An Endless Stream of Lies

by Rabon, Don

  THE SEARCH FOR THE SOURCE OF FRAUDSTER

  Time is a sort of river of passing events, and strong is its current; no sooner is a thing brought to sight than it is swept by and another takes its place, and this too will be swept away.

  —MARCUS AURELIUS

  NAVIGATION POINT AND HEADING Nothing happens in a vacuum. There is no coincidence in life. Events, like rivers, have a beginning—a starting point from which there is an increasing flow toward the middle and onward to a precise finality. Identifying the end of the river or the event is not especially difficult. It is discovering the beginning that proves to be most challenging. Where exactly does the river begin? Likewise, at what precise point did Alex launch on his voyage into the abyss? More importantly perhaps is “Why?”

  WHERE DID IT BEGIN – WHERE IS THE SOURCE?

  The beginning of a river is known as the “source.” In the 1800s, there was a great undertaking to find the source of the Nile. A prize was offered for the explorer who made the discovery. Some of the famous explorers participating in the quest were Richard Burton, John Hanning Speke, Sir Samuel White Baker, Henry Morton Stanley, James Augustus Grant and Dr. David Livingstone. For their times, the task was much more daunting than what we might think of today with satellite technology allowing for a look at the world from an all-encompassing perspective. There was, and continues to be today, a complex, geographical set of circumstances that made the search to find the beginning of the Nile no easy undertaking. With regard to Alex, our search for the headwaters as the source of his fraudulent machinations is a similar challenge. In order to work our way back up river to the source, we have to begin with the first step.

  IT IS A LONG WAY BACK

  In the beginning of our exploration, we will utilize as our map the “Complaint For Permanent Injunction And For Other Relief Case 1:07-cv-00306, filed September 24, 2007,” in The United States District Court for the Western District of North Carolina. The complaint was filed by the United States Department of Justice. As you read through the complaint, you will gain an appreciation for the complexity of investigating and prosecuting crimes of this nature. Concurrently, gain and maintain an appreciation for those responsible for the investigation and prosecution thereof.

  As we progress through this and the subsequent chapters, we will incorporate other sources, including Alex’s own testimony, to gain understanding.

  Step by step, throughout the text we will endeavor to trace back through Alex’s course of activities, to examine what transpired. Along our way, we will discover specific junctions—individuals coming together, forming companies, advertising, meeting with perspective clients, gaining their trust, taking their money and using it for their own purposes. Each of these junctions serves as an additional branch flowing into the larger stream of Alex’s life. Like any explorer, our collective goal is to “know” and ultimately, “understand.” Knowing tells us what. Understanding tells us why. In this case also, we want to know “when” and “how” the seemingly still waters of Alex’s life took on a destructive undercurrent that did, in fact, run treacherous and deep.

  The complaint discloses:

  Alex had been preparing tax returns since 1999 (49). He was “neither a licensed nor registered tax return preparer” but rather what is termed “an unenrolled tax return preparer” (12).

  In 1999, Alex’s co-conspirator, Brian Noel, incorporated Certified Estate Planners, Inc. The company was designed to allow him to sell trusts. Brian was the president of Certified Estate Planners, Inc. (7).

  NOTE: “What Does Trust Mean?

  A fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary. The assets held in the trust can include, but are not limited to, a business, investment assets, cash and life insurance policies“ (www.investopedia.com)

  In September, 1999, Noel founded Pinnacle Advisors, LLC. “Pinnacle Advisors was set up as a trustee company to provide trustee services (i.e., managing assets, securities, annuities, insurance contracts, etc.) for the irrevocable trusts of Certified Estate Planners, Inc.’s customers” (14).

  NOTE: “What Does Irrevocable Trust Mean?

  A trust that can’t be modified or terminated without the permission of the beneficiary. The grantor, having transferred assets into the trust, effectively removes all of his or her rights of ownership to the assets and the trust.

  The main reason for setting up an irrevocable trust is for estate and tax considerations. The benefit of this type of trust for estate assets is that it removes all incidents of ownership, effectively removing the trust’s assets from the grantor’s taxable estate. The grantor is also relieved of the tax liability on the income generated by the assets. While the tax rules will vary between jurisdictions, in most cases, the grantor can’t receive these benefits if he or she is the trustee of the trust.” (www.investopedia.com)

  Alex “began working with Noel in May, 2000” (11). The merging of these two streams—Alex and Noel—marks a significant connection. Pause here a moment, look around and contemplate. Without Alex, the possibility of the fraudulent activity involving the same victims occurring still existed. But, what could have been the course of events in Alex’s life had he not met Noel and subsequently began to work with him? How differently would the current of his life have flowed had these two streams never intersected? Would it have flowed differently but reached the same destination?

  TWO DROPS OF WATER

  That day in May, 2000, when Alex began working with Noel was not the source of the fraud but rather a contributing factor, making it possible to happen. In Henderson County, North Carolina, Highway 64 East runs from Hendersonville to Bat Cave. Along the way, it passes through the picturesque, apple-farming community of Edneyville.

  There, by the roadside, the traveler will find a sign indicating the point of the eastern continental divide. To the east of the sign, rain water will flow to the Atlantic Ocean. West of the sign, rain water will find its way to the Gulf of Mexico. Whether the rain falls to the east or the west of the divide is determined by a set of variables over which the drops have no control. These variables include but are not limited to wind, humidity, gravity, temperature, cloud type and barometric pressure. It is possible for two raindrops to begin their fall from the cloud to earth side by side; however, due to the actions of the variables, one drop falls east of the divide and the other falls to the west. While on the journeys to their respective destinations, one drop could serve as part of a lifesaving drink of water, while the other drop could be part of the water that fills the lungs of a drowning victim.

  That day in May, 2000, Alex was the drop of water leaving the cloud. What were the factors which would ultimately place him on the deceptive side of the divide? How did he come to land on the wrong side of the divide between right and wrong that carried him downward to fraud, deception and ultimately—to the abyss?

  In Shakespeare’s Hamlet, scene III, act III, the concept of small events resulting in dire consequences is presented when Rosencrantz speaks:

  “To whose huge spokes ten thousand lesser things

  Are mortised and adjoin’d; which, when it falls,

  Each small annexment, petty consequence,

  Attends the boisterous ruin. Never alone

  Did the King sigh, but with a general groan.”

  When Alex met Noel and subsequently began working with him, it was—in the daily course of human interactions—a seemingly “lesser thing.” Such connections happen multiple times on a daily basis. It is possible that on a number of levels—personally, socially and economically—those who were previously strangers can form a relationship, go forth and, through their financial undertakings, legitimately benefit themselves and others. For example, somewhere along the line Ben met Jerry, and many of us enjoy their ice cream. Mr. Harley joined Mr. Davidson
, and it made for the world’s best motorcycle.

  But when Alex met Noel, a prosperous and legitimate outcome was not to be the case. From this meeting, the downstream consequences were indeed “boisterous ruin.” At the point when they met for the first time, the over one hundred people destined to be washed over by the “annexment” of one small stream uniting with another did not cry out with a “general groan.” Their lamentations would only be heard years later. And while they were affected collectively, they individually felt the pain personally. Like a tsunami pouring over hundreds of people at once, they all would be drowned individually. Ultimately, Alex, in his own manner, would be drowned also.

  On the day Alex and Noel met, none of the destined-to-be victims of their fraud felt as if someone had walked over their grave. Were it the case that they all futilely consulted a horoscope that day, they would have found no financial caution in the stars applying to a multitude of different birthdays. No, it was but one of a multitude of “lesser things” that, in the aggregate, proved to be disastrous. The companies were formed and the positions were appointed—all lesser tributaries leading to tribulation. These tributaries had names such as Certified Estate Planners, Silverado Financial Group, Pinnacle Fiduciary and Trust, International Titanium Corporation, and International Mineral Exchange.

  “In 2000, Noel was the subject of an IRS audit. During this audit, the revenue agent informed Noel that the trust he was using personally was not valid and the agent made substantial adjustments to his income taxes. During the audit, Noel stated that he now understood that the trust was invalid for income tax purposes. After the audit, Noel continued to market and create substantially similar ‘trusts’ for his customers” (45).

  “Alex and Noel founded the company Silverado Financial Group, Inc. in February 2001. The purpose of the company was to facilitate the preparation of returns for the trust customers. They founded Silverado as equal partners. Alex was listed as the registered agent for Silverado (11). Alex conducted business as Silverado while he prepared tax returns for the trust customers” (17).

  “In March 2001, Noel and Alex formed Pinnacle Fiduciary and Trust as an ‘irrevocable’ trust for the purpose of managing all of the clients’ assets. Alex served as the trustee for Pinnacle Fiduciary and Trust” (15).

  “On September 5, 2001, Alex became the registered agent of Certified Estate Planners, Inc. (11). On that same day Alex became the registered agent for Pinnacle Advisors and began performing trustee services and preparing income-tax returns for customers” (14).

  “Alex’s activities included preparing customers’ trust returns and managing customer’s investments by transferring the funds to various accounts and conducting short-term stock trades. Alex was neither a licensed nor a registered tax return preparer” (12).

  “Alex was operating as an unlicensed broker and was not registered with the Securities Exchange Commission to sell securities. Neither was Alex a Certified Financial Planner” (13).

  “In 2002 the IRS began audits of Alex and Noel’s customers who had purchased “irrevocable living trusts” (28). “After this investigation commenced, they ceased selling the ‘irrevocable living trusts.’ That same year they began selling ‘revocable asset management trusts’” (29). “Alex and Noel had marketed the revocable asset management trusts to their customers as a way to avoid taxes on their investments” (30).

  Note: “What Does Revocable Trust Mean?

  “A trust whereby provisions can be altered or canceled dependent on the grantor. During the life of the trust, income earned is distributed to the grantor, and only after death does property transfer to the beneficiaries. Also referred to as a “revocable living trust”. This type of agreement provides flexibility and income to the living grantor; he or she is able to adjust the provisions of the trust and earn income, all the while knowing that the estate will be transferred upon death.” (www.investopedia.com)

  “In 2002, Noel received a letter from an investor’s attorney detailing the invalidity of the trust and threatening suit against Noel and Certified Estate Planners, Inc. Specifically, the letter detailed that the customers were not properly advised about the consequences of the transfer of assets to the trust, nor was the trust an appropriate estate planning, income tax, or asset protection strategy. Noel showed the letter to an attorney” (46).

  “After receiving and reading the letter Noel had shown to him, the attorney warned Noel about the trusts he was promoting. The letter caused the attorney to question the validity of the trusts. As a result, the attorney conducted his own research on the validity of the trusts and was unable to find any legal or tax information to support these types of trusts. The attorney informed Noel of that finding in writing” (47).

  “From 2000 to 2002 Alex and Noel sold ‘irrevocable trust’ tax schemes” (18). “The sole purpose of these ‘trusts’ was to evade the customer’s tax obligations” (19). “In marketing the ‘trusts,’ Noel would target primarily wealthy elderly customers to join Certified Estate Planners, Inc. Advertisement was made through flyers, conferences, and via their website” (20).

  “These advertisements falsely claimed that the customers would be able to avoid their income taxes by placing their assets in trust while still continuing to ‘manag[e] everything’ but ‘own nothing’” (21). “Once a customer joined, Alex and Noel would create an individual ‘irrevocable trust’ for that customer. Each trust would obtain an Employer Identification Number (EIN) from the IRS. These ‘trusts’ typically listed Alex as a trustee and Noel as co-trustee” (22).

  “After the trust was established, customers would withdraw assets from their retirement accounts, IRAs, annuities and other deferred tax devices and deposit the funds into their ‘irrevocable trust.’ The customers then used these assets for personal expenses such as mortgage payments and home repairs” (23).

  “The early withdrawal of these funds and subsequent use for non-tax-exempt purposes should have resulted in the assets being subject to taxation and early withdrawal penalties. As a result, the income should have been reported on the customer’s individual federal income tax return. However, Alex and Noel’s scheme resulted in the customer not reporting this taxable income” (24).

  “As part of this scheme, Alex prepared customers’ Form 1040 Individual Federal Tax Return and Form 1041 Federal Tax returns for the customer’s ‘trust.’ Instead of reporting the withdrawn assets as personal income subject to taxation on the customer’s individual Form 1040, Alex improperly reported the customer’s withdrawn funds on the customer’s Form 1041 ‘trust’ tax return. Further, Alex would consistently under-report the total amount of this income on the Form” (25).

  “After reporting this taxable income on the wrong form, Alex would make fraudulent deductions on the customer’s Form 1041 return to fully deduct, or ‘zero out,’ the income reported. This would result in customers paying nominal, if any, taxes on this income. Alex improperly listed personal expenses (such as mortgage payments, utility bills, rent, and health insurance) as deductions on the customer’s Form 1041 trust return” (26). “Alex would further reduce the customer’s reported income by reporting large K-1 distribution fees, claiming that the customer’s ‘trust’ distributed the income to the customer. However, these large ‘distributions’ were not then reported on the customer’s Form 1040” (27).

  “As part of this scheme Alex and Noel created a new trust, Pinnacle Fiduciary and Trust Group (PFTG), designating Alex as the trustee. As before, the customers transferred all their assets into the PFTG trust. This ‘trust’ was designed to be a meta-trust, meaning it held all of the assets of all of PFTG’s customers in one trust. They commingled the customers’ funds in order to conceal them from the IRS” (31).

  “Once deposited into this ‘trust’ they did not track the individual customers’ funds. As a result all of the various customers’ funds became indistinguishable and they were unable to determine the
value of each customer’s ‘investment’” (32). “They would then use the funds in the PFTG ‘trust’ to ‘invest’ at their discretion” (33). “These ‘investments’ consisted of Alex and Noel making short-term trades, ‘investing’ money in Noel’s enjoined mineral business, and withdrawing large account management fees” (34).

  “Customers were not aware of their ‘investments’ and they only issued reports of the customer’s account activity upon request. However, these reports did not accurately represent the customer’s account ‘activity’ because they were unable to determine which percentage of the PFTG ‘trust’ belonged to an individual customer” (35).

  “They used the PFTG ‘trust’ as a shelter to hide their customers’ assets from the IRS and avoid their correct income tax responsibility” (36). “They evaded taxes by falsely reporting trust performance on a Form 1041, utilizing arbitrary amounts that eliminated the tax liabilities. In essence, these returns underreported the customers’ tax liabilities by not accurately reporting the basis for tax calculations, such as income earned on the customer’s assets in the meta-trust, early withdrawal penalties, and capital gains the customer would have incurred” (37). “As a result, the customers evaded taxation of income earned on assets held in the PFTG trust by claiming that the assets were fully distributed” (38).

  “Additionally, they did not issue Forms 1099 (forms that report non-wage income) to all of their customers; instead, they only issued the Forms 1099 to those customers who requested the information. However, even on the Forms 1099 that they did issue, they were unable to report the accurate gains and losses for each customer because they had combined all customers’ assets and failed to keep records. As a result they reported arbitrary amounts” (39).

  And so the stream of lies began and continued to flow (as shown by the information presentation of Complaint For Permanent Injunction And For Other Relief in the preceding paragraphs) with increasingly disastrous potential. But the question is, “Began at what point?” From having read the complaint above, we can only see the surface of the water. The real dangers lie in wait below the surface. For years, to the investors, and even to Alex’s partner, the waters looked fine. The surface was calm and there were no warning signs posted along the banks.