Text of Hubbell Indictment Thursday, April 30, 1998 The following are federal tax evasion and fraud charges against former Justice Department official Webster L. Hubbell, his wife, Suzanna, his Little Rock lawyer and his accountant. A grand jury in Washington handed up the indictment April 30. See The Post's May 1 story for more details.
IN THE UNITED STATES DISTRICT COURT
UNITED STATES OF AMERICA
THE GRAND JURY CHARGES:
1. WEBSTER L. HUBBELL was an attorney at the Rose Law Firm in Little Rock, Arkansas. In 1993, he became Associate Attorney General at the Department of Justice.
2. In 1994, WEBSTER L. HUBBELL resigned from the Department of Justice. In late 1994, WEBSTER L. HUBBELL pled guilty in connection with him fraudulent billing during 1989-1992 of almost $400,000 at the Rose Law Firm.
3. The fraudulent billing resulted in additional income that WEBSTER L. HUBBELL and his wife, SUZANNA W. HUBBELL, did not report on their state and federal tax returns. This additional unreported income, in turn, created additional tax due.
4. In addition to owing taxes, interest and penalties for 1989-1992, the HUBBELLs did not pay a substantial portion of their tax liabilities for 1994 and 1995.
5. Beginning in 1995, the Internal Revenue Service, the State of Arkansas, and the District of Columbia took steps to collect the HUBBELLs' delinquent taxes. By late 1997, the taxes, interest and penalties for 1989-1992, 1994, and 1995 exceeded $894,000.
6 a. During 1994 through 1997, WEBSTER L. HUBBELL, SUZANNA W. HUBBELL, MICHAEL C. SCHAUFELE (a certified public accountant and HUBBELL friend), and CHARLES C. OWEN (an attorney and HUBBELL friend), and others, took various steps to conceal the HUBBELLs' income, and to impede the ascertainment, assessment. and collection efforts of certain creditors, including the Internal Revenue Service (IRS), the State of Arkansas, the District of Columbia, and the Rose Law Firm. These steps included, but were not limited, to, the following:
b. Between 1994 through 1997, WEBSTER L. and SUZANNA W. HUBBELL had income in excess of one million dollars, but made only modest tax payments to the Internal Revenue Service toward paying their 1989-1992, 1994 and 1995 tax liabilities.
c. During the same period, the HUBBELLs spent over $750,000 on personal items. The HUBBELLs liquidated assets and spent down their funds which reduced the amount of money available to the IRS and other government creditors.
d. MICHAEL C. SCHAUFELE prepared and filed false federal tax returns for the HUBBELLs for 1994, 1995, and 1996, which understated income and tax.
e. MICHAEL C. SCHAUFELE, assisted by CHARLES C. OWEN, created and used bank accounts which assisted the HUBBELLs in concealing funds from the Internal Revenue Service and other creditors.
f. SUZANNA W. HUBBELL and CHARLES C. OWEN provided false and incomplete financial information to the IRS to conceal the existence of a bank account and to conceal the existence of trusts of which the HUBBELLs were beneficiaries.
g. CHARLES C. OWEN created a company called Bridgeport Group, LLC (Bridgeport), and assisted MICHAEL C. SCHAUFELE in setting up a Bridgeport bank account to conceal funds from and impede the ascertainment, assessment, and collection efforts of the IRS, the State of Arkansas, the District of Columbia and the Rose Law Firm.
7. Through these and other efforts, the HUBBELLs attempted to impede and impair these creditors and pay substantially less money than they owed and were able to pay.
8. From in or about 1973 through in or about 1992, WEBSTER L. HUBBELL was an attorney in the Rose Law Firm of Little Rock, Arkansas.
9. In or about January 1993, WEBSTER L. HUBBELL began his employment with the United States Department of Justice.
10. In or about May 1993, WEBSTER L. HUBBELL was confirmed as an Associate Attorney General at the Department of Justice.
11. In or about March 1994, WEBSTER L. HUBBELL announced his resignation from the Department of Justice, which took effect in April 1994.
12. In or about March 1994, there was a meeting at the White House, at which was discussed the issue of whether WEBSTER L. HUBBELL should resign due to allegations concerning HUBBELL's possible over billing of the Rose Law Firm and its clients while he worked there. Subsequently, one or more individuals suggested that efforts be taken to assist WEBSTER L. HUBBELL in obtaining work.
13. At the time WEBSTER L. HUBBELL resigned from the Department of Justice, the Rose Law Firm had already started examining HUBBELL's prior billing practices at the Firm. The Rose Law Firm started its inquiries in approximately Spring 1993, and continued to make inquiries of HUBBELL concerning possible fraudulent billing of personal expenses to clients and the Firm.
14. In or about May 1994, a Special Prosecutor served WEBSTER L. HUBBELL with a federal grand jury subpoena commanding HUBBELL to produce certain financial information, including tax return information and information relating to his billing practices.
15. Beginning in or about April 1994, WEBSTER L. HUBBELL commenced holding himself out as a consultant. From April 1994, through December 1994, HUBBELL received approximately $450,010 in connection with his "consulting" business. He only reported approximately $376,075 of these payments on his federal tax return. WEBSTER L. HUBBELL made zero estimated tax payments to the IRS concerning his 1994 consulting income and zero tax payments with his 1994 return.
16. Approximately 15 clients paid WEBSTER L. HUBBELL consulting income in 1994. The fees ranged between $5,000 and $100,000. WEBSTER L. HUBBELL performed little or no work for some of these payments. The payors of these fees included Hong Kong China Limited ($100,000), Revlon ($62,775), and others.
17. In or about September 1994, the Office of the Independent Counsel notified WEBSTER L. HUBBELL that it could prove HUBBELL had intentionally falsely billed in excess of $350,000 to the Rose Law Firm and/or certain of its clients. The Office of the Independent Counsel further advised WEBSTER L. HUBBELL that his anticipated additional tax liability for 1989-1992 would be substantial and in excess of $100,000.
18. On December 6, 1994, WEBSTER L. HUBBELL pled guilty to a two-count Criminal Information filed in the United States District Court for the Eastern District of Arkansas in Little Rock, Arkansas, charging him with one count of willful tax evasion for 1992 and one count of mail fraud concerning the fraudulent billing of approximately $394,000 between 1989-1992, and the failure to include that money as income. United States v. WEBSTER HUBBELL, No. LR-CR-94-241, United States District Court, Eastern District of Arkansas, Western Division.
19. In or about December 1994 through January 1995, WEBSTER L. HUBBELL and MICHAEL C. SCHAUFELE executed three trust agreements designating SCHAUFELE as trustee, MICHAEL C. SCHAUFELE was a resident of Little Rock, Arkansas, a Certified Public Accountant (CPA), and a partner at L. Cotton Thomas Company. SCHAUFELE was a long-time friend of WEBSTER L. HUBBELL.
a. The first trust agreement, executed on or about December 30, 1994, was titled the Webster Hubbell Legal Expense Trust.
b. The second trust agreement, executed on or about. January 19, 1995, was titled the Hubbell Children's Education Trust.
c. The third trust agreement, executed on or about January 19, 1995, was titled the Hubbell Family Support Trust.
20. On or about January 24, 1995, MICHAEL C. SCHAUFELE opened three non-interest bearing bank accounts at Metropolitan National Bank, Little Rock, Arkansas.
a. One account was styled, "WEBSTER HUBBELL Legal Expense Trust, MICHAEL C. SCHAUFELE, Trustee."
b. A second account was styled, "HUBBELL Children's Education Trust, MICHAEL C. SCHAUFELE Trustee."
C. A third account was styled "HUBBELL Family Support Trust ... MICHAEL C. SCHAUFELE Trustee."
21. The signatories on these accounts were SCHAUFELE and his secretary. In some instances, SCHAUFELE transferred funds into his interest-bearing account.
22. Under the terms of the Children's Education Trust agreement, money contributed to the trust was to be used for the HUBBELL children's education. In some instances, funds were transferred from the Education Trust account to another account SCHAUFELE opened in 1996, and were then spent on living expenses for WEBSTER L. and SUZANNA W. HUBBELL.
23. On June 28, 1995, HUBBELL was sentenced on his two-count Criminal Information by the Honorable George Howard, Jr., Senior Judge, United States District Court, Eastern District of Arkansas, to 21 months' incarceration.
24. Prior to reporting to federal prison, WEBSTER L. HUBBELL wrote a handwritten sheet which purported to list all of his consulting income by client when in fact it only listed some of his income. The sheet also listed purported business expenses. HUBBELL failed to include income received from five clients, which totaled approximately $74,000. WEBSTER L. HUBBELL provided this hand-written sheet to MICHAEL C. SCHAUFELE for SCHAUFELE's use in preparing WEBSTER L. and SUZANNA W. HUBBELL's 1994 joint individual income tax, Form 1040. SCHAUFELE had prepared the HUBBELLs' tax returns for a number of years.
25. In or about August 1995, pursuant to the obligations of the Plea Agreement, WEBSTER L. HUBBELL filed and caused to be filed, Amended U.S. Individual Income Tax Returns for the years 1989-1992.
26. As reported on the amended federal returns, the unreported income from HUBBELL's embezzlement resulted in additional tax, exclusive of interest and penalties of,
1989 - $25,403.00,
1990 - $37,552.00,
1991 - $66,529.00, and,
1992 - $48,476.00.
Total - $177,960.00.
27. The HUBBELLs made no tax payments with the amended federal tax returns, despite having substantial cash available.
29. On or about August 7, 1995, WEBSTER L. HUBBELL reported to the Federal Correctional institution in Cumberland, Maryland to begin serving his sentence.
29. On or about October 2, 1995, WEBSTER L. HUBBELL caused SCHAUFELE to prepare and file Amended Arkansas tax returns for 1989, 1990, 1991, 1992, and a nonresident Arkansas tax return for 1994.
The returns reported additional tax due of:
1989 - $5,503,
1990 - $8,322,
1991 - $14,753,
1992 - $10,510, and
1994 - $1,742
Total - $40,830.
The HUBBELLs did not make any payments on these additional tax liabilities.
30. On or about October 18, 1995, WEBSTER L. HUBBELL filed, and caused to be filed, a false and fraudulent joint U.S. Individual Income Tax Return, Form 1040, for the calendar year 1994. The return was signed by SUZANNA W. HUBBELL on behalf of WEBSTER L. HUBBELL and herself. This tax return reported Schedule C gross income from WEBSTER L. HUBBELL's "consulting" business of $376,075. This Schedule C and tax return failed to report "consulting" income from certain clients of approximately $74,000. This Schedule C and tax return also overstated certain business expenses by claiming as business expenses certain personal travel expenses for HUBBELL's wife and children to various locations including Greece and the Gulf Coast of Florida.
31. WEBSTER L. and SUZANNA W. HUBBELL reported total tax on the 1994 return of $141,432. The HUBBELLs made no tax payments with the tax return. The only tax applied to the 1994 return was $1,434 withheld from the W-2 wages of SUZANNA W. HUBBELL at the United States Department of the Interior, $7,111 withheld from the W-2 wages of WEBSTER L. HUBBELL at the Department of Justice prior to his April 1994 resignation, and $577 withheld from a gross distribution of the Thrift Savings Plan of WEBSTER L. HUBBELL, for a total of $9,122. WEBSTER L. and SUZANNA W. HUBBELL made no estimated or any other tax payments toward their joint 1994 additional tax due and owing of $136,345.
32. In order to extend the filing deadline for the 1994 federal tax return beyond April 15, 1995, SCHAUFELE's accounting firm filed an extension application, Form 4868. The extension application listed the estimated tax liability as $40,000. The HUBBELLs did not include the required payment with the extension application. The extension expired on August 15, 1995. The HUBBELLs filed their 1994 return on or about October 18, 1995.
33. The HUBBELLs made no estimated payments on their 1994 tax liability, did not make any payments when they applied for extensions, and did not include any payments when they actually filed the 1994 return. WEBSTER L. and SUZANNA W. HUBBELL received substantial income during 1994 and 1995 from which they could have made payments to the Internal Revenue Service to reduce their 1989-1992 and 1994 tax liabilities.
a. WEBSTER L. HUBBELL received gross income (before expenses) in 1994 from "consulting" totaling approximately $450,010.00. The consulting income derived from 15 sources, including, but not limited to,
1. Hong Kong China Limited (Riady) - $100,000.00,
2 Revlon - $62,775.00.
WEBSTER L. HUBBELL's net consulting income was approximately $405,919.95.
b. WEBSTER L. HUBBELL also received income from the withdrawal of pension and annuity funds from the ROSE LAW FIRM of approximately $41,886.00 in 1994.
c. WEBSTER L. HUBBELL also received wages in 1994 from the Department of Justice prior to his resignation of $39,634.00.
d. WEBSTER L. HUBBELL also received 1994 interest income of $13,099.00, and dividend income of $20.00.
e. WEBSTER L. HUBBELL also received capital gains in 1994 of approximately $16,957.00.
f. SUZANNA W. HUBBELL received wages from the Department of the interior in 1994 of $13,899.00.
The HUBBELLs' total 1994 income was approximately $531,414.95.
35. During 1995, the HUBBELLS received income from several sources.
a. WEBSTER L, HUBBELL received consulting and book income, after expenses, in 1995 of approximately $95,175.00.
b. WEBSTER L. HUBBELL received pension and annuity income in 1995 of $164,311.00.
c. WEBSTER L. HUBBELL received capital gain and interest income in 1995 from the payoff of an installment sale of a warehouse of approximately $83,128.26.
d. SUZANNA W. HUBBELL received wages in 1995 of $46,988. The HUBBELLs' total 1995 income was $409,602.26.
36. During 1995, the HUBBELLs again made no estimated tax payments on their 1995 anticipated tax liability, and made no tax payment when they filed their return. The HUBBELLs also made no payments to reduce their 1989-1992 and 1994 federal tax liabilities.
37. Commencing in or about November 1995, the Internal Revenue Service began sending notices regarding the HUBBELLs' tax liabilities. For example:
a. On or about November 20, 1995, the Internal Revenue Service sent a notice regarding the 1994 return and the failure to make any payments on the tax liability (including interest and penalty) of $167,562.80.
b. On or about December 11, 1995, the Internal Revenue Service sent notices regarding the 1989, 1990, 1991, and 1992 tax liabilities.
c. In or about January 1996, notices of intent to levy were sent regarding 1989-1992 taxes, interest, and penalties: 1992 $107,927.23; 1991 $156,416.96; 1990 $98,028.18; and 1989 $74,415.90.
38. In or about February 1996, the HUBBELLs received a notice concerning the tax liability the HUBBELLs owed to the District of Columbia for the year 1994, in the amount of $40,033.60. The District of Columbia notice was also provided to SCHAUFELE who then provided a copy to CHARLES C. OWEN. OWEN was an attorney in Little Rock, Arkansas, and was a long-time friend of WEBSTER L. HUBBELL.
39. In or about early February 1996, the HUBBELLs, OWEN and SCHAUFELE executed a Power of Attorney to represent the HUBBELLs with respect to their outstanding tax liabilities.
40 a. Because the defendants were concerned about the HUBBELLs' bank accounts being frozen or SUZANNA W. HUBBELL's wages being garnished, on or about February 8, 1996 OWEN contacted the William Morris Agency and requested on behalf of the HUBBELLs that William Morris Agency establish an escrow account for an upcoming payment that was to be made to WEBSTER L. HUBBELL pursuant to a book contract he had entered into with Harper Collins Publishers dated September 28, 1995. OWEN and the HUBBELLs requested that William Morris Agency put the book advance money into an interest-bearing account and disburse the funds only at the direction of WEBSTER L. or SUZANNA W. HUBBELL. OWEN confirmed this request by a letter dated February 15, 1996. William Morris Agency did not agree to set up the requested escrow account.
40 b. On February 26, 1996, the IRS recorded a Notice of Federal Tax Lien in Washington, D.C. The Notice was for an unpaid balance of $105,664.94 for the HUBBELL's 1992 tax liability.
41 a. In or about April 1994, John Phillips, a friend of WEBSTER L. HUBBELL's, recommended that the Consumer Support and Education Fund (CSEF) hire HUBBELL to write a series of articles on public service, for which HUBBELL was to be paid $45,000. HUBBELL received the $45,000, but did not write the articles. After HUBBELL pled guilty in December 1994, he continued to represent to CSEF that he would complete the articles. By December 1995, HUBBELL still had not written the articles. Phillips, the founder of CSEF, decided to reimburse CSEF the $45,000. HUBBELL then volunteered to repay Phillips, and made a $10,000 payment to Phillips in January 1996.
41 b. In or about February 1996, WEBSTER L. HUBBELL provided Phillips a promissory note in the amount of $45,000 and a security agreement. CHARLES C. OWEN drafted the note and agreement and SUZANNA W, HUBBELL signed it as attorney-in-fact for WEBSTER L. HUBBELL. The security agreement provided that certain specified pieces of the HUBBELLs' art collection, valued at approximately $40,000, would secure the promissory note. The security agreement had the effect of encumbering the art collection and subordinating the interest that the IRS and other creditors, such as the State of Arkansas and the District of Columbia, had in the art collection, to the interest of Phillips. Even though the promissory note and agreement were dated December 14, 1995, they were not prepared, executed and filed until February 1996.
42. On or about March 26, 1996, WEBSTER L. and SUZANNA W. HUBBELL entered into a contract in the amount of $613,000.00 to sell their personal residence located at 3843 Macomb Street, Northwest, Washington, D.C.
43. On or about April 14, 1996, WEBSTER L. and SUZANNA W. HUBBELL filed their 1995 joint U.S. individual Income Tax Return which was prepared by MICHAEL C. SCHAUFELE. The return was signed by SUZANNA W. HUBBELL on behalf of WEBSTER L. HUBBELL and herself. This return failed to report capital gains and interest income from the installment sale of a warehouse the HUBBELLs owned in Little Rock. WEBSTER L. and SUZANNA W. HUBBELL made no tax payment with the tax return, which reported a tax due and owing of $112,281.00. The unreported income from the warehouse sale would have caused the tax due and owing with the 1995 return to be substantially greater than $112,281.00.
44. After OWEN was unsuccessful in persuading the William Morris Agency to open an escrow account (as described above in Paragraph 40), on or about May 28, 1996, MICHAEL C. SCHAUFELE opened a non-interest bearing checking account at the Pulaski County Bank in Little Rock, Arkansas. This non-interest bearing account did not generate a Form 1099, a copy of which would be sent to the IRS. The account was opened in the name, "MIKE C. SCHAUFELE for the benefit of WEBB and SUZY HUBBELL," (hereinafter referred to as the FBO [For the Benefit Of] account), Post Office Box 1126, Little Rock, Arkansas 72203. The opening deposit into the account was an $18,000 book advance check from William Morris Agency, Inc. and Harper Collins Publishers, payable to WEBSTER L. HUBBELL. The only signatory on the account was MICHAEL C. SCHAUFELE. This account was opened and used to impede and impair various entities, including the Internal Revenue Service from collecting monies owed by concealing funds available to the HUBBELLs. In some instances, funds that had been deposited into the HUBBELL Children's Education Trust were transferred into the FBO account and spent by or made available by SCHAUFELE for the benefit of WEBSTER L. and SUZANNA W. HUBBELL.
45. In or about May 1996, OWEN contacted an Internal Revenue Service Officer in the Washington, D.C., office of the Internal Revenue Service to discuss the HUBBELLs' outstanding federal tax liabilities. OWEN agreed to provide the officer with a copy of the 1995 Federal tax return and work with SUZANNA W. HUBBELL to complete a Collection Information Statement Form 433-A.
46. In or about May 1996, the Internal Revenue Service (IRS) sent OWEN a summary of the federal taxes owed by the HUBBELLS for the years 1989, 1990, 1991, 1992, 1994, and 1995. As of May 1996, the amounts owed were as follows:
Tax, Penalty and Interest Tax Year Tax and Penalty as of 5/20/96 1989 $43,878.48 $78,555.03 1990 $65,984.50 $103,898.16 1991 $115,972.75 $166,143.72 1992 $85,346.86 $112,428.83 1994 $154,206.85 $184,433.53 1995 $112,281.00 $115,663.88 TOTAL $577,670.44 $761,123.15
48. On or about August 7, 1996, the IRS recorded a lien against the HUBBELLs in Washington, D.C. for the years 1989, 1990, 1991, 1994, and 1995 in the amount of $607,629.73.
49. On or about August 12, 1996, SUZANNA W. HUBBELL signed and filed a IRS Collection Information Statement (Form 433-A) which purported to list financial information including income, assets and liabilities. SUZANNA W. HUBBELL was assisted in preparing this form by CHARLES OWEN. This form reported equity in assets of $12,758 and liabilities of $1,696,869.
50. The Form 433-A failed to disclose the existence of certain bank accounts including:
a. Account No. 2009927 at Pulaski County Bank titled "MIKE C. SCHAUFELE For the Benefit of WEBB and SUZY HUBBELL." SCHAUFELE was the signature authority on the account.
b. Account No. 1542842 at Metropolitan National Bank. That account was styled "HUBBELL Children's Education Trust, MIKE C. SCHAUFELE Trustee." SCHAUFELE and his secretary were the signature authorities on the account.
C. Account No. 1542834 at Metropolitan National Bank. That account was titled "HUBBELL Family Support Trust. . . MIKE C. SCHAUFELE Trustee." SCHAUFELE and his secretary were the signature authorities on the account.
51. The Form 433-A also required SUZANNA W. HUBBELL to identify whether she or WEBSTER L. HUBBELL were a, "participant or beneficiary to trust, estate, profit sharing, etc. . ." SUZANNA W. HUBBELL answered no to that question when, in fact, she and WEBSTER L. HUBBELL did participate in and benefit from certain accounts and trusts which she did not report on the Form 433-A.
52. In or about October through November 1996, the HUBBELLs caused a joint Amended U.S. Individual Income Tax Return, Form 1040X, for 1994, to be prepared and filed with the IRS. This return was prepared by Capital Accounting, a Washington, D.C. accounting firm.
53. The Schedule C attached to the amended return reported additional income from WEBSTER L. HUBBELL's "consulting" business of approximately $77,000 for a new total of $453,075. This additional income came from five clients which HUBBELL did not report on the original 1994 tax return. This unreported income was not reflected on Forms 1099 that were filed with the IRS. The new Schedule C continued to falsely and fraudulently claim approximately $10,000 in personal travel expenses for family members which the HUBBELLs claimed as business expenses.
54. This amended return was prepared and filed after WEBSTER L. HUBBELL was subpoenaed by the Office of Independent Counsel for certain records related to income from his "consulting" business, and after HUBBELL was questioned about his consulting clients by a United States Senate Committee.
55. In or about late October 1996, in settlement of a lawsuit that the Rose Law Firm brought against WEBSTER L. HUBBELL, HUBBELL entered into an agreement to pay the Firm restitution for funds he had stolen from the Firm and/or certain clients. WEBSTER L. HUBBELL agreed to make certain payments to the Firm. He also agreed that if he earned any gross income in excess of $100,000 minus certain tax payments, per year, to pay 50% of such income to the Rose Law Firm until he satisfied his restitution obligation. SUZANNA W. HUBBELL's income was excluded in the calculation of WEBSTER L. HUBBELL's gross income.
56 a. In or about November through December 1996, following his release from incarceration, WEBSTER L. HUBBELL renewed his efforts to obtain a book contract.
56 b. In or about November 1996, the District of Columbia notified the HUBBELLs that they owed taxes to the District in the following amounts:
TAXES, PENALTIES AND INTEREST OWED
Tax Year Tax Tax, Interest, and Penalty 1994 $30,560.00 $44,617.60 1995 $20,836.00 $28,545.32 TOTAL $51,396.00 $73,162.92
57. On or about March 13, 1997, CHARLES OWEN prepared and filed with the State of Arkansas, Articles of Organization for a company entitled Bridgeport Group, LLC. According to Bridgeport's Operating Agreement, WEBSTER L. HUBBELL had a 49% ownership interest, SUZANNA W. HUBBELL had a 49% ownership interest, and the Children's Trust had a 2% ownership interest, MICHAEL C. SCHAUFELE was listed as the "managing member."
58. On or about April 15, 1997, the HUBBELLs filed a U.S. Joint individual income Tax Return, Form 1040, for 1996. SCHAUFELE prepared the 1996 tax return. The HUBBELLs omitted $18,000 in income the William Morris Agency paid WEBSTER L. HUBBELL. The payment was an advance for a book contract WEBSTER L. HUBBELL entered into with Harper Collins. SCHAUFELE deposited the $18,000 into the FBO bank account SCHAUFELE set up for the benefit of the HUBBELLs.
59. In or about June 1997, WEBSTER L. HUBBELL, through Bridgeport, entered into a book contract with the William Morrow and Company, Inc., a book publisher. Though HUBBELL appeared to have only a 49% ownership interest in Bridgeport, in fact, HUBBELL acknowledged to William Morrow that he owned and controlled Bridgeport.
60. Under the terms of the agreement, Morrow agreed to pay a $400,000 advance, which WEBSTER L. HUBBELL agreed to split evenly with his ghostwriter. The agreement provided for three installment payments: $150,000 upon the signing the agreement; $150,000 upon completion of the manuscript; and $100,000 upon the book's publication.
61. On or about June 17, 1997, Bridgeport received a check for $49,500. This amount represented WEBSTER L. HUBBELL's share of the first installment of the advance after expenses and .payments to prior publishers were deducted.
62. On or about June 19, 1997, a bank account was opened at Pulaski Bank, Account No. 3058662, in the name of Bridgeport Group, LLC. MICHAEL C. SCHAUFELE and his secretary had signature authority on this account. Also on June 19, 1997, the check for $49,500 was deposited into the account. The defendants used Bridgeport and its bank account in an attempt to conceal certain financial transactions to impede and impair the IRS and other creditors. Further, WEBSTER L. HUBBELL made no estimated tax payments with this money. The HUBBELLs were able to spend the book advance before the IRS could discover the location of the funds.
63. As of July 1997, the HUBBELLs owed taxes, interest and penalties to the District of Columbia in the following approximate amounts:
TAXES, INTEREST AND PENALTIES OWED
Tax Year Tax Tax, Interest, and Penalty 1994 $30,560.00 $47,826.40 1995 $20,836.00 $31,045.64 TOTAL $51,396.00 $78,872.04
64. In or about February 1997, the State of Arkansas notified the HUBBELLS that they owed state taxes with interest for the tax year 1994. In or about October 1997, the State of Arkansas notified the HUBBELLs that they owed state taxes with interest for the tax years 1969 through 1993.
The relevant amounts of taxes and interest are as follows:
Tax Year Tax Tax with Interest 1989 $ 4,762.30 $ 7,769.67 1990 $ 8,322.00 $12,067.99 1991 $14,753.00 $19,912.48 1992 $10,510.00 $13,138.90 1994 $ 1,759.00 $ 2,032.73 TOTAL $40,106.30 $54,941.77
65. As of the Fall 1997, the HUBBELLs owed Federal, State and District taxes, interest and penalties of approximately the following:
Federal [1989, 1990, 1991, 1992, 1994, 1995] $761,123.15 State [1989, 1990, 1991, 1992, 1994] $ 54,941.77 District [1994, 1995] $ 78,872.04 Total: $894,936.96
66. From January 1994 through December 1997, the HUBBELLs received in excess of one million dollars in income. During this same time period, the HUBBELLs were credited with withholding and payments for the years 1989-1992, 1994, and 1995, totaling approximately $23,055.07 to the IRS, $2,516.71 to the State of Arkansas and $4,367.19 to the District of Columbia. Their outstanding tax liabilities for these same years, after credit for these payments, totaled in excess of $500,000. Their total liabilities, including taxes, interest and penalties for these same years totaled in excess of $894,000.
67. During 1994 through 1997, the HUBBELLs used approximately 20 credit cards to purchase goods and services. These cards included among others American Express Gold, Platinum, and Optima cards, Nordstrom, Ann Taylor, Bloomingdales, Dillards, Lord & Taylor, and Saks.
68. During the years 1994-1997 the HUBBELLs made personal (non-business) purchases by check and credit card of approximately $750,000. During this same period they also made substantial payments on their personal debt.
69 a. Payments for these purchases during 1994-1997 included, but were not limited to, clothing and accessory purchases of approximately $85,000; private school tuition payments of approximately $95,000 (some payments for which were made from funds provided by WEBSTER L. HUBBELL's sister and James Riady to the education trust); telephone charges of approximately $20,000; laundry and dry-cleaning payments of approximately $10,000; purchases from Ace Beverage of approximately $11,500 (in addition to grocery purchases); beauty salon payments of approximately $5,000; and domestic help payments of approximately $9,900.
69 b. During this same period, currency withdrawals were made from the HUBBELLs' accounts in excess of $60,000.
70. From in or about February 1994 continuing through October 1995, WEBSTER L. HUBBELL made numerous withdrawals from his individual Retirement Account (IRA) at Worthen Bank. These withdrawals totaled approximately $223,310.58
71. A person who makes a premature withdrawal from an IRA is subject to an early withdrawal penalty. All withdrawals, whenever made, are subject to having 20% of the withdrawal amount withheld to offset federal taxes. The 20% is automatically withheld unless the account holder signs a written statement requesting that there be no withholding. The written request HUBBELL signed at Worthen Bank notified him that, "[Y]ou are liable for payment of the same taxable portion of your distribution. You may also be subject to tax penalties under the estimated tax payment rules if your payments of estimated tax and withholding, if any, are not adequate."
72. In every instance of an IRA withdrawal, WEBSTER L. HUBBELL filled out and signed or caused MICHAEL C. SCHAUFELE to fill out and sign a document in which he expressly elected to withdraw all the funds without having taxes withheld to pay over to the IRS.
73. The withdrawals and elections included the following:
DATE of Withdrawal Request AMOUNT 1. 1/23/94 $19,000.00 2. 3/16/94 $20,000.00 3. 1/20/95 $30,000.00 4. 5/1/95 $50,000.00 5. 6/8/95 $65,000.00 6. 7/12/95 $ 2,414.32 7. 8/9/95 (date received) $ 7,829.91 8. 10/12/95 $29,066.35 TOTAL $223,310.58
74. The last withdrawal from WEBSTER L. HUBBELL's IRA at Worthen Bank of $29,066.35 in October, 1995, actually involved a transaction with HUBBELL's pension plan at the Rose Law Firm.
75. As do many businesses, the Rose Law Firm (RLF) operated a pension plan for the benefit of its employees. WEBSTER L. HUBBELL contributed to the pension plan at RLF when he worked there.
76. Similar to the rules for an IRA, pension plan withdrawals were subject to a 20% withholding to offset federal income taxes. Unlike an IRA, however, withholding on premature pension plan withdrawals was mandatory. One could not elect to simply defer the taxes until the return was filed. An individual could, however, roll over pension funds into an IRA without any withholding.
77. During the time he worked at the RLF, WEBSTER L. HUBBELL borrowed against (from) his profit sharing/pension plan.
78. In or about August 1995, the RLF, notified WEBSTER L, HUBBELL that he was in default on three outstanding loans he had from the RLF's profit sharing plan. The outstanding balance owed, including interest, was approximately $29,066,35. If WEBSTER L. HUBBELL did not become current on the loans or did not pay off the loans, the RLF would declare the loan in default, which would result in a taxable distribution to WEBSTER L. HUBBELL. Because of the mandatory 20% withholding requirement, WEBSTER L. HUBBELL would not only have income of $29,066.35, he would also be required to pay the pension plan 20% of the amount which in turn would be paid to the IRS for withholding.
79. On or about August through October 1995, MICHAEL C. SCHAUFELE devised a plan, in which WEBSTER L. HUBBELL assisted, to cancel WEBSTER L. HUBBELL's debt owed to the RLF without paying any withholding to the IRS. SCHAUFELE was able to accomplish this transaction by "proposing that we swap checks." The check swap worked as follows.
80. On or about October 10, 1995, SCHAUFELE provided three checks to the RLF drawn on WEBSTER L. HUBBELL's checking account at Worthen Bank (now NationsBank) totaling $29,066.35 to pay off .the past due debt. At the time SCHAUFELE provided the checks, there were insufficient funds in WEBSTER L. HUBBELL's Worthen account to cover the checks.
81. SCHAUFELE then persuaded an individual at the RLF that, in order for the RLF to receive payment, the RLF had to hold these checks and not immediately deposit them until SCHAUFELE could deposit funds to cover them, funds he would receive ultimately from the RLF profit sharing/pension plan account.
82. The RLF then, at SCHAUFELE's request, directed that a check be issued from the RLF's profit sharing plan clearing account for $29,066.35 to be paid to WEBSTER L. HUBBELL's IRA account at Worthen. Since the transfer was from the pension plan to HUBBELL's IRA, no withholding was required.
83. SCHAUFELE then immediately caused the IRA to transfer $29,066.35 to WEBSTER L, HUBBELL's personal account at Worthen. SCHAUFELE signed the election as WEBSTER L. HUBBELL's power of attorney to have no withholding from the IRA.
84. The $29,066.35 was used to cover the three checks drawn on WEBSTER L. HUBBELL's personal account that were given earlier in the day to the RLF. SCHAUFELE then notified the RLF to deposit the three checks into its clearing account to cover the check previously issued on that account. The purpose of SCHAUFELE and WEBSTER L. HUBBELL in structuring the transaction in this fashion was so that WEBSTER L. HUBBELL did not have to pay the IRS 20% withholding. The individual at the RLF was willing to accommodate this transaction in order to end the RLF's dealings with WEBSTER L. HUBBELL on this matter.
85 a. In January 1994, WEBSTER L. HUBBELL and SUZANNA W. HUBBELL had approximately $223,000 in an IRA and pension plan, a coin and art collection, and equity in a house and warehouse. Between 1994 and 1996 they earned over a million dollars. By the end of 1997, the HUBBELLs had liquidated all of those assets and spent virtually all their money.
85 b. As of December 31, 1997, the HUBBELLs owed the IRS (for the years 1989-1992, 1994 and 1995), the State of Arkansas (for the years 1989-1992 and 1994) and the District of Columbia (for the years 1994 and 1995) over $895,000 and had not made any further payments to reduce those years' liabilities.
THE GRAND JURY FURTHER CHARGES THAT:
86. From in or about Spring 1994, the exact date being unknown to the grand jury, continuing to in or about January 1998, in the District of Columbia and elsewhere,
(1) to willfully, knowingly, and unlawfully defraud the United States, and an agency thereof, by impeding, impairing, obstructing, and defeating the lawful functions of the United States Department of the Treasury, Internal Revenue Service, in the ascertainment, computation, and collection of the revenue;
(2) to willfully attempt to evade or defeat a tax due and owing to the United States, in violation of Title 26 United States Code, Section 7201;
(3) to knowingly and willfully devise, and intend to devise, a scheme and artifice to defraud: the State of Arkansas of taxes interest, and penalties; the District of Columbia of taxes, interest, and penalties; and the Rose Law Firm of Little Rock, Arkansas, of money in connection with a Settlement Agreement entered into in October 1996 and the creation and use of Bridgeport Group, LLC; by means of false and fraudulent pretenses, representations and promises, and by means of the United States mail carriers, in violation of Title 18, United States Code, Section 1341; and
(4) to knowingly and willfully devise, and intend to devise, a scheme and artifice to defraud: the State of .Arkansas of taxes, interest, and penalties; the District of Columbia of taxes, interest, and penalties; and the Rose Law Firm of Little Rock, Arkansas, of money in connection with a Settlement Agreement entered into in October 1996 and the creation and use of Bridgeport Group, LLC; by means of false and fraudulent pretenses, representations and promises, and by means of wire transmissions in interstate commerce, in violation of Title 18, United States Code, Section 1343.
87. It was a part of the conspiracy that certain actions were taken as follows:
(1) The defendants, through various means, attempted to obstruct, impede and impair the lawful functions of the Internal Revenue Service in its attempts to determine the HUBBELLs' true income and taxes for certain years and to collect those taxes due.
(2) The defendants attempted to evade the payment of hundreds of thousands of dollars in taxes, interest and penalties that the HUBBELLs owed to the United States.
(3) False and fraudulent U.S. Individual Income Tax Returns for WEBSTER L. and SUZANNA W. HUBBELL were prepared, signed and filed with the Internal Revenue Service.
(4) The defendants attempted to defraud the State of Arkansas and the District of Columbia out of income taxes owed by the HUBBELLs.
(5) The defendants attempted to defraud the Rose Law Firm out of money owed to the Firm as a result of WEBSTER L. HUBBELL's embezzlement, which the Firm attempted to recover through a Settlement Agreement entered into with WEBSTER L. HUBBELL in or about October 1996.
(6) Certain bank accounts were created and used to conceal funds from the Internal Revenue Service and other creditors and to impede the Internal Revenue Service's and other creditors, ability to locate funds and assets owned or controlled by the HUBBELLs.
(7) Certain financial transactions were structured and orchestrated so that the HUBBELLs' income taxes would not be withheld and paid over to the Internal Revenue Service. These transactions included withdrawals from a pension plan and an Individual Retirement Account (IRA) without any taxes being withheld.
(8) Bridgeport Group, LLC, was created and used to impede the Internal Revenue Service and other creditors. WEBSTER L. HUBBELL was listed as less than a 50% owner when, in fact, he controlled the company. Similarly, a bank account was created in Bridgeport's name with persons other than WEBSTER L. HUBBELL as signatory to further impede the IRS and others.
(9) The HUBBELLs liquidated assets and spent funds, while at the same time failing to make tax payments to the Internal Revenue Service, the State of Arkansas, and the District of Columbia. The result was that the HUBBELLs spent substantial funds on personal items to the detriment of these Government entities.
(10) Certain financial records relating to the HUBBELLs were subpoenaed from SCHAUFELE by a federal grand jury, which were not produced to the grand jury at the time called for.
(11) Further, the defendants took various actions to conceal the objectives of the conspiracy.
88. The factual allegations in introductory Paragraphs 1-85 .are realleged and incorporated by reference into Count 1 as further describing the Ways, Manner, and Means of the conspiracy.
89. In furtherance of the conspiracy and to effect the objects of the conspiracy, the following overt acts, among others, were committed in the District of Columbia and elsewhere.
90. The factual allegations in paragraphs 19-22, 24-25, 30, 32, 40, 41b, 43-44, 49, 51, 52, 57-59, 61, 62, 69, 73 (2-8), 80-84 are realleged as separate overt acts in furtherance of the conspiracy.
(Impede and Impair IRS)
THE GRAND JURY FURTHER CHARGES THAT:
91. Beginning in or about Spring 1994, the exact date being unknown to the grand jury, and continuing through in or about January 1998, in the District of Columbia, and elsewhere,
92. The factual allegations in Introductory Paragraphs 1-85, and 87(l)-(11) are realleged and incorporated by reference into Count 2 as further describing the endeavor to obstruct and impede the due administration of the revenue laws.
THE GRAND JURY FURTHER CHARGES THAT:
93. Beginning in or about Spring 1994, the exact date being unknown to the grand jury, and continuing through in or about January 1998, in the District of Columbia and elsewhere,
94. Introductory paragraphs 1-85, and the factual allegations in Count 1, paragraph 87(l)-(11), are realleged and incorporated by reference into Count 3 as further describing the attempt to evade and defeat the payment of income taxes.
(Aid in Preparing A False Return)
THE GRAND JURY FURTHER CHARGES THAT:
95. The factual allegations contained in Introductory paragraphs 1-16, 24, 30, 31, 32, 34, and 41 of this Indictment are realleged as though fully set forth herein.
96. On or about October 4, 1995, within the District of Columbia and elsewhere,
1. Schedule C line 1 substantially understated gross receipts,
2. Schedule C line 24a substantially overstated business expenses,
3. Form 1040 line 12 substantially understated business income, and
4. Form 1040 line 31, substantially understated adjusted gross income.
(Aid in Preparing A False Return)
THE GRAND JURY FURTHER CHARGES THAT:
97. The factual allegations contained in Introductory paragraphs 35, 36, and 43 of this Indictment are realleged as though fully set forth herein.
98. On or about April 14, 1996, in the District of Columbia and elsewhere,
(Mail Fraud and Wire Fraud)
THE GRAND JURY FURTHER CHARGES THAT:
99. The factual allegations contained in paragraphs 1-85 of this Indictment are realleged as though fully set forth herein.
100. From in or about October 1995, through in or about December 1997, within the District of Columbia and elsewhere,
SCHEME AND ARTIFICE TO DEFRAUD
101. The means and methods of the scheme and artifice to defraud include the same means and methods listed in Count 1 , paragraphs 87(7)-(11), of this Indictment. As such, the factual allegations contained in paragraph 87(7)-(11) of Count 1 of this Indictment are realleged as if fully set forth herein.
102. On or about the dates listed below, within the District of Columbia and elsewhere,
All in violation of Title 18, United States Code, Sections 1343 (Count 6), and 1341 (Counts 7-10), and 2.
A True Bill:
GRAND JURY FOREMAN
KENNETH W. STARR
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