There’s a rule that I’ve stated over and over in this blog: If it sounds too good to be true, it probably is. If you hear of an investment that pays 30% when the typical investment is paying 3%, there’s a problem. If you hear of a method of turning your lead into gold, it’s time to look again. And if someone tells you he has a “foolproof” method of turning your large capital gain into a non-event for taxes, it’s time to talk to someone else.
The last item is what got Quellos into trouble. There were parts of the firm that were very legitimate (those are now part of Black Rock, Inc.). However, their tax shelter business probably should have been renamed their tax fraud business because that’s what it was.
Eventually, the IRS and Department of Justice got word of the tax shelter tax fraud. With a huge loss to the government, two individuals–Jeff Greenstein and Charles Wilk–pleaded guilty to tax fraud. Besides agreeing to pay $7 million in fines, the two also agreed to give talks at their alma maters on tax fraud.
Mr. Greenstein spoke to the University of Washington business school last week. And the talk made people wonder how in the world people are so gullible. Bill Resler, who teaches tax research, is quoted by the Seattle Times, “The nature of the tax shelter was ridiculous; and even though they’d only been in graduate school for six weeks, they could tell that it stunk,” says Resler. “They could see that this so-called sophisticated tax shelter was a house of cards.”
Mr. Greenstein is the former CEO of Quellos; Mr. Wilk, who was a tax attorney for Quellos, won’t be talking to his alma mater, New York University. That school declined to have Mr. Wilk speak.
In any case, I was glad to see Mr. Resler noting that my truism applies in the real world: If it sounds too good to be true, it probably is. The sniff test is applied in the real world, too.