Case CV-03-4518online.wsj.com/public/resources/documents/mycfo-case03062007.pdfCase 5:03-cv-04518-JW Document 51-1 Filed 04/24/2006 Page 4 of 21: ... CARDS tax shelter and the other

KEVIN V. RYAN (CSBN 1 1832 1) United States Attorney JAY R. WEILL (CSBN 75434) Assistant United States Anomev Chief, Tax Division CYNTHIA STIER Assistant United States Attorney

450 Golden Gate Avenue, Box 36055 San Francisco, California 94 102 Telephone: (41 5) 436-7000 Facsimile: (4 15) 436-6748

W. CARL HANKLA (D.C. Bar No. 411665) JOSEPH A. SERGI GOUD P. MARAGANI JUSTIN S. KIM Trial Attorneys, Tax Division United States Department of Justice P.O. Box 683, Ben Franklin Station Washington, D.C. 20044 Telephone: (202) 307-6448 Facsimile : (202) 307-0054 . ,

joseuh.a.ser~i@usdoi .eov Attornevs for Defendant and Plaintiff on ~ounte;claim United States of America

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

NEAL M. DOUGLAS and CHRISTINE R. DOUGLAS, 1

) Case No. CV-03-4518 JW (RS) Plaintiffs. (Related Cases: CV-04-5357 JW (RS).

j CV-06-2064 JW (RS))

? UNITED STATES OF AMERICA, ) UNITED STATES' MOTION FOR

) STAY OF DEPOSITIONS, TRIAL AND Defendant and ) OTHER ACTIVITY (EXCEPT Plaintiff on Counterclaim, ) DOCUMENT DISCOVERY)

v. ) PENDING COMPLETION OF STEIN ) CRIMINAL TAX SHELTER CASE

NEAL M. DOUGLAS and CHRISTINE R. ) IN S.D.N.Y. DOUGLAS, 1

) Hearing: June 5,2006 at 9:00 a.m. Defendants on ) Counterclaim. 1

1

US.' MOTION FOR STAY Case No. C03-04518 JW RS

Case 5:03-cv-04518-JW Document 51-1 Filed 04/24/2006 Page 1 of 21

TABLE OF CONTENTS

NOTICEOFMOTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

RELIEF SOUGHT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

ISSUES TO BE DECIDED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

STATEMENTOFFACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

TheCARDSplayers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

The Stein criminal tax shelter case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Ongoing criminal investigations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Deposition, Trial and Other Activity Should Be Stayed Pending the Completion of the Stein Criminal Tax Shelter Case Pending in S.D.N.Y., Although Document Discovery Should Be Allowed to Continue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

1. Legalstandard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

2. The Ninth Circuit Factors Support a Stay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

A. The interests of Plaintiffs in proceeding expeditiously with the litigation and the potential preiudice of a delay is slight and outweighed by the other factors that - - - - 'favor granting a stay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

B. There are compelling government interests that favor the imposition of a stay. . . 10

(1) Depositions or trial testimony in the civil case could unfairly prejudice the Stein trial and the ongoing criminal investigations. . . . . . . . . . . . . . . . 10

(2) The United States has been, and will be, unable to conduct adequate discovery until after completion of the related criminal trial and . . investigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

(3) A stay is necessary to protect the government's interest . . . . . . . . . . . . . . 14

C. A stay will promote judicial efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

D. The interests of non-party witnesses favor a stay . . . . . . . . . . . . . . . . . . . . . . . . . 17

E. The interests of the public in the pending civil and criminal litigation favor a stay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19


TABLE OF AUTHORITIES

FEDERAL CASES

Ashworth v. Albers Medical, Inc., 229 F.R.D. 527 (S.D. W. Va. 2005) . . . . . . . . . . . . 18

Campbell v. Eastland, 307 F.2d 478 (5th Cir. 1962), cert. denied, 371 U.S. 955 (1963) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,12, 18

Degen v. United States, 5 17 U.S. 820 (1 996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Douglas v. UnitedStates, 410 F.Supp.2d 292 (S.D.N.Y. 2006) . . . . . . . . . . . . . . . . . . . 4

Federal Savings and Loan Insurance Corp. v. Molinaro, 889 F.2d 899 903-4 (91h Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 , 8 , 9

In re Grand Jury Proceedings, 995 F.2d 1013, 1017 (1 1" Cir. 1993) . . . . . . . . . . . 10, 12

Keating v. Ofjice o f Thrlfi Supervision, 45 F.3d 322,324 (9th Cir. 1995) . . . . . . . . . . . . 8

Russell v. United States, 76-1 USTC 7 9377 (loth Cir. 1976) . . . . . . . . . . . . . . . . . . 9, 12

United States v. Kordel, 397 U.S. 1, 12, n. 27 (1970) . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

DOCKETED CASES

AWS Management, LLCv. UnitedStates, Case No. CV-05-1056 (N.D. Cal.) . . . . 3 , 8 , 9

Belford Strategic Investment Growth Fund, LLC and Presidio Growth LLC (Tar Matters Partner) v. United States, Case No. CV-04-4309 (N.D. Cal.) . . . 3, 8, 9

Jones v. Deutsche Bank, et al., No. CV-04-5357 (N.D. Cal.) . . . . . . . . . . . . . . . . . . . . . 4

United States v. DeGiorgio, Information No. 05 (S.D.N.Y.) . . . . . . . . . . . . . . . . . . . . . . 6

United Stares v. Stein, et al., No. S1 05 Cr. 888 (S.D.N.Y.) . . . . . . . . . . . . . . . . . . passim

FEDERAL STATUTES

26U.S.C.57201 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

26U.S.C.57206 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

lSU.S.C.5371 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Fed.R.Crim. P . 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 14

MISCELLANEOUS

"The Role of Professional Firms in the U.S. Tax Shelter Industry," U.S. Senate Permanent Subcommittee on Investigations, S.Rep. No. 109-54 . . . . . . . 6


Notice of Motion

The United States' Motion for Stay of Depositions, Trial and Other Activity (Except for

locument Discovery) Pending Completion of && Criminal Tax Shelter Case in S.D.N.Y.

"Motion for Stay") is set for hearing before Judge James Ware on June 5,2006, at 9:00 a.m., at

he United States Court House in San Jose.

Relief Sought

The Motion for Stay seeks an order staying depositions, trial and other activity (except for

iocument discovery) in this civil tax shelter refund case pending the completion of a related

:riminal tax shelter case before the United States District Court for the Southern District ofNew

fork. United States v. Stein. et al.. No. S1 05 Cr. 888 (S.D.N.Y.) ("m'). Document discovery

thould be permitted to continue for a reasonable period during the period of the stay, and the

liscovery period should be reopened after the stay to permit taking depositions before trial.

Issues to Be Decided

In order to decide whether this case should be stayed, the Court should consider the

actors identified by the Ninth Circuit in Federal Savings and Loan Ins. Cow. v. Molinaro, 889

:.2d 899. 903-4 (9th Cir. 1989)):

1. The interest of the plaintiffs in proceeding expeditiously with this litigation or any particular aspect of it, and the potential prejudice to plaintiffs of a delay.

2. The burden that any particular aspect of the proceedings may impose on the government.

3. The convenience of the Court in the management of its cases.

4. The interests of persons not parties to the civil litigation.

5. The interest of the public in the pending civil and criminal litigation.

Introduction

The purpose for this Motion for Stay is to avoid forcing the United States to make a

3obson's choice between (i) protecting && and ongoing criminal investigations of tax shelters

)r (ii) fully defending this civil tax refund suit and prosecuting the penalty counterclaim.

Vithout a stay, the United States believes that either the criminal proceedings or this case or both

#ill be unfairly prejudiced. The Northern District of California has entered stays in two similar

J.S.' MOTION FOR STAY lase No. C03-04518 JW RS


:ivil tax shelter cases to avoid these concerns, Belford Strategic Investment Growth Fund, LLC

md Presidio Growth LLC (Tax Matters Partner) v. United States, Case No. CV-04-4309 VRW,

!005 WL 3278597,96 A.F.T.R.2d 2005-7057 (N.D. Cal.) ("Presidio," copy attached hereto as

3xhibit A) and AWS Manaeement. LLC v. United States, Case No. CV-05-1056 CW, 2006 WL

i24506 (N.D. Cal.) ("m," copy attached hereto as Exhibit B), and this Court should do the

iame here.

This Motion for Stay, as in Presidio and m, is made at the request of the Office of the

Jnited States Attorney for the Southern District of New York ("OUSA"). The OUSA is

,espnnsible for Stein and the criminal investigations. Stein is believed to be the largest criminal

ax case ever filed. The Stein defendants include nineteen attorneys, accountants, and other

inancial professionals. The OUSA's pending investigations concern individuals and entities

nvolved in devising, marketing, and implementing tax shelters and otherwise participating in

hem. The investigations encompass the CARDS ("Custom Adjustable Rate Debt Structure") tax

jhelter at issue in this civil case.

Filed in support of the Motion for Stay is the declaration of Assistant U.S. Attorney

Shirah Neiman, Chief Counsel to the U.S. Attorney for the Southern District of New York

YNeiman Declaration"). AUSA Neiman is supervising the team of attorneys in the OUSA

working on and the investigations. Ms. Neiman has prepared a second declaration to be

filed under seal in further support of the Motion to Stay ("Sealed Neiman Declaration").

The Motion for Stay is also made by the Justice Department's Tax Division, which is

responsible for the defense of this refund suit for over $14 million and for pursuing a

counterclaim for a civil penalty of $5.7 million.

The criminal proceedings and the instant case involve some of the same key

players-attorney R.J. Ruble; Dominick DeGiorgio, who was an employee of Bayerische Hypo-

und Vereinsbank ("HVB"); Deutsche Bank; and others who were involved extensively in

designing, promoting and implementing abusive tax shelters like CARDS. Persons likely to be

deposed in this case may be called to testify inStein andlor may be subjects of the investigations.

As explained in the Neiman Declaration, the stay would prevent the prejudice to the criminal

US.' MOTION FOR STAY Case No. CO3-04518 JW RS


xoceedings that might result from a partial preview of the criminal case during discovery or trial

in this case, and it would help ensure a full and fair defense of this refund suit by minimizing

Fifth Amendment claims and allowing Tax Division counsel access to the record of the Stein

trial, and possible disclosure to Tax Division counsel of confidential information currently in the

possession of the prosecutors, some of which cannot be disclosed under Fed. R. Crim. P. 6(e).

The stay would extend through the completion of the Stein trial, which is scheduled to begin on

September 11,2006 and last for several months.

It bears repeating that CARDS is a subject both of the criminal investigations and the

instant litigation. The investigations include Deutsche Bank-which funded the Douglases'

CARDS tax shelter and the other CARDS tax shelters arranged by myCFO, Inc. and Chenery

Associates, 1nc.-along with current and former employees of Deutsche Bank. HVB has already

~ntered into a deferred prosecution agreement arising in part from its involvement in 29 CARDS

shelters, and DeGiorgio has entered into a guilty plea.

Document discovery should be carved out of the stay because it does not present the same

problems with respect to the criminal proceedings as deposition or trial testimony. The United

States requests that it be allowed to continue conducting document discovery during the stay, for

a reasonable amount of time past the current May 15,2006 discovery cutoff! Also, once the

'The need for additional time to compIete document discovery arises largely from the delay caused by litigation in other courts over a subpoena duces tecum United States served on Deutsche Bank. The subpoena sought relevant "pattern evidence" in the form of financial records of other CARDS transactions substantially similar to the one at issue in this case. Third- party CARDS customers filed a motion with the district court for the Southern District of New York to quash the subpoena under the Right to Financial Privacy Act; the district court denied that motion, holding that the government demonstrated a reasonable belief that the financial records were relevant to determine whether Neal Douglas's CARDS transaction lacked economic substance and would not support the claimed deductions. Douglas v. United States, 410 F. Supp.2d 292 (S.D.N.Y. 2006). (Similarly, in Jones v. Deutsche Bank. et a]., No. CV-04-5357 JW (RS), a related RlCO case involving a CARDS tax shelter transaction substantially similar to Neal Douglas's, Magistrate Judge Richard Seeborg granted Jones's motion to compel Deutsche Bank to produce a wide range of documents relating to Deutsche Bank's participation in CARDS and other tax shelters, reasoning that the documents were relevant to Jones's RICO claim that Deutsche Bank and the other defendants (Sidley Austin Brown & Wood, LeBoeuf, Lamb, Greene & MacRae, Roy E. Hahn, Chenery Associates, Inc.) were engaged in an enterprise to sell Jones a tax shelter that they knew would not pass muster under the Internal Revenue Code. Order



:riminal proceedings are over and the stay is lifted, the government will need additional

iiscovery time to take depositions before trial.

Statement of Facts

Plaintiffs Neal and Christine Douglas ("Plaintiffs" or "Douglases") seek a refund of

individual income taxes in the amount of over $14,454,664 paid for the 2000 tax year. See Joint

Ease Management Statement. Neal Douglas engaged in a CARDS transaction on or about

December 20,2000 whereby he "purchased" from Marylebone Financial Trading, LLC ("LLC")

a Euro-denominated promissory note made by Deutsche Bank. His consideration for the

purchase was his assumption ofjoint liability with the LLC for payment of a "loan" from

Deutsche Bank that had been made to the LLC to facilitate the transaction. The promissory note

represented approximately 15 percent of the proceeds of the loan. Douglas claimed a cost basis

in the note for tax purposes equal to 100 percent of the loan, however. He immediately "sold"

the note by requesting Deutsche Bank to convert it to dollars. This disposition of the high-basis

promissory note, according to the Douglases, triggered a short-term capital loss of $68,251,902.

The Douglases then claimed the loss on their joint Form 1040 return for 2000. The loss served to

shelter from income tax the short-term capital gain the Douglases had realized from stock sales

zarlier that year.

The United States contends that the Douglases' CARDS transaction is an abusive tax

shelter lacking in economic substance and that the loss generated thereby is not deductible.

Joint Case Management Statement. The United States has counterclaimed against the Douglases

for an accuracy-related penalty of $5.7 million.

Granting Motion to Compel Production of Documents and Responses to Interrogatories and Requests for Admission, filed in Case No. 04-CV-5357 on March 10,2006, a copy of which is attached hereto as Exhibit C.) But the third-party CARDS customers obtained a temporary stay from the district court pending appeal, and then obtained a temporary stay from the Second Circuit pending a panel hearing on their motion for stay scheduled for May 9,2006. See Notices regarding this discovery dispute filed by the United States on December 22,2005 and February 22, 2006.



The CARDS players

The players include the persons who conceived, marketed and implemented CARDS

ransactions for wealthy taxpayers like the Douglases: R.J. Ruble, formerly an attorney with

Sidley Austin Brown & Wood and one of the defendants in Stein (see Neiman Declaration,

3xhibit A thereto, which is a copy of the S&& indictment); Graham R. Taylor, formerly an

ittorney with LeBoeuf, Lamb, Greene & MacRae, who has been indicted in Utah for his

nvolvement in other tax shelters; Roy E. Hahn, a principal of Chenery Associates, Inc., a tax

shelter boutique; various former employees of myCFO, Inc., a Silicon Valley financial services

irm; DeGiorgio, who has pleaded guilty and admitted his role in spearheading HVB's

~articipation in fraudulent tax shelters (see Neiman Declaration, 7 4, Exhibit B thereto (copy of

ieferred prosecution agreement with HVB; Exhibit C, copy of information filed in United States

i . DeGioreio, Information No. 05 Cr. 853 (BSJ) (S.D.N.Y.))'; HVB, which has admitted

nvolvement in 29 fraudulent CARDS transactions (see Neiman Declaration, Exhibit B thereto);

iarious current and former employees of Deutsche Bank, which was involved in 23 CARDS

.ransactions3 (Neiman Declaration, 7 2); and three individuals residing in the United Kingdom

who facilitated the CARDS transactions with their foreign status through their membership in

jingle-purpose LLC's formed to facilitate each CARDS transaction (see Neiman Declaration, 7

3).

2 0 n February 14,2005, HVB entered into a deferred prosecution agreement for its role in elp ping finance some of the tax shelters that generated about $2.5 billion in tax savings for wealthy individuals, including 29 CARDS transactions as described in the statement of facts in rupport of the deferred prosecution agreement. A copy of this agreement is attached as Exhibit B o the Neiman Declaration. Under the agreement, HVB has paid $29.6 million in fines, .estitution and penalties and must cooperate with the investigation by the OUSA into the tax jhelter transactions, which took place between 1996 and 2003. In addition, HVB agreed to the iling of a one-count Information charging HVB with participating in a conspiracy in violation of 18 U.S.C. § 371(i) to defraud the United States and its agency, the IRS; (ii) to commit tax wasion in violation of 26 U.S.C. 5 7201; and (iii) to make and subscribe false returns in iiolation of 26 U.S.C. § 7206.

3 Deutsche Bank's extensive involvement in questionable tax shelter transactions has been well documented. "The Role of Professional Firms in the U.S. Tax Shelter Industry," U.S. Senate Permanent Subcommittee on Investigations, S. Rep. No. 109-54 (2005).

U.S.' MOTION FOR STAY Case No. C03-04518 JW RS


The Stein criminal tax shelter case

The Neiman Declaration describes the &&case as it relates to this case and the need for

a stay. Ruble is one of the nineteen indicted individuals. Neiman Declaration, 7 4. The Stein

indictment, a copy of which is attached as Exhibit A to the Neiman Declaration, alleges that the

defendants participated in a scheme to defraud the IRS by devising, marketing, and implementing

fraudulent tax shelters, by preparing and causing to be prepared, and filing and causing to be filed

with the IRS, false and fraudulent U.S. individual income tax returns containing the fraudulent

tax shelter losses (indictment at 11 25 and 78(rr)). The indictment further alleges that Ruble

provided clients with fraudulent tax opinions for numerous shelter transactions (see indictment at

77 16 , 27,47 and 49). The indictment focuses on, among other things, four tax shelters known

as FLIP, OPIS, BLIPS and SOS, and encompasses conduct by, among others, Ruble, Sidley

Austin Brown & Wood, Deutsche Bank ("Bank A in the Stein indictment) and HVB ("Bank B

in the Stein indictment). Neiman Declaration, 7 4. DeGiorgio will be an important cooperating

witness at the Stein trial, which has a firm start date of September I 1, 2006. Neiman

Declaration, 7 4, 7. The government expects the Stein trial to be completed by approximately no

later than the end of January 2007. Neiman Declaration, 7 14.

Ongoing criminal investigations

The investigations that produced the Stein indictment are continuing. With respect to the

CARDS shelter, the investigations have established that approximately 62 CARDS transactions

were conducted between 1999 and 2002. Neiman Declaration, 7 2. These transactions generated

tax losses of approximately $1.8 billion. Id. The CARDS criminal investigations are focused on,

among other things, whether the purported 30-year loans involved in CARDS were bona fide or

sham loans; whether the loan documentation was false and fraudulent; whether the transactions

had no legitimate business purpose; and whether certain purportedly tax-neutral, foreign third

parties were legitimate, arms' length participants in the transactions. Neiman Declaration, 7 3.

Many of the individuals and entities who are being investigated for their activities in the

CARDS tax shelters are also being investigated for their involvement in the four tax shelters

(FLIP, OPIS, BLIPS and SOS) that are the focus of the- indictment. Neiman Declaration, 7

U S . ' MOTION FOR STAY Case No. C03-04518 JW RS


5. For example, Deutsche Bank and current and former employees of Deutsche Bank are under

criminal investigation for their participation in numerous fraudulent tax shelters, including the

shelters described in the Stein indictment and the 23 CARDS transactions Deutsche Bank

funded-including the Douglases' transaction at issue in this civil case. Neiman Declaration, 1 5.

The Sealed Neiman Declaration provides confidential information relevant to this motion.

Neiman Declaration, 7 I. A motion to file the Sealed Neiman Declaration exparte under seal is

filed herewith.

Argument

Depositions, Trial and Other Activity Should Be Stayed Pending the Completion of the Stein Criminal Tax Shelter Case Pending in S.D.N.Y., Although Document Discovery Should Be Allowed to Continue.

Because of the overlap of this civil tax refund case with the criminal case and the

ongoing investigations of fraudulent tax shelter activity pending in the Southern District of New

York, a stay of this case is warranted to prevent h a m to the criminal proceedings and to permit

the United States to mount a full and complete defense in this case unencumbered by claims of

Fifth Amendment privilege and with access to all relevant information. The overwhelming

weight of legal authority points to the necessity of a stay in such a situation. As noted above, the

Northern District of California has entered stays in Presidio and M, two other civil tax shelter

cases, because of the criminal proceedings in the Southern District of New York. Copies of the

orders in Presidio and AWS are attached hereto as Exhibits A and B.

1. Legal Standard

Federal courts may stay civil proceedings pending the outcome of a related criminal

prosecution in "the interests ofjustice." United States v. Kordel, 397 U.S. 1, 12, n. 27 (1970);

Deeen v. United States, 517 U.S. 820,827 (1996) (stating that a trial court's inherent authority to

manage discovery in a civil suit includes the ability to manage the impact of a criminal

proceeding to avoid interference with a related civil case); Keatine v. Office of Thrift

Su~ervision, 45 F.3d 322, 324 (9th Cir. 1995) (holding that a court may decide in its discretion to

stay civil proceedings "when the interests ofjustice seem to require such an action"); Federal



Savs. and Loan Ins. Corn. v. Molinaro, 889 F.2d 899 (9th Cir. 1989) (stating that a trial court has

Siscretion to stay proceedings where necessary).

The Fifth Circuit in Campbell v. Eastland, 307 F.2d 478 (5th Cir. 1962), cert. denied, 371

U.S. 955 (1 963) set forth the policy considerations supporting the deferral of civil discovery

pending the trial of a criminal proceeding as follows:

The very fact that there is a clear distinction between civil and criminal actions requires a government policy determination of priority: which case should be tried first. Administrative policy gives priority to the public interest in law enforcement. This seems so necessary and wise that a trial judge should give substantial weight to it in balancing the policy against the right of a civil litigant to a reasonably prompt determination of his civil claims or liabilities.

Id. at 487. In keeping with this approach, requests made by government prosecutors may be

viewed more favorably than requests made on behalf of private litigants. Russell v. United

States, 76-1 USTC 7 9377 (10th Cir. 1976) (commenting favorably upon the trial court's

decision to give "substantial weight to the Government's demonstrated concern for the

interference with the criminal proceeding"); Presidio; m. In Molinaro, the Ninth Circuit enumerated at least five factors for courts to consider in

deciding whether a stay is appropriate:

A court must decide whether to stay civil proceedings in the face of parallel criminal proceedings in light of the particular circumstances and competing interests involved in the case. JSEC v.1 Dresser Indus., 628 F.2d [I3681 at 1375. Obviously a court should consider the extent to which the defendant's fifth amendment rights are implicated. Id. at 1375-76. Other factors a court should consider will vary according to the case itself, K t generally will include:

(1) the interest of the plaintiffs in proceeding expeditiously with this litigation or any particular aspect of it, and the potential prejudice to plaintiffs of a delay; (2) the burden which any particular aspect of the proceedings may impose on defendants; (3) the convenience of the court in the management of its cases, and the efficient use of judicial resources; (4) the interests of persons not parties to the civil litigation; and (5) the interest of the public in the pending civil and criminal litigation.

889 F.2d at 903-04. Those factors are discussed below.

2. The Ninth Circuit Factors S u ~ ~ o r t a Stav.

The factors identified by the Ninth Circuit in Molinaro support the granting of a stay until

the conclusion of the Stein criminal trial at or about the end of January 2007.



A. The interests of Plaintiffs in oroceeding expeditiouslv with the litigation and the potential preiudice of a delav is slight and outweighed by the other factors that favor eranting a stav.

The first factor addresses the Douglases' interest in proceeding expeditiously to

udgment. The United States does not dispute that the Douglases, like all plaintiffs, have such an

nterest. However, any potential prejudice to the Douglases from delaying the civil case is slight.

f they ultimately prevail, they will be entitled to an award of interest as permitted by law to

:ompensate them for the time value of their money. As to the $5.7 million penalty that was

messed against the Douglases, collection has been frozen. They continue to have the use of

heir funds; presumably they can invest them at a rate sufficient to pay the statutory interest that

ill be due the government if it prevails on its counterclaim. Further, it should be noted that "the

iesire to conclude a civil dispute quickly-whether to cut the parties' litigation expenses or to

idvance the court's docket-is not a compelling reason for interfering with" a criminal

~roceeding. In re Grand Juw Proceedinns, 995 F.2d 1013, 1017 (1 1th Cir. 1993).

B. There are compelline government interests that favor the imposition of a stav.

(1) Depositions or trial testimonv in the civil case could unfairly preiudice the Stein trial and the ongoing criminal investieations.

In order to develop this case adequately, Tax Division counsel representing the United

States would need to depose, among others, Ruble and other attorneys at his firm; Taylor; Hahn;

several former myCFO employees; several former and current Deutsche Bank employees; and

DeGiorgio. Some or all of those persons could be expected to be called to testify at trial.

restimony from these persons or others could prejudice Stein and the ongoing criminal

nvestigations by giving an unfair preview of the government's evidence, theories and strategy,

4USA Neiman outlines the potential harm to the United States' criminal proceedings that could

:esult from the taking of depositions or trial testimony in this case:

In order to move forward with discovery and trial in the Douglas case, and to conduct an effective defense, the Tax Division attorneys representing the United States have advised me that they need to depose certain individuals, and are likely to add more names to the list after they receive the DB [Deutsche Bank] CARDS documents that are the subject of a pending appeal in the Second Circuit. These individuals include a cooperating government witness, individuals who are currently under investigation some of who may become cooperating government witnesses in the near future, as well as



others. It is my judgment that permitting any of these depositions or a trial to go fonvard now would prejudice I) the Stein trial, 2) the investigation of DB and its current and former employees with respect to their involvement in the Stein shelters, 3) the ongoing criminal investigation of the individuals and entities involved in designing, marketing and implementing CARDS, and 4) the other ongoing criminal investigations discussed in my sealed affidavit.

Jeiman Declaration, 7 6.

AUSA Neiman provides an example in DeGiorgio. He worked on CARDS transactions

.t HVB, has entered a guilty plea, and is a cooperating witness for the government:

For example, Dominick DeGiorgio will be an important cooperating witness I) at the Stein trial, 2) in the investigation of the current and former employees of DB and DB itself for the conduct charged in Stein, and 3) in the CARDS investigation. Among other things, DeGiorgio has relevant testimony to provide at the Stein trial regarding how he and HVB handled the 29 BLIPS transactions, and his dealings with DB and its employees during the transition from the 56 BLIPS transactions handled by DB, to those handled by HVB. A deposition in Douglas will cover these facts because many of the DB employees involved in CARDS were also involved in one or more of the Stein shelters. [footnote 4: I have also been advised that lawyers for the Plaintiff in Reese M. Jones v. Deutsche Bank AG, et al, Case No. C 04-5357, want to depose DeGiorgio about CARDS and BLIPS in pursuit of among other issues, the Jones RICO claims, and that the U.S. Magistrate Judge has ruled that discovery of Deutsche Bank with respect to the Stein shelters is appropriate in pursuit of the RlCO claims.] Obviously, DeGiorgio can also provide information relevant to his and HVB's participation in CARDS transactions. DeGiorgio's testimony at a deposition and/or a trial in Douglas will compromise the Stein trial by disclosing prematurely the full nature of the government's theory of its case, and permit Stein defendants to tailor their trial strategy, tailor their own testimony and the testimony of any witnesses they may call in their defense, around DeGiorgio's testimony. And those under criminal investigation would be able to similarly tailor their response to the ongoing investigations, around DeGiorgio's testimony. Such advance discovery regarding a criminal trial witness or an investigation is not available under the restrictive discovery rules in criminal cases that are designed to protect the integrity of the criminal process. A deposition of DeGiorgio and other likely cooperating government witnesses may also undermine their future effectiveness by exposing them at this early stage to cross- examination and impeachment at a time when the Tax Division attorneys handling Douglas will not have access to material developed during the criminal investigation, including any grand jury materials covered by Rule 6(e)(2).

qeiman Declaration, 7 7.

The concern that civil discovery and trial would prejudice the criminal proceedings is

~eightened because this civil case involves not only the Douglases themselves but indirectly one

rromoter and other taxpayers who engaged in CARDS to shelter their income. As indicated by

he Declaration of William Lukens and the attachments thereto filed herein at docket number 40,

~t least some of those third parties appear to have helped finance this case along with myCFO,

J.S.' MOTION FOR STAY :ase No. C03-04518 JW RS


:nc., which helped arrange the CARDS transactions." Neiman Declaration, 7 11. And the

same lead attorney who represents the Douglases in this case, Christopher Kliefoth, has also

.epresented, in the related Jones case before the Court, Roy E. Hahn and Chenery Associates, Inc.

According to Ms. Neiman,

In addition, because of the unusual nature of the Douglas case, to allow the Plaintiffs to participate in deposing witnesses who may testify in the criminal case will provide those under investigation for the CARDS transactions particularly inappropriate access to any cooperating government witnesses. Counsel for the Douglases represented Roy E. Hahn and Chenery, co-promoters of CARDS, for what I understand to be a considerable period of time. I also understand, from documents filed in Douglas by Counsel for the Plaintiff in Jones v. Deursche Bank, that a coalition of certain individuals and entities involved in the design, marketing, and implementation of the CARDS transactions. and certain CARDS taxpayers, banded together to fund the Douglas lawsuit through a CARDS Litigation Fund. Declararion of William M. Lukens in Support of Reply on Motion ro Consolidare Acrions, and arrachmenrs, filed May 23, 2005, Docket #40. Thus the subjects of the CARDS investigation will obtain an unwarranted and premature, birds-eye-view of witness testimony that is integral to the criminal lnvestlgat~on.

Yeiman Declaration, 7 11.

The United States should not have to compromise its criminal investigation to defend a

:ivil lawsuit. In Russell v. United States, the Tenth Circuit commented favorably on the trial

:ourt's decision to give

substantial weight to the government's demonstrated concern for the interference with the criminal proceeding which would accompany investigation and use of the more liberal discovery procedures available in a civil case, as well as to the potential for violation of Russell's Fifth Amendment rights.

76-1 USTC 7 9377; Camvbell, 307 F.2d at 487; see also Souza v. Schlitnen, 1996 WL 241824

P . D . Cal. May 6, 1996) (staying the plaintiffs civil suit challenging an immigration decision

luring a grand jury investigation of the plaintiff)

4Ten CARDS customers who, like Neal Douglas, engaged in CARDS transactions manged by myCFO, Inc., have banded together to attempt to prevent the United States from sbtaining records of their CARDS transactions from Deutsche Bank. See note 1 above.



(2) The United States has been, and will be, unable to conduct adeauate discovew until after com~letion of the related criminal trial and investieations.

As is common in civil tax refund litigation, the taxpayers-in this case, the Douglases-are

n possession of much of the facts, and it is up to the government to seek out the testimony of

)the13 to defend its interests and challenge the Douglases' version of the events. The United

jtates contends that the CARDS loss claimed by the Douglases on their Form 1040 was

neffective for tax purposes. Accordingly, the govemment must conduct discovery sufficient to

;how that the heavily documented form of the CARDS transaction does not reflect its true

jubstance.

However, Tax Division counsel will not be able to conduct full and fair deposition

liscovery while the criminal proceedings are ongoing?

First, a number of the witnesses the government would want to depose are likely to refuse

:o testify based on the Fifth Amendment. Neiman Declaration, 7 12. Although not identified

~y Ms. Neiman, these may include Ruble, a defendant in Stein who repeatedly invoked the Fifth

4mendment during a government deposition in Presidio (g Case No. 04-4264, docket no.

53-Declaration of Stuart D. Gibson); Taylor, who was indicted by a grand jury in Salt Lake City

Jn November 2, 2005 for tax-shelter-related activity (Case No. 05-CR-00805, District of Utah);

3nd current and former Deutsche Bank employees, who were involved in approving and closing

the CARDS transactions and maintaining the various collateral accounts and related foreign

currency hedging transactions post-closing until the "loans" were satisfied.

Second, without full access to the information in the possession of the prosecutors, Tax

Division counsel will be unable to conduct effective direct and redirect examination of witnesses.

The OUSA does not want to share such information at the present time, including by obtaining a

court order under Rule 6(e), because to do so would compromise the trial and ongoing

investigations. See Neiman Declaration, 7 8.

5 It is likely that by the time t h e m trial is completed, the investigations will have progressed to the point that a further stay will be unnecessary. Neiman Declaration, 7 14.



(3) A stav is necessaw to ~rotect the ~overnment's interest.

As stated in the Neiman Declaration, without a stay in this case, the United States will be

forced to make a Hobson's choice between protecting the criminal proceedings by not making

important evidence available to its attorneys and the Court in this civil case, or advancing the

civil case by prematurely exposing evidence to be used in the criminal trial and investigations.

No matter what choice it makes, one or both of the government's cases will be unfairly

prejudiced.

If the United States chooses to protect the criminal case, both its civil case and its

criminal case and investigations will be unfairly prejudiced because the United States' civil

attorneys will be forced to take and defend civil depositions while they lack information that the

prosecutors are temporarily unable to share with them about documents, facts, witnesses and the

criminal defendants. The United States' civil attorneys will not be able to fairly (or even

adequately) examine adverse witnesses during civil depositions. This might preclude later

effective cross-examination at trial. Depositions of friendly witnesses would also be prejudiced

because the United States' civil attorneys would be lacking the information in the prosecutors'

possession that would allow them to conduct an effective direct examination, make necessary

objections during cross-examination, and ask necessary follow-up or redirect questions in order

to help clarify their testimony or defend their credibility. The result will be an inadequate

testimonial record on the important issues and facts and would make the friendly witnesses

susceptible to unfair impeachment and thus potentially useless at both the civil and the criminal

trial.

If the United States chooses to protect the civil case, defendants in the Stein case and

subjects of the criminal investigations will obtain an unfair preview of the testimonial evidence

(to the extent witnesses testify notwithstanding the Fifth Amendment). This preview would

occur if the OUSA has to obtain a Rule 6(e) order allowing it to share the identities of witnesses

and their prior statements with civil Tax Division attorneys to adequately defend the civil case.

In turn, this otherwise-protected information will be available in the Douglas case, and therefore

US.' MOTION FOR STAY Case No. CO3-04518 JW RS


indirectly to the criminal defendants and subjects, when it would otherwise not be available in

the criminal proceedings.

Allowing deposition testimony to go forward now will give the criminal defendants and

the subjects of the investigations an unwarranted and premature view of the witnesses' testimony

which forms part of the evidence the OUSA intends to offer at the criminal trial, thereby

interfering with the prosecution of the criminal case. Even if the Court entered protective orders,

this information would be used during depositions of witnesses with ties to the criminal

defendants and subjects and thus make its way into their hands. Moreover, as a matter of

fairness, any deposition or civil trial testimony would have to be made available to the defendants

and subjects prior to trial.6 Similarly, disclosure of impeachment information with respect to

witnesses who may be hostile to the government would also result in unwarranted and premature

disclosure of evidence the government would use in the criminal trial, provide those witnesses

with the opportunity to tailor their testimony in advance of the criminal trial and thereby interfere

with the prosecution of the criminal case.

To illustrate this Hobson's choice, if the Court were to deny a stay and permit DeGiorgio,

a cooperating witness, to be deposed, AUSA Neiman states as follows:

If this court were to deny a stay and, for example, permit DeGiorgio to be deposed, the Government will be faced with a Hobson's choice in deciding whether to protect the criminal case or the United States' defense of Douglas. In the first instance, to protect the criminal case we would normally ask the Tax Division not to depose DeGiorgio or call him as a trial witness. This would undermine the defense of Douglas because DeGiorgio possess relevant information about CARDS transactions that would shed light on the Douglas transaction where DB served as the financial institution. On the other hand, were DeGiorgio to be deposed, in order for government civil counsel to conduct an effective direct and redirect examination and ask clarifying questions, in my judgment they would need access to information developed in the criminal case, including matters occurring before the grand jury covered by Rule 6(e). We do not want to share such information at the present time, including by obtaining a Court Order, because to do so would compromise the Stein trial and ongoing investigations, in the manner set forth above in 77. [footnote 2 omitted] Without sharing this information, any resulting examination would of necessity be incomplete and distorted. This would prejudice the government in the civil case, and, in the criminal case, defendants would

6The OUSA opposes, as unworkable and possibly unconstitutional, the issuance of any protective order barring access by the Stein defendants, individuals and entities under investigation, their attorneys. and the prosecutors in the criminal matters, to any deposition testimony taken in this case.





