Originally published on Forbes.com.
On Thanksgiving Day 2018, as I pondered things to be thankful for, one of them was that I am not Marc Howard Berger, a CPA, retired from a large regional firm where he was a tax partner. Last week he was denied retrial on his July 18 conviction on three counts of aiding and assisting the filing of a false tax return. Usually, decisions about the rules of evidence are too lawyerly for my taste (and competence), so I will pass them by. In this one, though the story behind the story is too compelling, so I have been digging in the publicly available records on the case. I’m thinking that Mr. Berger got a really raw deal.
Two Narratives
If you really want to engage with this story you can get the opening statements of the Government and the defense here. (They start at the bottom of page 19 with Lori Hendrikson “who will proudly represent the United States in this criminal case.” Miranda Kane starts in for the defense at the bottom of page 35.) Most of the facts are not in dispute. The big one that the jury has to infer from the opposing narratives is whether Mr. Berger was a tax professional trying to do the best he could with a difficult client or a sort of criminal mastermind plotting to have his client avoid millions of dollars of income tax on his ill-gotten gains. The Government’s story, as Ms. Hendrikson puts it is:
Now, in his one main duty that he had to prepare accurate income tax returns, he failed and he failed on purpose. What he did was help his clients evade millions of dollars of taxes on income that he knew should have been reported.
Ms. Kane sees it another way:
The evidence will show that Marc did not knowingly or intentionally file or help Mr. Burrill to file false tax returns. Not in 2012. Not in 2013. Not in 2014. Not ever. He believed that the returns were accurate. He believed the transactions were loans, and he had good reason to believe it.
The message that the Government is sending here is in the DOJ new release on Mr. Berger’s conviction.
“The jury’s verdict should serve as a message to all professionals who assist their clients in evading their tax obligations that such assistance will be prosecuted ,” said Principal Deputy Assistant Attorney General Richard E. Zuckerman.
“We are gratified by the jury’s verdict,” said Acting United States Attorney Alex G. Tse. “Tax preparers must know that they cannot willfully assist clients in defrauding the IRS and failing to pay their fair share.”
The actual lesson to tax professionals is probably that you need to be careful about who you do work for, but that is a hard lesson to absorb for practitioners in regional CPA firms who are generally judged primarily by how much business they generate. And perhaps more seductively tend to like and admire their clients who are often dynamic and entrepreneurial. That seems to be the case with the client who caused all this trouble – G. Steven Burrill.
G. Steven Burrill
You can get a feel for what G. Steven Burrill was about from this story by Theral Timpson – You Can’t Google Insight: Up Close with Steve Burrill.
Talk to anyone about the history of biotech, and at some point you’ll end up talking about Steven Burrill: venture capitalist, merchant banker, consultant, speaker, mentor, and teacher. On Nov 4, Burrill received the Scrip Lifetime Achievement Award in London’s Grosvenor House.
“There’s an incredible number of people and companies who really owe their existence and success to Steve,” says colleague Fred Dorey, special council at the law firm, Cooley Godward Kronish.
Steve’s colleagues from the early days of biotech are quick to acknowledge him as one of the major architects of the industry.
If you can spare five minutes, check out this. It was made when he was receiving a BayBio Pantheon Award.
Pretty good for somebody who started out in public accounting. He made partner at EY before he struck out on his own.
Where Did Burrill Go Wrong?
Mr. Burrill ran a management company (Burrill Capital LLC) for biotech investment funds, where he would of course also have a carried interest. The management company was organized as an LLC, which, when solely owned, defaults to a disregarded entity that drops straight onto his individual return. A revenue source for the company is 2% management fees. Around 2010 the biggest account was Burrill Life Sciences Capital Fund III LLC (Fund III) which had assets around $283 million.
Beginning in 2007, Burrill Capital began taking its management fees a little early to deal with “cash flow” problems. By 2012, it had taken more than it could possibly earn before the fund’s scheduled closing – over $18 million. In 2012, there was a capital call on the investors purportedly to fund investments. but some of that went to the prepaid management fee. It is important to note that Mr. Berger had nothing at all to do with these shenanigans. That was one of the objections to the way that the Government had presented its case to the jury.
Berger argues he was prejudiced by the admission of evidence that related “only to Burrill’s fraud.”. Berger specifically objects to the admission of (1) testimony from Burrill employee Roger Wyse, (2) testimony from Fund III investor representative Craig Demko, and (3) “piles of capital call letters, agreements and side letters between Fund III and its investors.” According to Berger, this evidence ran afoul of the Court’s admonition that the government “focus its presentation of any fraud-related evidence on material that is relevant to what Berger knew,” and should have been excluded under Federal Rule of Evidence 403.. Berger further contends the government used Demko’s testimony to highlight that the investment fund included a pension plan that benefited public servants such as police officers and teachers. Finally, Berger argues the government improperly invited the jury to infer Berger participated in Burrill’s fraud based solely on proof of Burrill’s fraud rather than on proof of Berger’s subjective intent.
There was a CPA held accountable by the SEC for issuing an unqualified opinion on the fund without adequately disclosing the extra money being taken by the management company. On June 25, 2018, a few week’s before Mr. Berger’s conviction, the California Board of Accountancy issued a Disciplinary Order against Adrian D. Beamish. His CPA license was revoked, but the revocation was stayed and he was placed on probation for three years. Mr. Beamish was the PwC audit partner on the financial statements of Fund III that Mr. Burrill was taking funds from in violation of the partnership agreement. PwC had proposed a note to the financial statements that would have made things clearer, but backed down under client pressure.
Burrill and Berger were indicted together in September 2017 – Burrill on 34 counts and Berger on 3. Mr. Burrill ended up pleading guilty to one count of investment-adviser fraud and one count of tax evasion on December 7, 2017. His sentencing keeps getting pushed back and is now scheduled for December 4.
Where Did Berger Go Wrong?
As a fellow former regional firm tax partner, I think Berger went wrong by having Burrill as a client . After having gone through many of the documents included on PACER, it is still unclear to me what the right tax answer was for the issue that Mr. Berger was held criminally liable on. What Berger’s team was getting from Burrill Capital was a trial balance which showed as income the amount of management fee that was actually earned by the management company. There was a deferred revenue account that was listed as a liability.
The deferred revenue was noticed by the staff and that raised a tax concern, because even though something might not be income under GAAP, it can be taxable income when received. The problem escalated to Mr. Berger, the tax partner on the account and it got a lot of attention. Here he is just trying to get somebody’s tax return done. Somebody who has done something that he should not have done. He still has to file a tax return.
At the end of the day, when you are looking at Burrill’s return, you have to decide- was he borrowing from Peter to pay Paul or was he robbing from Peter to pay Paul. After a lot of agonizing Berger concluded it was the former, in which case the returns he signed were correct. He encouraged the client to document the loan status of the payments, which they did do, drafting a note form Burrill to the fund. Subsequently, the note was torn up because it was not consistent with the story coming out of the other side of the mouth that was being fed to PwC to hoodwink the investors.
Berger did not believe that Burrill was avoiding tax on the $18 million – just deferring it. When Burrill was contemplating liquidating his carried interest to square up, Berger was raising the issue that now the tax chickens were finally coming home to roost. Apparently, that was not allowed in as evidence:
Berger argues several of his emails were improperly excluded as hearsay, specifically Defense Exhibits 28, 55, and 126. According to Berger, DX 28 was not introduced to show that Burrill “ personally liable for the debt,” but rather to show that Berger believed this to be true at the time the email was sent. DX 28. Berger also contends DX 126 was offered simply to show that he was contemplating the tax consequences of a sale of carried interest, and therefore believed Burrill was personally liable for the purported loans.3 Finally, Berger contends each of these emails qualifies for the business records exception.
The government objected to the introduction of each of these emails as inadmissible hearsay. Berger’s strongest argument is that DX 28 reflected his subjective belief that Burrill was personally liable to repay the Fund III payments, regardless of the truth or falsity of the assertions in the email. Read in context, however, Berger’s email asserts that he met with Burrill and that Burrill stated that he was liable to repay the purported loans.4 When viewed in this light, DX 28 clearly constitutes hearsay. Furthermore, Berger fails to establish the requisite elements of the business records exception. Accordingly, there was no error in the exclusion of these three exhibits.
The Lesson
I was going to say that the lesson is that Berger should have bailed on the engagement once he realized that Burrill was taking money out of the partnership that he shouldn’t have been taking. That made it close to impossible to come up with the right tax answer. Only there was that unqualified opinion on the Fund from a Big 4 accounting firm. So whatever Burrill was doing could not have been that bad.
In an email to Burrill and his team he wrote:
Our preliminary review of the Assignment Agreement and Mutual Release for BLSCF LP with Wetherell could result in a tax cost of $6M if the repayment to the Fund is $18M.
So it may be that the lesson is that it is better to be lucky than good, and Mr. Berger was just not lucky. CPAs with careers similar to Mr. Berger who ponder whether something like this could happen to them fall into two classes those who will think there but for fortune go I and those who are kidding themselves.
Other Coverage
The Government, so far has been relatively frustrated in its desire to make this prosecution a lesson to tax advisers, as it does not seem to have generated much coverage.
Dorothy Atkins had Accountant Blames $18M Fraud On VC’s Ego As Trial Wraps, Cara Bayles had Accountant Hid Silicon Valley VC Firm’s $18M Theft, Jury Told. Those are both behind the Law360 pay wall.
Jack Townsend had a rather technical piece – The Difference Between § 7206(2) Aiding and Assisting and 18 USC § 2(a) Aiding and Abetting (11/22/18). Don’t go mixing up abetting and assisting when Mr. Townsend is in earshot.
David Kasing had something on the conviction.
Cara Salvatore had something behind the Law360 pay wall about the recent ruling. Accountant Denied Retrial Over $18M Biotech VC Fraud. I only have the first sentence, but I think that is wrong:
A California federal judge declined Thursday to order a retrial for an accountant found guilty of helping a venture capitalist siphon $18 million from a fund using false tax returns
There is no allegation anywhere that Mr. Berger had anything to do with moving money out of the fund. Burrill’s 1040 was an effect not a cause.