Published by Bloomberg – 22nd November 2016
When Credit Suisse AG pleaded guilty in 2014 to helping Americans cheat on their taxes, it promised to help the U.S. root out suspicious accounts. Now, U.S. investigators want to know why the Swiss bank neglected to tell them about $200 million in undeclared assets owned by an American client, according to people familiar with the matter.
The client, Dan Horsky, a citizen of the U.S., U.K. and Israel, pleaded guilty Nov. 4 to conspiring to defraud the Internal Revenue Service. He has been cooperating for more than a year with investigators examining whether the bank helped clients with ties to Israel evade U.S. taxes, said five people who weren’t authorized to discuss the case publicly.
The Horsky accounts were considered “toxic” on the bank’s Israel desk because they were hidden from the IRS using methods like those that led to Credit Suisse’s guilty plea, the people said. The U.S. learned about Horsky’s accounts independent of Credit Suisse and after the bank had entered its guilty plea, they said. Credit Suisse could face a new civil or criminal case based on the Horsky probe, the people said.
“If they didn’t provide information about this account when they had it in their files, there was either gross negligence or more likely some kind of conspiracy at the bank to avoid disclosing this account,” said Larry Campagna, a Houston tax attorney, when told by Bloomberg News about the new Credit Suisse inquiry.
Anna Sexton, a spokeswoman for Credit Suisse Group AG, the parent of the unit that pleaded guilty, declined to comment when asked about the U.S. investigation into the bank’s handling of Horsky’s accounts. The bank has set aside more than 2 billion Swiss francs ($2 billion) in general litigation reserves. Horsky’s lawyers declined to comment.
Prosecutors, the U.S. Securities and Exchange Commission and the IRS are probing whether the bank’s failure to reveal Horsky’s accounts — before its guilty plea — was a lapse in internal controls or a crime involving bankers who acted with approval of managers, the people said. The bank, which wasn’t identified in Horsky’s guilty plea, is Credit Suisse, the people said.
In February 2014, a U.S. Senate committee found that Credit Suisse helped American customers hide as much as $10 billion in assets from the IRS. At the time, Credit Suisse executives told skeptical lawmakers that only a small group of bankers helped U.S. clients cheat on their taxes.
Credit Suisse AG pleaded guilty that May, saying hundreds of employees handled American accounts, both declared and undeclared to the IRS. Its $2.6 billion fine was a record among 85 Swiss banks that admitted helping Americans evade taxes. In its plea agreement, Credit Suisse pledged to help flush out U.S. accounts not declared to the IRS.
Credit Suisse is separately in settlement talks with the Justice Department and U.S. states over abuses in residential mortgage-backed securities. The bank is also under the scrutiny of a monitor appointed by the New York Department of Financial Services after the 2014 tax plea. The monitor, Neil Barofsky, declined to comment on the new investigation.
Horsky, 71, went to great lengths to shield his money, according to plea papers in federal court in Alexandria, Virginia, and interviews with three people familiar with the matter.
He worked from 1989 to 2015 as a business professor at the University of Rochester in upstate New York, specializing in marketing and game theory.
Bad Bets
In 1995, Horsky bought shares in startup businesses through Credit Suisse accounts. He joined two other game-theory experts in investing, the people said.
Horsky invested in as many as 18 companies, but most were bad bets, according to court papers. He ran up more than $350,000 in credit-card debt, forcing him to take a second mortgage.
He finally struck it rich in 2008, when a company identified in court papers as Company A was bought for $1.8 billion. Horsky had invested in the firm using his money, funds from his father and sister, and margin loans from his bank.
He reaped $80 million in net proceeds, but only reported a gain of $7 million to the IRS, he said. He also admitted filing false returns from 2009 to 2015.
After his windfall, Horsky bought stock in a second company, identified as Company B, which had acquired Company A. His assets rose to $200 million by 2013.
‘Toxic’ Accounts
His holdings were among undisclosed accounts serviced by Credit Suisse bankers in Zurich who helped people with Israeli citizenship, according to three people familiar with the matter.
Horsky’s accounts were considered “toxic” on Credit Suisse’s Israel desk as Swiss banks came under increasing pressure after 2009 to jettison undeclared U.S. assets, the people said. That year, UBS Group AG, Switzerland’s largest bank, admitted that it helped Americans evade taxes.
Horsky used various accounts at Credit Suisse, including one under the name of Horsky Holdings, according to court papers. He put assets in the names of others to hide them from the IRS even as bank employees sent him e-mails denoting his U.S. residence, according to court papers.
In 2011, he gave signatory authority over accounts to a person identified in court papers as Individual A. At the suggestion of Credit Suisse bankers, Individual A agreed in 2012 to replace Horsky as a director of several offshore shell entities even as Horsky retained control, court papers said.
In 2013, Individual A renounced his U.S. citizenship and moved abroad, in part to ensure that Horsky’s control of accounts wouldn’t be reported to the IRS, Horsky said as part of his guilty plea. Individual A also filed a false expatriation statement with the IRS that failed to disclose his net worth and ownership of foreign assets, according to court papers.
“Despite his extraordinary wealth, Mr. Horsky concealed funds offshore, failed to report substantial income, conspired to submit false expatriation documents to cover up his fraudulent scheme, and evaded paying his fair share of tax,” Caroline Ciraolo, the prosecutor who oversees the Justice Department’s tax division, said in a statement when he pleaded guilty.
In his plea, Horsky admitted that he failed to file Reports of Foreign Bank and Financial Accounts, known as FBARs, until 2011, and that he filed false reports in 2012 and 2013. He will pay a FBAR penalty of $100 million, which is the largest in a publicly filed case.
The Simon Business School at University of Rochester said Horsky retired last December. He resigned his honorary title of professor emeritus on Nov. 7, three days after his guilty plea.
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