Justice Files Complaint Against Xxc3xa9lan

Justice Files Complaint Against Xxc3xa9lan

News story posted in U.S. District Court on 12 November 2004| comments
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The Justice Department has filed a complaint in U.S. district court against Xelan Inc., in which it alleges that Xelan and others allegedly sold abusive tax shelters to thousands of medical professionals. In one alleged fraudulent scheme, the defendants operate the Xelan Foundation as a donor-directed fund. The Foundation purportedly allows doctors to make tax-deductible donations, and then direct those donations to pay for the college tuition of the doctors' children (either as an outright payment to the college or university, or as a purported loan to the donor's child), or to pay the doctors for doing charitable, "pro bono," work.

United States v. L. Donald Guess, et al.; No. 04 CV 2184 W (AJB)

Full Text:

Date: Oct. 29, 2004


UNITED STATES OF AMERICA,
Plaintiff,
v.
L. DONALD GUESS, LESLIE S. BUCK, DAVID JACQUOT, MONTE T.
MELLON, G. THOMAS ROBERTS, CHRIS G. EVANS, NIGEL BAILEY,
DOCTORS BENEFIT INSURANCE COMPANY, LTD., DOCTORS BENEFIT
HOLDING COMPANY, DOCTORS INSURANCE SERVICES, INC., Xxc3x89LAN
INVESTMENT SERVICES, INC., Xxc3x89LAN ANNUITY CO., LTD.,
Xxc3x89LAN ADMINISTRATIVE SERVICES, INC., Xxc3x89LAN FOUNDATION,
INC., Xxc3x89LAN OF TEXAS, INC., Xxc3x89LAN, INC., Xxc3x89LAN,
THE ECONOMIC ASSOCIATION OF HEALTH PROFESSIONALS, INC.,
PYRAMIDAL FUNDING SYSTEMS, INC., DBA Xxc3x89LAN INSURANCE SERVICES,
Xxc3x89LAN PENSION SERVICES, INC., Xxc3x89LAN FINANCIAL
PLANNING, INC., EURO-AMERICAN TRUST COMPANY, AMS TRUST COMPANY,
AND JOHN DOES, UNKNOWN PERSONS WHO ARE TRUSTEES OF Xxc3x89LAN LONG
TERM CARE TRUST, Xxc3x89LAN DISABILITY EQUITY TRUST, Xxc3x89LAN
MALPRACTICE EQUITY TRUST, AND Xxc3x89LAN MEDICAL SAVINGS
EQUITY TRUST,
Defendants


UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF CALIFORNIA

FILED UNDER SEAL

COMPLAINT OF THE UNITED STATES PURSUANT TO
18 U.S.C. § 1345 AND 26 U.S.C. § 7402(a)
FOR INJUNCTIVE RELIEF

COMES NOW the United States of America ("United States"), by and through its undersigned attorneys, and for its complaint against the defendants alleges as follows:


JURISDICTION

1. This is a civil action brought by the United States against defendants L. Donald Guess, Leslie S. Buck, David Jacquot, Monte T. Mellon, G. Thomas Roberts, Chris G. Evans, Nigel Bailey, Doctors Benefit Insurance Company, Ltd., Doctors Benefit Holding Company, Doctor's Insurance Services, Inc., xxc3©lan Investment Services, Inc., xxc3©lan Annuity Co., Ltd., xxc3©lan Administrative Services, Inc., xxc3©lan Foundation, Inc., xxc3©lan of Texas, Inc., xxc3©lan, Inc.; xxc3©lan, The Economic Association of Health Professionals, Inc., Pyramidal Funding Systems, Inc., dba xxc3©lan Insurance Services, xxc3©lan Pension Services, Inc., xxc3©lan Financial Planning, Inc., Euro-American Trust Company [Tortola, BVI], AMS Trust Company, and the yet unknown trustees of the xxc3©lan Long Term Care Trust, xxc3©lan Disability Equity Trust, xxc3©lan Malpractice Equity Trust, xxc3©lan Medical Savings Equity Trust, pursuant to the fraud injunction statute, 18 U.S.C. § 1345, and the equitable jurisdiction vested in district courts by the Internal Revenue Code, 26 U.S.C. § 7402(a).

2. The court has jurisdiction over this action pursuant to 18 U.S.C. § 1345, 26 U.S.C. § 7402(a), and 28 U.S.C. §§ 1331 and 1345.


VENUE

3. Venue lies in this district pursuant to 28 U.S.C. § 1345(a)(1) and 28 U.S.C. § 1391(b)(2) as the judicial district in which a substantial part of the events or the omissions giving rise to the action occurred.


PARTIES

4. Plaintiff is the United States.

5. Defendant L. Donald Guess is a citizen of the United States and resides in this judicial district. On information and belief, Guess controls -- directly or indirectly -- some or all of the entities named as defendants in this action.

6. Defendant Leslie S. Buck is a citizen of the United States and resides in the State of Maryland. On information and belief, Buck controls -- directly or indirectly -- some or all of the entities named as defendants in this action.

7. Defendant David Jacquot, a former resident of California who now resides in Idaho, is a former general counsel of the xxc3©lan family of companies.

8. Defendant Monte T. Mellon, who resides in California, is a former Director of the Department of Client Services for xxc3©lan, Inc., and is presently a Director of defendant Doctors Benefit Insurance Company, Ltd. The United States is informed and believes that Mellon has an ownership interest in at least two of the entities named as defendants in this action, Doctors Benefit Holding Company, and Doctors Benefit Insurance Company, Ltd.

9. Defendant G. Thomas Roberts, who on information and belief resides in Pennsylvania, is a director of defendant Doctors Benefit Insurance Company, Ltd.

10. Defendant Chris G. Evans, who on information and belief resides in Barbados, is vice-president and director of defendant Doctors Benefit Insurance Company, Ltd.

11. Defendant Nigel Bailey, who on information and belief resides in Barbados, is a vice-president of defendant Doctors Benefit Insurance Company, Ltd.

12. On information and belief, defendant Doctors Benefit Insurance Company, Ltd., is a corporation that purports to have been established under the laws of Barbados, and purports to be operated in Barbados. On information and belief, defendant Doctors Benefit Insurance Company is, in fact, operated by one or more of the individual defendants in this case, including Leslie S. Buck. On information and belief, Doctors Benefit Insurance Company is operated, at least in part, through the other defendants in this case.

13. On information and belief, defendant Doctors Benefit Holding Company, is a corporation that purports to have been established under the laws of Barbados, and purports to be operated in Barbados. On information and belief, defendant Doctors Benefit Holding Company, which is owned by a number of xxc3©lan doctors, including defendant Monte T. Mellon, owns defendant Doctors Benefit Insurance Company.

14. On information and belief, that defendant Doctors Insurance Services, Inc. is a corporation organized under the laws of the State of Maryland, and is owned and operated by defendant Leslie S. Buck.

15. Defendants xxc3©lan Investment Services, Inc., xxc3©lan Administrative Services, Inc., an Foundation, Inc., xxc3©lan of Texas, Inc., xxc3©lan, Inc.; xxc3©lan, The Economic Association of Health Professionals, Inc., Pyramidal Funding Systems, Inc., dba xxc3©lan Insurance Services, xxc3©lan Pension Services, Inc., xxc3©lan Financial Planning, Inc., are corporations with their principal place of business at 401 "A" Street, 22nd Floor, San Diego, California. They are presently either owned or controlled -- directly or indirectly -- by defendant L. Donald Guess.

16. The United States is informed and believes that defendants xxc3©lan Annuity Co., Ltd. Euro-American Trust Company [Tortola, BVI], AMS Trust Company, xxc3©lan Long Term Care Trust, xxc3©lan Disability Equity Trust, xxc3©lan Malpractice Equity Trust, and xxc3©lan Medical Savings Equity Trust are corporations or trusts that purport to be established under the laws of either the British Virgin Islands, the United States Virgin Islands, or Barbados, at the direction of one or more of the individual defendants in this case, including L. Donald Guess, and other defendants whose identities are not yet known to the plaintiff. The plaintiff will seek to amend its complaint to add these additional defendants, when it learns their identities.


THE SCHEMES TO DEFRAUD

17. From 1998 (and perhaps earlier) on, defendants have been operating a number of schemes to defraud members of the public -- medical doctors, in particular -- by soliciting their participation in a number of purported insurance, retirement, investment, and charitable giving arrangements. These arrangements are not what they purport to be, but have been established and used for purposes other than as presented to the doctors. The defendants have also established and used these schemes to defraud the United States of taxes, by establishing, selling and maintaining non-tax-deductible retirement savings plans in the guise of tax-deductible insurance and charity programs.

18. From 1998 (and perhaps earlier) up until the present, defendants Guess and others have been aggressively soliciting medical doctors around the country, to participate in schemes that Guess and xxc3©lan represent to prospective participants are legal methods to amass savings for retirement, with tax-deductible dollars. These xxc3©lan "tax-deductible savings programs" involve -- for the most part -- allegedly supplemental insurance arrangements, that purport to provide supplemental insurance to Subchapter C corporations that doctors set up under xxc3©lan's guidance. Each doctor's corporation pays a minimum of $4,000, and up to hundreds of thousands of dollars, each year to buy so-called supplemental insurance through xxc3©lan from a "captive" offshore company called Doctors Benefit Insurance Co. (DBIC). DBIC, which purports to be an "independent" Barbados- licensed insurance company, then issues "certificates of insurance" purporting to evidence insurance.

19. The defendants fraudulently advise doctors that their subchapter C corporations can deduct 100% of the premiums as "ordinary and necessary" business expenses under one section of the Internal Revenue Code (26 U.S.C. § 162), though the "premiums" bear no relation to the cost of any insurance, but merely reflect what the doctor believes he can afford to save towards retirement in any given year. The defendants fraudulently fail to disclose that another section of the Internal Revenue Code (26 U.S.C. § 419(a)) places strict limits on the deductibility of insurance premiums, and that the payments that xxc3©lan doctors make for the xxc3©lan supplemental insurance programs are not fully deductible because of that section. The defendants also fraudulently fail to disclose that xxc3©lan doctors may not be able to exclude from their gross income all of the money that their subchapter C corporations pay to xxc3©lan for this "supplemental insurance." In furtherance of this scheme, defendant Roberts has prepared "tax opinion letters" that fraudulently omit the correct tax advice, and fraudulently fail to disclose his relationship with xxc3©lan, and his role as a Director of DBIC.

20. The defendants and their agents present these programs orally at "seminars" for doctors who were invited by mail, by wire and in person, as well as through a network of financial counselors who solicit prospective participants by mail, by wire, and in person. At these seminars, and through mail and wire communications, Guess, Mellon and others acting in concert with them make the following false and fraudulent representations to induce potential participants to join xxc3©lan:

a. that 100% of the payments to the programs are tax deductible;

b. that each doctor maintains ownership and control over the funds that are paid the programs, and held in a segregated account in the doctor's name;

c. that all the funds that doctors have paid into the programs -- minus commissions and fees disclosed to the doctors -- are invested according to the doctors' choice, and that the funds are available for the doctors to withdraw at any time;

d. that the programs provide "Maximum Safety," referring in part to safety from IRS audit, when Guess and others know that the programs are likely to be -- and have, in fact been -- audited by the Internal Revenue Service, and that doctors may be at risk for substantial additional federal income taxes, penalties and interest;

21. At these seminars, and through mail and wire communications, Guess, Mellon and others acting in concert with them falsely and fraudulently fail to disclose the following material facts to potential participants:

a. failing to disclose that Guess, the founder of xxc3©lan, receives commissions on all insurance products sold by xxc3©lan;

b. failing to disclose that Guess, the founder of xxc3©lan, receives commissions on the management of funds held by xxc3©lan- affiliated entities Doctors Benefit Insurance Company, Ltd., Inc. and xxc3©lan Foundation;

c. failing to disclose that funds invested in the programs are used to pay the legal fees and other liabilities of xxc3©lan and its affiliated entities; and

d. failing to disclose that funds invested in the programs were paid to Buck in his individual capacity.

22. In another fraudulent xxc3©lan scheme, defendant Guess and others acting in concert with him have fraudulently represented to doctors that they can generate significant tax savings by participating in a xxc3©lan-sponsored "welfare benefit plan" authorized by a section of the Internal Revenue Code, 26 U.S.C. § 419A. The defendants have fraudulently advised doctors that their subchapter C corporations can pay into the xxc3©lan 419 Plan with large amounts of tax-deductible dollars, which the Plan uses to purchase insurance from Indianapolis Life Insurance Co. The defendants fraudulently failed to advise doctors that, at the time the Plan was established, the IRS had issued temporary regulations -- which have since become permanent -- that disallow the tax benefits the defendants touted to doctors. The defendants also fraudulently failed to advise doctor that Guess was receiving commissions on the Trust's purchase of insurance from Indianapolis Life, practice that is made illegal by 18 U.S.C. § 1954. Finally, the defendants fraudulently advised doctors that the policy benefits vest after five years, that the doctors are the beneficiaries of the policies, and that the amount that xxc3©lan charges for the policies reflects the cost of the premiums. In fact, none of those material representations is true.

23. In another fraudulent scheme, defendants operate what purports to be a public charity, the xxc3©lan Foundation. Established and operated as a donor-directed fund, the Foundation purportedly allows doctors to make tax-deductible donations, and then direct those donations to pay for the college tuition of the doctors' children (either as an outright payment to the college or university, or as a purported loan to the donor's child), or to pay the doctors for doing charitable, "pro bono," work. Operated in this way, the Foundation fraudulently advises doctors that they can pay their children's college tuition with tax-deductible "donations," pay themselves with tax-deductible donations for doing "volunteer" work for charitable organizations, and claim a charitable contribution deduction for payments to the Foundation.

24. By engaging in this conduct, defendants Guess, Buck, Jacquot, Mellon, Roberts, and others acting in concert with them, have also engaged in a conspiracy to defraud the United States by selling the xxc3©lan insurance and charitable giving programs as legitimate tax reduction strategies, knowing that -- as designed and operated -- the xxc3©lan programs do not produce the tax benefits they have touted to xxc3©lan doctors. In addition, the defendants and others have perpetuated these frauds; by attempting to prevent the doctors and other law enforcement officials from learning the underlying facts about xxc3©lan's programs. In that respect, defendants Guess, Buck, Jacquot, Mellon, Roberts and others have engaged in conduct designed to obstruct IRS audits by preventing or dissuading xxc3©lan doctors from seeking their own independent financial and legal advice, making knowingly false statements in connection with Internal Revenue Service summons enforcement actions, and making knowingly false statements in connection with pending bankruptcy proceedings involving four of the defendants, xxc3©lan, Inc., Pyramidal Funding Systems, Inc., xxc3©lan Pension Services, Inc., and xxc3©lan Financial Planning, Inc.

25. Over the past three years, some xxc3©lan doctors have complained to the defendants about the xxc3©lan programs in which they have participated. In some cases, those complaints have taken the form of lawsuits filed against one or more of the defendants, seeking damages for fraud and other misconduct. In order to prevent other xxc3©lan doctors from learning of xxc3©lan's fraud, the defendants have liquidated funds controlled by DBIC -- in violation of representations they have made to other doctors who participate in xxc3©lan programs -- in order to pay the complainants. The defendants have made these payments on the condition that the complainants remain silent about their complaints, and do not disclose their allegations or the settlement to law enforcement agencies or to other xxc3©lan doctors.


THE CONSEQUENCES TO DOCTORS AND THE UNITED STATES

26. On information and belief, the defendants presently control assets with a present value of approximately $600 million. Those assets reflect funds that xxc3©lan doctors paid to participate in one or more of xxc3©lan's fraudulent tax reduction schemes, and earnings on those funds. Most of the funds are invested in accounts maintained at The Vanguard Group, a large investment firm based in the Philadelphia area. Other funds are held in bank accounts located in the United States, in the British Virgin Islands and, perhaps, elsewhere. To the extent the information is known to the United States, the accounts and other funds are located in the places identified in Exhibit A attached hereto.

27. As alleged earlier, the defendants have falsely represented to doctors that funds paid into xxc3©lan's fraudulent tax reduction schemes are held in "segregated" accounts, in the doctor's name and under the doctor's control. In fact, the defendants have taken funds that doctors have paid into xxc3©lan's fraudulent tax reduction schemes, held them in non-segregated accounts, exercised control over them, and diverted them to their personal use, to the use of other xxc3©lan doctors, and to other unknown uses that were not disclosed to or authorized by the doctors. Those diversions of funds have jeopardized the safety of the doctors' funds, and have reduced the likelihood that the doctors will eventually be able to recover the millions of dollars they have paid into xxc3©lan.

28. No defendant had any lawful right to any of the doctors' funds. On information and belief, no defendant was a bona fide transferee for value of any of the doctors' funds or any interest in real or personal property acquired with those funds. On information and belief, no defendant gave reasonably equivalent value or any other consideration in exchange for the doctors' funds which may be traceable to interests in real or personal property acquired with those funds.

29. The defendants' diversion of doctors' funds also reduces the likelihood that the xxc3©lan doctors will have assets readily available from which they can pay the additional taxes, penalties and no interest that they are likely to owe on the improper tax benefits claimed from their participation in xxc3©lan's fraudulent tax reduction schemes.

30. The Internal Revenue Service estimates that the defendants have sold their fraudulent tax reduction schemes to approximately 3,900 -- 4,100 doctors. Of that number, the defendants sold one or more fraudulent supplemental insurance schemes to approximately 2,800 doctors, the fraudulent 419A Plan to approximately 700-800 doctors, and the fraudulent charitable foundation scheme to approximately 300- 400 doctors.

31. Assuming that each xxc3©lan doctor has improperly deducted or excluded from their taxable income $100,000 per year as a result of their participation in one or more of xxc3©lan's fraudulent tax reduction schemes, that each of those doctors pays income tax at a 35% marginal rate, and that the IRS may assess additional taxes, penalties and interest against each doctor for the preceding three years, these xxc3©lan tax reduction schemes have cost the United States approximately $420 million in income taxes, plus any penalties and interest that might be due.

32. Many of the doctors who have purchased xxc3©lan's fraudulent tax reduction schemes have placed a significant portion of their assets in accounts managed by one or more of the defendants. Both the xxc3©lan doctors and the Internal Revenue Service may eventually have to look to those xxc3©lan-held accounts as a source of paying taxes, penalties and interest that the IRS, based on information currently available to it, expects to assess against xxc3©lan doctors.


CAUSES OF ACTION

COUNT 1

Fraud Injunction Statute -- 18 U.S.C. § 1345

33. Paragraphs 1 through 32 of this complaint are hereby realleged and incorporated as though set forth in full herein.

34. Beginning at least as early as 1998 and continuing up to the present, defendants L. Donald Guess, Leslie S. Buck, David Jacquot, Monte T. Mellon, G. Thomas Roberts, and others devised and intended to devise a scheme or artifice to defraud others of money or property, and used and caused others to use the United States mails and/or interstate wire communications in furtherance of the scheme. The targets of this fraudulent scheme are members of the public, and doctors in particular. This mail and wire fraud scheme violates 18 U.S.C. §§ 1341 and 1343.

35. Beginning at least as early as 1998 and continuing up to the present, defendants L. Donald Guess, Leslie S. Buck, David Jacquot, Monte T. Mellon, G. Thomas Roberts, and others have been engaged in a conspiracy to defraud the United States and aid others to defraud the United States of federal income taxes, by designing, selling and implementing the xxc3©lan fraudulent tax reduction schemes alleged above. That conduct violates 18 U.S.C. § 371.

36. Defendants L. Donald Guess, Leslie S. Buck, David Jacquot, Monte T. Mellon, G. Thomas Roberts, and others received the proceeds of this fraudulent scheme and are continuing to dispose of those proceeds. In addition, defendants L. Donald Guess, Leslie S. Buck, David Jacquot, Monte T. Mellon, G. Thomas Roberts, and others are continuing to alienate and dispose of property which is traceable to the proceeds of the fraudulent scheme.

37. Defendants' scheme to defraud the public and the United States is continuing.

38. Unless restrained by this Court, defendants will continue to promote, sell and service to members of the public in violation of 18 U.S.C. §§ 1341 and 1343, to conspire to operate a scheme to defraud the United States in violation of 18 U.S.C. § 371, and will continue to alienate or dispose of the proceeds of these fraudulent schemes.

39. The Attorney General is authorized under 18 U.S.C. § 1345 and Federal Rule of Civil Procedure 65 to commence an action for an immediate injunction, restraining order, preliminary injunction, permanent injunction, prohibition, the appointment of a receiver, and other measures against these defendants to prevent the continuing injury now occurring to members of the public and to the United States.

40. Pursuant to 18 U.S.C. § 1345, plaintiff United States is entitled to an immediate injunction, restraining order, prohibition, the appointment of a receiver, and other measures against these defendants as warranted to prevent the continuing and substantial injury to the United States and to members of the public.


COUNT 2

Tax injunction Statute -- 26 U.S.C. § 7402(a)

41. Paragraphs 1 through 40 of this complaint are hereby realleged and incorporated as though set forth in full herein.

42. Defendants L. Donald Guess, Leslie S. Buck, Monte T. Mellon, G. Thomas Roberts, Chris G. Evans, Nigel Bailey, and others presently control approximately $600 million in funds held for the benefit of xxc3©lan doctors. If not dissipated, diverted, stolen, or wasted, those funds could be used to pay the substantial tax liabilities that xxc3©lan doctors will likely owe as a result of the IRS disallowing tax benefits the doctors improperly claimed from participating in xxc3©lan's fraudulent tax reduction schemes.

43. It is necessary or appropriate for the administration of the internal revenue laws for the court to freeze the funds controlled by the defendants, so that the xxc3©lan doctors for whose benefit the funds are held may have access to the funds to pay anticipated tax deficiencies, and so that the Internal Revenue Service will be able to collect those taxes.

44. Pursuant to 26 U.S.C. § 7402(a), plaintiff United States is entitled to an immediate injunction, restraining order, prohibition, and other measure against these defendants as warrant to aid in the administration of the internal revenue laws, and to prevent the continuing and substantial injury to the United States and to members of the public. The Secretary of the Treasury or his delegate has authorized this action.

45. Pursuant to 26 U.S.C. § 7402(a), the United States is entitled to the appointment of a receiver to take control of all property acquired in these fraudulent schemes, to make an accounting, and to preserve that property for tax administration purposes. The United States is also entitled to an order requiring the defendants to identify property located outside the United States, to repatriate that property, to remain within the United States until after the receiver has identified and secured all property acquired in these fraudulent schemes. Finally, the United States is entitled to any other orders necessary to aid and assist the receiver to identify, obtain control over, and account for the xxc3©lan assets and claims to those assets.


PRAYER FOR RELIEF

WHEREFORE, the United States requests the following relief against the defendants:

46. Plaintiff asks the Court to enjoin the defendants, their agents, servants, employees and all individuals acting in concert, with them from selling, assigning, hypothecating, pledging, withdrawing, transferring, removing, dissipating, or disposing of any or all of their interest in property that they obtained as a result of their fraudulent conduct.

47. Plaintiff asks the Court to appoint a receiver to immediately take control of all property generated from these fraudulent schemes, and to make an accounting of the disposition of all the property acquired or obtained in these fraudulent schemes.

48. Plaintiff asks the Court to order the defendants to repatriate all property generated from these fraudulent schemes, and all proceeds from the sale of such property, which has been removed from the United States or transferred to persons or entities outside the United States.

49. Plaintiff asks the Court to enter a writ of ne exeat republica, ordering the individual defendants to surrender their passports, and enjoining the individual defendants from leaving the United States until after the receiver has identified and secured all property acquired in these fraudulent schemes, except as allowed by this Court.

50. Plaintiff asks the Court to grant such other and further relief as it deems just and proper to prevent a continuing and substantial injury to members of the public and the United States.

DATED: October 29, 2004

STUART D. GIBSON
Senior Litigation Counsel
Department of Justice, Tax
Division

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