Will Joe and Teresa Giudice Go to Prison for Bankruptcy Fraud?
Invotex accessed the 2011 Annual Report of the U.S. Courts to determine how often bankruptcy fraud crimes are prosecuted. The answer is not frequently. Between 2007 and 2011, just 294 cases involving 345 defendants commenced in the entire country, which is fewer than 60 cases and 70 defendants on average each year.
The conviction rate for 83 bankruptcy fraud cases disposed of in 2011 was 92% – the 76 convictions led to 46 jail sentences, averaging 25 months. In comparison, TotalBankruptcy.com reported that there were 27 bankruptcy fraud cases initiated in 2010, which resulted in 21 prison terms, averaging 31 months.
The most recent high-profile case, other than Teresa and Joe Giudice’s indictment on July 29, 2013 (click here to read details about the Giudice’s bankruptcy and federal indictment for money fraud), was on September 30, 2013, when former Enron Executive Jeffery Adam Shankman was indicted for concealing assets in a bankruptcy petition filed in the fall of 2008. He is accused of concealing, transferring and selling assets such as jewelry, fine art and other assets without consent, approval or knowledge of the bankruptcy court or his trustee. The value of the assets in question was close to $1 million. If convicted he faces a possible $250,000 fine and up to five years in prison for each count.
In another high-profile case, former Arkansas football coach John L. Smith was accused of defrauding creditors in his bankruptcy petition filed in September 2012 – he claimed to have $40.7 million in debts stemming from real-estate deals gone bad around Louisville, Kentucky. He also listed just $1.3 million in assets. In February 2013, creditors sued Smith in bankruptcy court to prevent him from discharging nearly $18 million in debt. The creditors said Smith tried to “hinder, delay or defraud” them by transferring assets to family members before he filed his bankruptcy petition. In court documents, Smith had denied all “allegations of inferences of bad faith or intent to defraud.”
Among other problems, between 2008 and 2012 Smith and his wife transferred $525,000 to Smith’s wife’s revocable trust. Also during that period Smith and his wife gave their children $120,000. The Razorback Foundation and the University of Arkansas also paid Smith somewhere between $133,000 and $167,000 before he filed for bankruptcy.
Smith, now the head coach at Fort Lewis College in Colorado, reached a settlement in May 2013 with his bankruptcy trustee to return some of the money he gave away or received before he filed for Chapter 7. Smith, his wife and children will return $165,000 in cash and $600,000 in property (44 acres of undeveloped land in Jefferson County, Kentucky) to settle the “fraudulent transfer” claims. In September 2013, a federal bankruptcy judge approved the settlement that ended the $40.7 million bankruptcy case.
Another recent high-profile case was that of former Philadelphia Phillies and New York Mets All-Star Lenny Dykstra, who in July 2012 pleaded guilty to bankruptcy fraud, concealment of bankruptcy property and money laundering. He faced up to 20 years in prison – federal prosecutors had asked the judge to sentence Dykstra to 2 1/2 years in prison, saying he had been “trading on his celebrity status” and acted as if he was above the law.
The government alleged that after Dykstra filed for bankruptcy in 2009, he stripped as much as $400,000 in valuables and fixtures from the $18.5 million mansion north of Los Angeles he had bought two years earlier from Hall of Fame hockey player Wayne Gretzky. Dykstra sold a profitable car wash business in 2007 when he bought the mansion just as the real estate market started its decline, and a plan to turn the mansion into a time-share went nowhere as did his Players Club magazine. As his finances deteriorated, Dykstra’s substance abuse increased.
After filing bankruptcy in 2009, Dykstra was forced to move out of his mansion in Thousand Oaks, California, and was barred from returning. He relocated to his penthouse in Los Angeles, where he lived as a custodian for property that belonged to his bankruptcy estate. Dykstra, along with others, gained access to his mansion through improper means and removed personal property, including artwork and sports memorabilia, and fixtures made of gold, which he tried to conceal from the trustee. He also removed bankruptcy estate property from the penthouse and other locations.
In December 2012, Dykstra was sentenced to 6 1/2 months in prison for the federal bankruptcy fraud charges. He was already serving a three-year California state prison term for grand theft auto and a nine-month term for lewd conduct and assault with a deadly weapon (Dykstra pleaded no contest in state court to three counts of grand theft auto and filing a false financial statement – he had been charged with trying to lease cars with phony business and credit information).
The state and federal sentences ran concurrently and Dykstra was released from a California prison in June 2013. He is now on three years’ probation and must complete 500 hours of community service, participate in a substance abuse treatment program, and pay $200,000 in restitution.
Also in the Giudice’s federal indictment, Joe Giudice is charged with failing to file tax returns from 2004-2008, which is different from tax evasion. However, I’ve included the following report, 10 Celebrities Convicted of Tax Evasion, from April 2011, which summarizes 10 high-profile celebrity tax evasion cases and the lessons they offer.
Think tax evasion is a poor’s man’s game? Think again. Convictions range from middle class Joes all the way up to top celebrities like Nicolas Cage, Annie Leibovitz and Marc Anthony. Here’s a look at 10 high-profile celebrity tax evasion cases and the lessons they offer.
1. Martha Stewart: She may be a home and garden guru, but she’s also a convicted tax evader. Before doing jail time for insider trading, Stewart was forced to pay $220,000 in back taxes and penalties to the State of New York, learning the hard way that East Hampton mansions also generate taxes. Her claim that she hardly spent time there didn’t reduce her burden, or appease the state of New York.
2. Wesley Snipes: You know him as Blade, but the IRS knows him as a tax evader that used various means to hide a lofty income. Snipes was found guilty on three counts of failing to file a federal income tax return, owing the government $17 million in back taxes plus penalties and interest. His attempt to pay off a portion of what he owed during his trial to avoid the slammer, failed and in 2008, Snipes was sentenced to three years in prison. He began serving his sentence in December 2010.
3. Willie Nelson: After seizing most of his assets in 1990, the federal government forced Willie to pay over $16 million in back taxes and fines for his involvement with a bogus tax shelter, offering new meaning to the singer’s top-ten hit from 1975, “Blue Eyes Crying in the Rain.” Offering a note of redemption for the famous crooner, it was later discovered that Price Waterhouse had not paid Nelson’s taxes for years and invested the funds instead.
4. Nicolas Cage: Cage inspired humor in “Raising Arizona” and sobriety in “Leaving Las Vegas,” but only irony when the star of “National Treasure” contributed to the national debt to the tune of approximately $6 million, according to the IRS’ 2009 charge. Accusing his ex-manager and accountant of making poor investment choices in risky real estate and failing to pay his taxes, Cage set out to make good with the IRS, but still paid considerable fines on the taxes. Be careful whom you trust with tax advice.
5. Marc Anthony: He may be the husband of superstar Jennifer Lopez, but fame didn’t remove his obligation to pay taxes. In 2007, the IRS served Anthony with $2.5 million in back tax bills. Then in 2010, he received two additional bills totaling over $3 million for unpaid taxes on real estate. Marc Anthony blames management, but few empathize after the IRS claimed numerous years of zero tax payments.
6. Annie Leibovitz: It was December 8, 1980 when celeb portrait photographer Leibovitz captured John Lennon and Yoko Ono for the cover of Rolling Stone. Since then, her notoriety rocketed almost as fast as her spending. After years of extravagance and poor financial management, it seems paying taxes was just one expense she couldn’t afford. Picture this: in 2009 Leibovitz owed $2.1 million in unpaid taxes for 2004-2007 and was forced to pledge the copyright to every photograph she has ever taken, or ever will, to get the loan she needed to pay her debts.
7. Darryl Strawberry: Mets or Yankees? Strawberry led them both to World Series titles, but like Pete Rose, he stumbled when it came to claiming taxable income. Both can likely recite their stats for every season played, but neither was very good at recalling income from autograph and memorabilia shows. After years of signing away without paying taxes, both received tax evasion convictions. The lesson? If you earn money from it, so should Uncle Sam.
8. Boris Becker: Christened “Boom-Boom” thanks to an impressive serve, the 90s tennis star impressed men and women alike with his talent, but the German tax authority? Not so much. Claiming to be living in the tax haven of Monaco from 1991 to1993, Becker was actually at home in Munich with his wife and kids. When the final ball dropped, Becker paid approximately $3 million in back taxes and interest on earnings from prize money, endorsements and appearance fees.
9. “Survivor” Richard Hatch: He survived the first season of Survivor, winning $1 million. But when it came time to paying his taxes, he stayed on the island and voted CBS off, claiming the network agreed to pay his taxes. In 2006, Hatch was found guilty of tax evasion and served part of a six-year prison sentence as a result. Then in March 2011, he returned for his third prison term for failing to file amended returns. Celebrity tax lesson: Don’t “forget” to pay taxes on your income…especially before 51 million television viewers.
10. Heidi Fleiss: Known as the “Hollywood madam,” Heidi Fleiss was sentenced in 1997 on tax evasion charges in connection with her high-profile prostitution ring. She served part of her seven-year sentence in prison and a halfway house. Her excuse? Apparently it’s a bit challenging to pay legal taxes on illegal earnings.
While some celebrities engage in various attempts to avoid paying taxes, from filing false returns to hiding money overseas, regardless of the method or fame of the individual, the government can force those guilty of tax fraud to pay back taxes and penalties, and serve time in confinement—a costly lesson for an avoidable mistake.