I Won $104M for Blowing the Whistle But Was the Only One Who Went to Jail | Hacker News Reader

I Won $104M for Blowing the Whistle But Was the Only One Who Went to Jail

melmagazine.com

461 pointsmonsieurpng100 comments

A little more detail from a neutral source on why Birkenfeld was jailed: http://content.time.com/time/business/article/0,8599,1928897...

One difference between the two stories is that the Time article says he went to the Feds because of the problem with his bonus. That doesn't make sense because he had already spirited out the UBS documents which he wouldn't have had access to after resigning. He also didn't know at the time that he would eventually get a whistblower bonus. So the separation bonus was real money.

Still seems very shady. His defence, as portrayed in the article, seems to be that they 1) did not offer him a cooperating witness agreement which he would seem to have deserved and 2) was being asked to break serious laws in the country of residence.

Conversely, the DoJ's defence, against as portrayed in the article, seems oddly nebulous, and in light of the later IRS decision, probably flat out wrong.

Most odd.

This almost makes some kind of sense. The "whistleblower award" he got was the percentage of recovery the IRS pays as a bounty for intelligence on tax avoidance schemes; it's a portion of the money he actually helped recover for the government. There is a rational case to make for someone being both fully culpable for wrongdoing while still remaining entitled to bounties they've satisfied.

For another complicated IRS recovery bounty case, see the story about Vanguard's "internal whistleblower" who is making the case to the IRS that their cost-saving structure is an unfair advantage, and that they owe taxes on those savings to the government. If that "whistleblower" prevails, he'll have harmed the retirement savings of tens of millions of Americans, all of whom benefit from Vanguard's novel structure. But there you go!

As for this guy's superiors not being prosecuted, yeah, that sucks. The prosecutors can only make the cases they can make; this guy confessed.

> [...] this guy confessed.

Yes, he did, but after:

> All I asked for in return was a subpoena or immunity. They said no.

I wonder realistically how long can you drag this out as a whistleblower? How many times can you say "I'll give you these people if you don't charge me", especially when your document stash is well hidden.

It sort of looks like this bank exec traded 3 years in minimum security prison for more money than any of us could ever use in a lifetime.

I'm pretty OK with that precedent!

I'm not. It was not an exchange. He neither knew about the money, nor expected it at the start. I think it would be more precise to say:

"Bank exec blew a whistle his company and got 3 years in minimum security prison. By coincidence he also got a lot of money afterwards."

Basically unless the whole story the whistleblower reported was fabricated, I don't think there's any situation where I'd be ok with the whistleblower being the only one jailed. As part of a larger group - sure, maybe.

Otherwise what's the point of whistleblowing? It would only work if you hate the company more than you like your current life. Or if you knew how to do it anonymously.

What do you mean he didn't know about it? He's a banking exec whistleblowing on tax evasion. The IRS bounty on recoveries is not exactly a secret. Even in the unlikely event that he himself wasn't aware of his prospects when he went in, you'd assume literally the very first thing any competent lawyer would have told him was "you stand to make a hundred million dollars if you go through with it".

The thing I like about the precedent? That banking executives need to be on their toes because all of their colleagues have an immense incentive to rat them out.

> (It is, however, extremely important to me that I make clear that I had no idea there was a law like this for a reward when I resigned from UBS in October 2005, as the law passed in December 2006.)

Huh. Fair point. I stand corrected.

No, I still sort of agree with you. The law did pass after he started to whistleblow. However, he wasn't whistleblowing because they were a sneaky bank doing things like set up tax evasion schemes. He was whistleblowing because they set him up to take the blame for the damages. His next plan was to get immunity for all his crimes while screwing them and keeping his money. Had that document not formed or he seen it, he would've kept helping companies in their crimes (or shady stuff) in exchange for large paycheck at the bank.

So, he's still a piece of shit that doesn't give a damn about tax evasion doing it solely for himself. He got a great reward in the process anyway despite it backfiring a bit. Like you said above, I think it's probably a good trade so long as it didn't screw up his head in there. :)

Immunity plus the bonus would be a better incentive to rat them out.

I'm not. As near as I can tell from objective sources, Birkenfeld:

1) Deserved the money

2) Did not deserve prison.

You can't equate those.

He aided tax evasion for U.S. and other companies. IRS threatened to come after me for about $1.20 once. No kidding. This guy helping them disguise tens of millions to billions... who knows amount... in taxes they owed? "Did not deserve prison." Oh no, I think the scumbag did. His bosses deserved a longer sentence, too.

Although, they're doing what their country makes a lot of money on. So maybe heroes of private industry over there. ;)

Unless I'm misreading, he's a bank executive who smuggled diamonds internationally to held a Russian oligarch avoid US taxes. Why exactly are you immunizing him?

https://en.wikipedia.org/wiki/Igor_Olenicoff#Tax_evasion

Prosecutors were extremely reluctant to prosecute the oligarch and didn't want him in jail. However they were pretty vigorous with his banker!

To clarify: I don't feel that he deserved prison for what he was accused of and eventually pled guilty to in a plea bargain, given the totality of the circumstances. Which was not, unless I'm misreading, anything to do with diamond smuggling.

Mind you, it's possible he plead guilty to what seems (to me) as vaguely absurd charges to avoid a much harsher penalty for the diamond smuggling and such.

You're undervaluing time spent locked up.

I would do 3 years for $100MM. I would do the next three years for $100MM, and they're pretty important years in my family! Someone offer me $100MM to be imprisoned for the next three years; I will put my money where my mouth is on this.

I'll do it for $90MM though, pick me! Pick me!

This would make for an interesting loser pays auction.

if you assume a 4-5% return on the money, only want to live off the returns (not the principal) and "six figures" (say, $250,000) is enough as yearly, net income...the lowest a person would go is about USD$6.7MM (after tax, of course)

I'd do it for a cool million, possibly less. There's plenty of places around the US, let alone the world, where returns around $50,000 yearly or less would provide a comfortable life. Add the ability to supplement that with whatever work you care to perform and you can be more than comfortable.

EDIT: On further thought, I'd go for much less, I think. It's really just a comparison the money offered against A) the amount I'd expect to earn in those 3 years, B) expected loss of lifetime income due to the time lost and/or resulting stigmas, and C) personal discomfort/inconvenience of the lockup time.

Hard to figure the latter two, but I expect even half a million would tip the balance in my case.

In the US ;)

I smell a reality TV show...

What if they were the last three years of your life?

Interesting thought but I would take the same deal as Thomas.

I also think your question can be generalized.

Waiting for the train, you hear the announcement "an uptown A train is 4 minutes away from west 4th st." "What if these are the last 4 minutes of my life?"

Waiting at a red light, looking at the countdown clock in the other direction: "What if these are the last three seconds of my life"?

When the time scale is seconds and you are in your middle age death is not what's on your mind. But when you're talking about years then that changes. Every year has a statistical likelihood of being your last, the older you get the bigger that chance (once you're out of infancy). Even if the distribution were flat then you'd be looking at something along the lines of 3/70th so roughly 4.5% or so for three years.

I've buried enough people in their middle age by now to not take the next three years for granted.

You can't take it with you.

We're all wasting our time anyway. An hour a day of commuting, 8 hours of work, 4 minutes brushing your teeth, 8 hours sleeping, an hour here and there trolling Hacker News... there's half your life right there.

Look at it as getting paid $6,000 an hour to read books for three years. Not the worst gamble someone my age could take.

A much tougher decision.

Before taking your million dollar choice I'd suggest a trial period of a month or so in jail. Maybe you'll see things in a different light after that.

Federal prison camps are not that terrible: https://www.bop.gov/about/facilities/federal_prisons.jsp

Think of it like a three-year, $100 million sabbatical "upstate." That is enough time to read through the great books. Room and board are covered and there is a commissary for personal items.

They are also not that great if you happen to annoy the wrong people. See for example Barrett Brown, John Kiriakou, et al.

http://www.johnkiriakou.com/books/letters-from-loretto/

Not that terrible compared to other prisons. Compared to freedom, though, not so not-that-terrible.

If I had to choose between a minimum security federal prison and 3-4 long-distance airline flights a week and living out of hotels (a not-unusual travel burden for the kinds of people who make 7 figures a year reliably), I would have absolutely no trouble picking "prison".

Remember: the premise here is that once you do your bit, you're set for life.

I'd add that $100M makes it easier, a felony conviction, especially at the federal level is no joke.

I used to see ads on TV for pardoning services, that implied that they could restore your ability to travel. Does anyone know if those actually work? If they do, then you might really be clear and free with a bit less than $100MM after, say, 5 years.

Any real "pardoning" service at that level is simply a very good, high-priced law firm. And yeah, they do "work." AKA they file the correct legal paperwork and navigate the bureaucracy better than your average citizen.

Federal charges can only be pardoned by the president, are limited in number, and don't expunge your record with very few exceptions. You still need to report the conviction, and still need to ask various states for "forgiveness" to restore your rights.

Personally, I'd stick to the PowerBall for a get rich quick dream.

If I had $104M in the bank I'd put it as the caption on the top of my resume "Spent three years in federal prison..."

You're kind of set for life either way.

I'm not. Most people won't be in the position to get that kind of deal.

... their cost-saving structure is an unfair advantage, and that they owe taxes on those savings to the government.

From what I remember, it's not about unfair advantages, but simply that they could have charged higher mutual fund fees, and thusly owe taxes on the fees they could have charged instead of the fees they actually charged.

Really? That makes no sense to me. Like it being wrong to work part time because you pay less taxes.

It is so much weirder than that. Vanguard's signature benefit is the way its organized: rather that a company that owns and manages funds, it's a collection of funds that own and share the management company. All of the expenses and overhead involved in managing the funds come directly out of the returns of the fund, so the company and its investors have aligned incentives.

The problem is that the funds have a client/vendor relationship with the management company. Since the vendor is captive to the funds, it has no incentive to charge its clients market rates for its services. But since it's a separate taxable entity, it theoretically cannot gift (or discount) its services to its clients without the clients recognizing those benefits as taxable income.

The "whistleblower" here is a former tax lawyer for Vanguard. Since Vanguard is basically one of the largest money managers in the world, that guy stands to make almost ten billion dollars in bounty fees if the IRS recovers based on his theory.

As always, start with Matt Levine:

https://www.bloomberg.com/view/articles/2015-11-25/calpers-f...

It's even wilder than that, because the former tax lawyer relied on a strange quirk of NY State Law which allows individuals to sue on behalf of the state. That is, the suit was titled "State of New York ex rel David Danon v. Vanguard Group, Inc."

note the ex rel -- it wasn't a personal suit against Vanguard !

This case was utterly bizarre and completely fascinating; the Bogleheads forum have perhaps the most informed discussion on the internet of this case: https://www.bogleheads.org/forum/viewtopic.php?t=143686

But lower fees mean higher returns which means clients already pay more capital gains tax etc.

Frankly if that's a tax loophole, then every credit union is in massive trouble. Not to mention restricted banks like USAA.

Thanks for the link, it was a good read.

> recovery the IRS pays as a bounty for intelligence on tax avoidance scheme

Tax evasion. Tax avoidance is legal; evasion is illegal. The one is avoiding taxes by applying the law; the other is breaking the law in some fashion or another.

The line between evasion and avoidance is really a matter of opinion (that we colloquially call 'case law'). It's hard to know what the delta actually is... I would argue that intent isn't really that different between the two.

The difference is very important because tax avoidance is completely legal and encouraged. Tax evasion is illegal.

Your statement below is false as written:

>the IRS pays as a bounty for intelligence on tax avoidance scheme

From the IRS' website: [1]

"The IRS Whistleblower Office pays money to people who blow the whistle on persons who fail to pay the tax that they owe"

You can't fail to pay a tax that you legally avoid.

[1] https://www.irs.gov/uac/whistleblower-informant-award

Here is some more information on the difference between tax avoidance and tax evasion: http://www.investopedia.com/video/play/tax-avoidance-vs-tax-...

While it would be unconstitutional in the United States, keep in mind that in certain countries "ex post facto" making certain tax avoidance schemes retroactively unlawful is not unheard of, e.g. BN66 in the UK: https://en.wikipedia.org/wiki/BN66

The IRS sometimes does that. They'll decide in 2008 that some accounting rule is invalid, and oh by the way, that means you owe taxes back to 2002 when you started using it. They can't reverse a rule, but apparently rules can be clarified at any time, so if your loophole hasn't been affirmatively decided, it may retroactively disappear.

Could this happen to the backdoor Roth? I know they've clarified the "mega" backdoor Roth, making it perfectly valid, but AFAIK there hasn't been word on the backdoor Roth.

I think that's a legislative issue, so probably not.

I'm thinking of cases like tax credits for R&D, where a company claims the lab janitors salary because the lab isn't going to clean itself, but the IRS decides that salary doesn't count as a research cost. The law from congress doesn't usually spell such things out. Or it says "necessary personnel" but is a janitor necessary or not?

Intent is the big differentiator. In most jurisdictions, tax evasion is fraud. Fraud gets you in jail. Say you siphon off $1m by doing a deal somewhere, and you don't declare taxes on it. That's evasion.

Avoidance is making sure the proceeds of that deal, for example, end up in a foreign corporate entity with a lower tax rate, while not breaking any laws. Even if you end up paying (close to) nothing, the first will (possibly) land you in jail, the second won't.

The intent to defraud the government is very clear and easy to prove in the first example. In the second, you didn't actually break any laws, and even if the avoidance mechanism wouldn't hold up in court, you didn't actually defraud anyone -> you pay the normal tax rate / maybe some small penalty and some interest / you won't end up in jail.

tldr: don't break the law.. but you can have creative interpretations.

It is completely different. A freegan is a tax avoider.

"There is a rational case to make for someone being both fully culpable for wrongdoing while still remaining entitled to bounties they've satisfied."

Not really. Throwing them in jail sends the message that whistleblowing is looked down upon, and thus fewer people will do it. If the whistleblower doesn't have immunity from prosecution, the only way for them really to blow the whistle is to confess to a crime.

The mistake he made was implicating himself in a crime without getting the deal first. He should have gone in and said "I can testify to criminal behavior, but only if you'll give me immunity." That's probably what his bosses did.

It should be either-or. Either you take the time and the money, or you get off with a warning and don't make a dime from the IRS.

Why? Without that money, what's the incentive to blow the whistle? Not to mention that most whistleblowers are blacklisted, so they have a difficult time finding work after doing so. If they don't get that money, they'll likely end up under a bridge somewhere.

That also sets up a precedent where you can engage in criminal behavior as along as you rat your co-conspirators at a later date.

Confessing should be considered favorably during settlement, but a get out of jail card in every situation is ridiculous.

It's not the whistleblowing that's looked down on! It's the knowing and deliberate participation in something you acknowledge is a crime. This guy was extremely culpable for the offenses he participated in (read the other link posted on the thread).

It's worth noting that both Kathryn Keneally, the assistant attorney general mentioned in this article, and Kevin Downing, the lead prosecutor that got him jailed, both now work for private law firms helping large corporations shelter their taxes.

It's the elephant in the room, textbook revolving door regulatory capture.

So, let's ignore the SEC here for a second (which truly is a mess):

These folks are tax lawyers. They obey every ethical restriction placed on them by the state bars.

If they quit the federal government, where exactly are they to go to have a job?

The narrowness of career paths for highly specialized attorneys combined with the possibility of entering an altogether different remuneration universe at the law firms the DOJ is theoretically adversarial to is what makes the revolving door spin, and the spinning of the door is what turns "adversarial" into "theoretically adversarial". That is the problem. I didn't say there was an easy solution.

The generalization of this principal to other government institutions (agencies, departments, offices including even the presidency) is one of the great problems of governance of our time. You can take the remuneration discrepancy as the "0=1" conclusion of a reductio ad absurdum argument against unfettered capitalism or as an argument that resistance is futile.

"That is the problem. I didn't say there was an easy solution."

I do not believe there is any solution, actually, other than paying them enough to not want to go into private law firms :)

Please tell more.

I have no evidence they help large corporations shelter taxes, but kathryn went to dla piper: https://www.dlapiper.com/en/us/people/k/kathryn-keneally/

and Kevin went to Miller and Chevalier http://www.millerchevalier.com/OurPeople/KevinMDowning

Now, again, i'm a big believer in the various ethics rules bars have for what previous government lawyers are allowed to do and not do.

But they still have to be able to get jobs.

Kevin spent 16 years in government. It's not a blood oath not to go to a private law firm and be on the other side of the table, anymore than working at Google for 16 years is a blood oath to not go work at apple or facebook.

Arguments that they use their previous experience/knowledge to abuse the system (by getting favors, etc) need to be backed up with evidence, not handwaving, because they are serious allegations.

If they did, great, lock them up. But their skill sets prety much only lend them to two types of work: Prosecuting people for civil/criminal tax law, and defending people being prosecuted in civil/criminal tax law.

It's not like you can reasonably say "they used to work at the DOJ so now they have to go work at the zoo".

The argument isn't that using knowledge and skill gained working at DOJ/SEC in private industry is bad. The argument is that while working at DOJ/SEC you go soft on your adversaries because you know you'll need them to hire you at some point.

" The argument is that while working at DOJ/SEC you go soft on your adversaries because you know you'll need them to hire you at some point."

You don't have to go to private law firms if you don't want, of course.

But again, this argument is applicable to everything.

While working at Apple, you'll go soft on improving Siri because you may want to transition to getting paid to work more on Google Now at Google ...

Is there a situation where you think this principle isn't applicable?

(also, what is your proposed solution?)

Or maybe you come down hard on whistleblowers that anger your future clients.

Whistle blowing is a total crap shoot. We'd have much more of it if that wasn't the case.

If the data you provide is so damning you don't even need to prove that you're a reliable source, then you could submit it anonymously, as an encrypted block along with a public key to decrypt it.

Then, if things look favorable, you can step forward and prove your identity by supplying the matching private-key.

I expect the problem is that first "if" -- authorities may want to be super-sure of the origin of the information before they proceed with it.

Sorry, an encrypted block? A public key? Like, for my desk drawer? A private key? But i alreaady gave the public key out how can it be private too?

See where i'm going with this? You've put a massive technical stumbling block on non-technical folks in order to expose wrong-doing.

Only if they do it from scratch. However, most of the possible encryption options and complicated parts of PKI aren't needed or relevant for this use-case.

It's arguably even simpler than a zip-file utility when it comes to workflows.

I'm not sure if that would satisfy the legal requirements of the wistleblower statutes. Plus, I don't see how that protects you once you do come forward as the source. So likely you'd end up with all the downsides without any of the upsides.

It sounds like he didn't actually go to jail for the crime he blew the whistle on, per se, but for continuing to cover up part of the crime afterward by refusing to produce information they knew he had. Maybe all the folks who got non-prosecution agreements actually cooperated with investigators.

Maybe. Stories like this are what make me sick when I think about our Justice department. That, and Aaron Swartz...and a slew of other things I guess.

It's "Swartz". Aaron Swartz. Not "Schwartz".

May the Schwartz be with you.

That's what he said

No, it isn't. (I'm not hitting refresh on these things waiting for the corrections).

His explanation was good, that he needed to keep appearances and not leak to others he was co-operating with government. Any way, he had the last laugh, the DoJ is a bunch of political hacks who hate Whistle-blowers any way.

The way I read it, he wasn't actually hiding anyone. This reads like sarcasm to me:

> Yeah, I was hiding all right. Hiding by walking right up to the DOJ headquarters in Washington, D.C. and dropping this massive, calculated tax evasion scheme in their laps.

Of course that's sarcasm, but this part is not:

> they charged me with conspiracy to commit bank fraud for not giving up one of my clients.

I don't see any point where he denies that he refused to give up one of his clients, and he pleaded guilty. Taken as a whole, it's my impression that he really was holding back information, but he thinks that should have been forgiven because he gave much more and much better information than he held back.

"I’ve tried to invest the reward money wisely. I collect Formula One memorabilia and antique hockey gear and sweaters from the NHL’s Original Six teams."

I'm not sure if I understand the term "wisely" correctly.

I was so confused by the chronology, particularly with respect to smuggling diamonds in a toothpaste tube[1], which I'd read about previously.

What I can't figure out is if that evidence was actually retained and entered as evidence at trial, or if the image in the article I linked was a reconstruction.

[1] http://upstart.bizjournals.com/views/columns/2008/09/17/UBS-...

His book: http://lucifersbanker.com/

As secretary of state, in an unusual move Hillary Clinton intervened with UBS to help it out with the IRS and DOJ. He seems to imply that Hillary brokered the treaty to release the 52,000 names -- a deal which they backed out of citing Swiss law after only providing 4,500 names -- because of the global corporate elites tied to our government, politicians from all over the globe and CIA who would be implicated. He notes that the CIA funneled the money from Iran-Contra through a Swiss bank account, and the plane used to deliver the 400 million in unmarked cash to Iran came from Geneva. He also thinks it was the CIA that leaked the Panama Papers, selectively exposing names.

After Hillary's deal, the Swiss bank paid Bill Clinton $1.5 million for speaking gigs. Total donations by UBS to the Clinton Foundation grew from less than $60,000 through 2008 to a cumulative total of about $600,000 by the end of 2014, according the foundation and the bank.

There is no evidence of any link between Hillary's involvement in the case and the bank’s donations to the Bill, Hillary and Chelsea Clinton Foundation, or its hiring of Mr. Clinton. But her involvement with UBS is a prime example of how the Clintons' private and political activities overlap.

It should also be noted that in 2011 the Clinton Foundation announced a partnership with UBS on the CEO-UBS Small Business Advisory Program which connects "small businesses" with - One-on-one pro-bono strategic financial and business counseling - Access to the entire suite of UBS's resources, including senior leaders within the firm's marketing, human resources, operations and Investment Banking divisions - Opportunities to network with industry influencers and major decision makers in both the private and public sectors.

The ten small businesses enrolled in the program had average annual revenues of $8.44 million in 2010 and together employed a total of 400 people at the end of 2010. The entrepreneurs and their companies who participated are: Julie Azuma, Different Roads to Learning, Inc.; Dinesh and Josh Boaz, Direct Agents, Inc.; K.Y. Chow, GM Printing; Richelieu Dennis, Sundial Creations; Kenny Lao, Rickshaw Dumpling Bar; Tamara Mangum-Thomas, Sharpened Image, Inc.; Mike DiMarino, Linda Tool; Marjorie Perry, MZM Construction & Management Company, Inc.; Jeffrey Smalls, Smalls Electrical Construction, Inc.; and Larry Velez, Sinu.

Just to clarify a minor point -- the person he says threw her Blackberry across the room in frustration over his award is described by the NYT article as being frustrated because it was larger than her department's entire budget, not necessarily because he got an award at all.

And she threw it "across the table", not across the room as he stated.

Aha, but does he need to pay taxes on that $104 million? =)

Yes he does.

And this is just the tip of the ice berg. Think about all the scheming, scams, power mongering, corruption and outright crime that goes on in the banking business. Self regulation my ass. They're gambling on the whole planet basically. And ofc nothing will ever chance, because the banks own the goverments. A single "occupy wall street" protester will certainly get more time in the jail for minor offence than a bank exec would ever get for his crimes.

Fuck this guy. No, seriously, fuck this guy. Why in the hell would anybody who's not an asshole decide to aid and abet the state in its coercive expropriation of money? I find this guy repulsive.

Huh? He's the only person out of dozens/hundreds/thousands of employees who pursued. Everyone else is happy to have a comfy job that pays their bills, while burying their heads in the sand and praying that nobody shuts them down so they can keep their cushy salaries performing illegal work.

"Fuck this guy". No, fuck almost everyone else who works for these kinds of companies, pretending like they're not the scum of society.

Word to the wise: if you work for this kind of company, and do not have the gumption to stand and fight, get the hell out and run for the hills. You might just wind up being the scapegoat; better to get out and let the other willing participants take the fall.

'Illegal' does not mean immoral. I would dodge taxes if I could, as I don't much appreciate people robbing me.

I see your point and agree but it must be understood that at that time, what these banker did was not illegal.

Are you trying to argue that taxes are inherently bad or something? How should we pay for roads, bridges, schools, and all that?

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