Edward A. Markowitz, a District tax shelter promoter and a director of the Washington Capitals hockey team, today pleaded guilty to selling more than $445 million in phony tax write-offs to investors, including a number of show business and other celebrities.
U.S. Attorney Rudolph W. Giuliani said the scheme was the biggest criminal tax fraud ever prosecuted and could end up netting the federal treasury more than $500 million in recovered revenue and fines.
Markowitz, 35, who faces a potential sentence of up to 16 years in prison and a $310,000 fine, created a series of tax-shelter partnerships that, between 1979 and 1984, engaged in bogus trading in U.S. government securities and precious metals, according to court papers filed here today.
Promising tax write-offs ranging from $4 to $10 for each dollar invested, Markowitz lured more than a hundred investors including movie stars Woody Allen, Bill Murray, Christopher Walken and Frank Langella, former television talk show host Dick Cavett, author Erica Jong and Broadway producer Alexander Cohen, Giuliani said.
These and other celebrities invested as much as "several hundred thousand dollars" each in Markowitz' partnerships, another federal prosecutor said.
Giuliani said that none of the celebrity investors were under criminal investigation, but that they all would be subject to civil audits by the Internal Revenue Service and could be forced to reimburse the government and pay interest and fines on their financial gains from the phony write-offs.
"I have a hard time summoning up a great deal of sympathy for these people as victims," said Giuliana at a news conference here. "They made a deal. . .Maybe they should have looked a little more carefully before they grabbed a four-to-one or ten-to-one write-off."
Markowitz, a heavy-set bearded man, quickly left federal court after his guilty plea, declining to talk to reporters. Until his financial empire collapsed last year, Markowitz had been known to his associates for his lavish lifestyle in the District and New York which included racehorses, a Rolls Royce and two expensive homes in Washington, as well as a $250,000 interest in the Washington Capitals.
"People thought he was a wunderkind," said Allan I. Mendelsohn, a lawyer who has been suing Markowitz on behalf of the investors in one of the partnerships. "They called him a boy wonder."
Markowitz, who is also a member of the Capitals' board of directors, was forced to surrender his interest in the team, estimated to be about two and one half percent, to the U.S. government as part of his guilty plea. Giuliani said the government anticipated selling that interest.
A spokesman for the Capitals, whose principal owner is Abe Pollin, declined to comment on Markowitz's involvement with the team or the U.S. government's new financial interest in it.
Appearing before U.S. Judge Morris Lasker, Markowitz pleaded guilty to conspiracy, assisting in the filing of false tax returns for two of his companies and evading taxes on $1 million in personal income. In response to questioning from the judge, he said he had been an alcoholic and a cocaine addict but no longer used the substances.
The Markowitz plea is the latest in a series of major tax fraud and tax evasion cases, such as Marc Rich and Sentinel securities cases, brought by federal prosecutors here as part of what Giuliani described as a nationwide IRS crackdown. In this case, federal prosecutors say, the five limited partnerships started by Markowitz were used to create false tax deductions for the investors by generating paper losses in the trading of government securities and precious metals forward contracts.
In order to create these losses, Markowitz, conspiring with unnamed lawyers and accountants, sometimes "rigged" trades of securities and entered false documentation for securities trades that never took place at all, according to prosecutors.
In addition, court documents allege that Markowitz conducted "sham" trades in government security repurchase agreements or "repos", paid fees to offshore companies in the Cayman Islands and the Nethlerlands Antilles for fraudulent documentation of such trades, and created other phony documents to to create artificial losses and interest expense deductions.
Giuliani said the investigation into the Markowitz partnerships is continuing, but he declined to identify which of Markowitz' business partners are under investigation.
The disclosure of the Markowitz transactions first came to light last year when Donald Weil, a Chicago-based commodities trader and co-general partner in one of the partnerships, contended in a civil suit that Markowitz had fradulently diverted more than $2 million from the partnership to his personal use. A lawyer for Weil said today that Markowitz earlier this week agreed to settle the case by paying a judgment of $900,000.
None of the celebrity investors in the Markowitz partnerships could be reached for comment today. But Victor Kovner, a prominent New York lawyer who was named by Giuliani as one of the investors, said in an interview that he and his law partners had agreed to invest "less than $10,000 apiece" in one of the partnerships on the advice of their accountants. "We were told that it looked good and prudent at the time," said Kovner, who added that he never met or talked to Markowitz. "We should have looked harder. It was sloppy. There's no excuse for it."
But lawyer Mendelsohn, who said his clients include the celebrity investors, said he resented Giuliani's statement that the celebrities should have looked "more carefully" before investing. He said all the celebrities had made the investment on the advice of one New York accountant, who is now deceased, and that, like Kovner, none of them ever met Markowitz.
"It was a good tax shelter and a good long-term risk," he said. "Ask Mr. Giuliani if he would say the same thing about (former Attorney General) William French Smith who took a five-to-one write off?"