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Lawyer who ran from EY tax shelter case gets 3 years

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A lawyer who spent more than a decade on the lam avoiding U.S. charges that he worked with partners at Big Four firm Ernst & Young LLP to develop and sell illegal tax shelters was sentenced to three years in federal prison.

David Smith pleaded guilty in February to a single count of filing a false tax return. He was initially indicted in 2008, but he fled to Vancouver ahead of the charges, selling his house in San Francisco and another in Marin County before going on the run. He fought extradition for 11 years before Canada’s top court handed him over to federal prosecutors in New York last July.

U.S. District Judge Sidney Stein in Manhattan handed down the sentence Monday, denying Smith’s request that he be sentenced to the 11 months he’d already served in New York’s Metropolitan Correctional Center. The three-year sentence was the maximum permitted under Smith’s plea agreement, and the judge said it was warranted because the lawyer was among the main facilitators of one of the largest tax-fraud schemes in U.S. history.

“I do find his conduct was very serious, long-running and caused great harm,” Stein said. “He was really a leader, a developer of this tax fraud scheme.”

The case was part of a major government crackdown on illegal tax shelters at the time. Four former EY partners were charged in 2007 with helping wealthy clients manufacture billions of dollars in paper losses that were used to offset their taxes. According to prosecutors, the scheme cost the government around $2 billion in lost revenue. Just two years earlier, federal prosecutors had targeted another $2 billion tax shelter ring, which resulted in Big Four firm KPMG LLP paying a $456 million fine.

Smith and Charles Bolton, an investment adviser, were also charged with participating in the EY scheme. The former partners were found guilty in 2009 though an appeals court later reversed convictions for two of them. Bolton and two other people pleaded guilty, but Smith went to Canada.

He told the judge on Monday that he did so not to avoid charges but because he wanted his daughters to grow up “in a different environment” after the Sept. 11, 2001, terrorist attacks. But he also argued that he feared prosecutors would renege on promises of leniency after he fully cooperated with their investigation.

Stein countered that the sale of tax shelters “certainly wasn’t tied to 9/11” and that Smith had the full opportunity to take the case to trial.

The case is U.S. v. Coplan, 07-cr-453, U.S. District Court, Southern District of New York (Manhattan).

Bloomberg News