Appeals from judgments of the United States District Court for the Southern District of New York (Weinfeld and Lasker, J.J.), convincing appellants of violating and conspiring to violate 26 U.S.C. §§ 7206(1) and (2) and 18 U.S.C. § 371.
Van Graafeiland, Kearse, Circuit Judges, and Pollack, District Judge.*fn*
VAN GRAAFEILAND, Circuit Judge.
Charles Agee Atkins and William S. Hack appeal from judgments convicting them of violating and conspiring to violate 26 U.S.C. § 7206(1) and (2) and 18 U.S.C. § 371, following a jury trial before Judges Weinfeld and Lasker in the United States District Court for the Southern District of New York. The charges included the willful making and subscribing of false individual and partnership tax returns, § 7206(1), and aiding and assisting in the filing of false individual and partnership returns, § 7206(2). See United States v. Atkins, 661 F. Supp. 491 (S.D.N.Y. 1987). We affirm.
Appellant Atkins was the founder and principal owner of a limited partnership called The Securities Groups, one of whose functions was the creation of tax write-offs for investors in money market instruments, primarily United States government securities. Appellant Hack controlled a similarly occupied company called Mountain Associates. The word "securities" may be somewhat misleading because, in the main, no physical certificates changed hands in the transactions involved herein. As one witness explained it:
Well, there are no physical certificates. The treasury stopped issuing the physical certificates a number of years ago. And when we refer to deliveries, what we are referring to are book entries done on the Federal Reserve system computers. So that the computer in fact keeps track of where the securities are versus where cash is. So that all of these transfers are actually electronic transfers of treasury bills versus fed funds.
Indeed, as another witness pointed out, artificial transactions in treasury bills or notes could be conducted without first purchasing anything from the treasury:
But with these so-called artifical [sic] transactions, they didn't require one having to actually go out and buy anything from the treasury. A dealer would just put something on his books indicating a purchase of transactions or purchase of some volume of securities as of day one in a sale as of some later day and then have corresponding transactions with some other party that also is self-reversing in that way. And that could be done without any transactions actually having to exist or be delivered over the delivery network in the government securities market. It didn't require that treasury securities actually exist.
At one point The Securities Groups' balance sheet showed it with $24 billion of assets and liabilities, with less than a $100 million of capital.
Although the Groups' offering memoranda represented that the Groups intended to handle clients' investments for the primary purpose of realizing economic gains, its real purpose was to generate tax losses for investors who needed them to offset unrelated gains. Such investors were promised 4 to 1 tax write-offs based on an investment consisting of 25 percent cash and 75 percent notes.
Because there is little dispute as to the facts, we need not recount in detail the evidence produced at trial. The Government proved beyond a reasonable doubt that Atkins, with the conniving assistance of Hack and other unindicted accomplices, created, purchased, and sold millions of dollars in fraudulent tax losses for his companies and his customers. Appellants used two basic schemes in creating the fraudulent losses--rigged straddles and rigged repurchase agreements.
A straddle in the securities industry is the concurrent establishment of "long" and "short" positions in a security or securities. A person is "long" if he has contracted to buy a quantity of securities for future delivery, speculating on an advance in the market; he is "short" if he has contracted to sell securities that he may not yet own, speculating on a decline in the market. Prior to the enactment of the Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, 95 Stat. 172, 323-26, dealers such as appellants, by going long and short at the same time, i.e., "straddling", could close out in one year the leg of the straddle that showed a loss and close out in the succeeding year the other leg showing the gain, thus deferring for one year the tax on the offsetting gain.
However, the ordinary straddle is not risk free because there is no assurance that the gain on the second leg will be equal in amount to the loss on the first leg. One witness described a straddle as the "simultaneous purchase and sale of similar but different instruments such that if the market interest rates moved, one side of the position would be profitable, while the other side would automatically lose money." See Lasker v. Bear, Stearns & Co., 757 F.2d 15, 16-17 (2d Cir. 1985). Because The Securities Groups was engaging in transactions involving billions of dollars, it proposed to eliminate the possibility of what could be extremely large losses resulting from such market fluctuations.
To accomplish this, it found accomplices such as Hack who, for a fee, were willing to enter into "paper" or computer transactions giving the Groups substantial first leg losses and then, by means of additional "paper" transactions, adjusting the second leg so as to eliminate any gains or losses that otherwise might result from market fluctuations. As one witness described the process, "the entire transaction from start to finish would be ...