges that the individual defendants are continuing to promote improper schemes.

The suit alleges one customer, an engineer from Hermosa Beach, Calif., used the defendants’ scheme to dispose of more than $700,000 worth of appreciated stock and failed to report $677,777 of gain. The complaint alleges that the defendants’ scheme is estimated to have cost the U.S. Treasury more than $230 million.

Since 2001, the Justice Department’s Tax Division has obtained injunctions against more than 250 tax preparers and tax-fraud promoters. Information about these cases is available at http://www.usdoj.gov/tax/taxpress2007.htm. Information about the Justice Department’s Tax Division can be found at http://www.usdoj.gov/tax.

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