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United States v. Orrock

United States District Court, D. Nevada

June 13, 2019

United States of America, Plaintiff
v.
Craig P. Orrock, Defendant

          ORDER DENYING DEFENDANT'S MOTION FOR A NEW TRIAL [ECF NO. 260]

          Jennifer A. Dorsey U.S. District Judge.

         Defendant Craig Orrock is a former attorney who worked for the Internal Revenue Service (IRS) for several years after graduating law school and spent the bulk of his career as a sole practitioner specializing in tax law. After a five-day trial, a jury found him guilty of two counts of evasion of payment and assessment of tax and one count of attempt to interfere with administration of internal revenue laws. The convictions stem from Orrock's long history of concealing his income by reporting false information to the IRS and moving funds through-as one testifying agent described it-an extensive “spider web” of bank accounts belonging to his many businesses, faux businesses he created in the name of his then-wife, and a trust ostensibly for the benefit of their children. When the IRS began to audit Orrock and attempted to later levy his accounts, he interfered with these efforts by continuing to maneuver funds through this web, falsely reporting to the IRS as part of a compromise offer he submitted that he had almost no assets, and filing a series of frivolous bankruptcy petitions to invoke the Bankruptcy Code's automatic stay of all collection efforts.

         Orrock now moves for a new trial, arguing that the weight of the evidence doesn't support the jury's verdict. But the government presented a compelling case, consisting of a mountain of documents and testimony from Orrock's ex-wife, individuals involved in the transactions that resulted in more than a million dollars in income that he didn't report, and an IRS forensic fraud examiner who summarized this information for the jury as an expert witness. This evidence was comprehensive, credible, and overwhelming. I therefore deny Orrock's motion.

         Standard of Review

         Under Federal Rule of Criminal Procedure 33, a district “court may vacate any judgment and grant a new trial if the interest of justice so requires.”[1] The “power to grant a motion for a new trial is much broader than [the] power to grant a motion for judgment of acquittal” under Rule 29.[2] And unlike an acquittal motion, a district court ruling on new-trial motion “need not view the evidence in the light most favorable to the verdict; it may weigh the evidence and in so doing evaluate for itself the credibility of the witnesses.”[3] Nonetheless, a new trial should be granted “only in exceptional cases, where the evidence weighs heavily against the verdict.”[4]

         Discussion

         I. The government's nominee theory was amply supported at trial.

         Before turning to the evidence that supported each charge, I first address one of the central theories underlying the government's case: that Orrock's many business entities were nominees and that the income earned by these entities was therefore attributable to Orrock individually. Orrock argues-as he did during closing-that the IRS did not apply a nominee theory while auditing him and that the government's expert witness during trial arbitrarily deemed his companies as nominees without properly relying on IRS regulations.

         But Orrock misrepresents the trial testimony. For instance, Revenue Officer Desiree Harkema, who began efforts in 2011 to collect on Orrock's outstanding tax bill, described a spider web of bank accounts controlled by Orrock and testified that, during her nearly 30-year career, she had never seen an individual with more accounts.[5] And during Orrock's cross examination, Harkema stated that she believed his corporations were nominees and that he went to great lengths to conceal his assets using these entities. When Orrock asked why she never used nominee liens to collect on his individual liability through his business entities, Harkema explained that, by the point that the fraudulent nature of Orrock's outstanding taxes came into full focus, the case was referred for criminal investigation, requiring her to close the IRS's civil proceedings against him.[6] Indeed, the fraud referral memorandum in 2012 lists “Concealment of Assets through Nominees” as one of Orrock's affirmative acts of fraud, highlighting the many accounts he controlled.[7]

         Revenue Agent Laura Blado, the certified fraud examiner who served as the government's expert witness, also testified extensively and effectively about Orrock's nominees. She explained that a nominee is an entity used to disguise the ownership of an asset. Orrock highlights the fact that Blado could not cite the specific portion of the IRS manual addressing nominees during his cross examination of her, asserting that “she pretty much assumed [his companies] were nominees for purposes of her calculations and didn't need to investigate further.”[8] But although Blado testified that she didn't consult the IRS manual or code in preparing for her testimony specifically, she clarified that she was familiar with the term through her work. Tellingly, the nominee definition from the IRS manual that Orrock advances in his new-trial motion is highly comparable to Blado's paraphrasing during trial.[9] And contrary to Orrock's assertion that Blado's use of the nominee theory is unfounded, she also testified extensively about the flow of funds through Orrock's many entities and his personal use of these assets. She also supported her testimony with charts that effectively summarized this information for the jury and were admitted into evidence.[10]

         In contrast, Orrock didn't present any evidence at trial that refuted the government's nominee theory. He instead attempted to demonstrate that at least two of his entities, Great White Investments and Competition Grand Prix, were legitimate businesses. Orrock argued adamantly throughout his closing that Great White helped return nearly $1 million in investments to victims of Ponzi schemes. But putting aside the fact that the government's evidence showed that Orrock was revictimizing some of the same individuals he claims to have aided, [11] Orrock's primary argument is a straw man because Blado testified that a nominee entity can have a legitimate business operation. The crux of the nominee theory is that an individual retains the benefit of assets held in the name of another entity or individual in order to avoid tax obligations. And as discussed in more detail below, the evidence at trial demonstrated that Orrock used the funds in his many business accounts and his children's trust accounts for personal expenses, such as dining and travel. It was thus reasonable for the jury to conclude that much of the funds flowing through Orrock's entities constituted personal income, thus creating a tax liability that he failed to pay.

         II. Counts one & three: evasion of payment of income tax and attempt to interfere with administration of internal revenue laws

         Because counts one and three are largely related, I address them together, beginning with an overview of their overlapping facts.

         A. Background

         Orrock has a long history of not paying his taxes.[12] Each year between 2000 and 2006, Orrock filed a tax return that self-assessed an amount of taxes due, ranging from $2, 500 to almost $38, 000.[13] But Orrock paid only a miniscule amount of this tax bill and attempted in multiple ways to avoid the obligation. In 2009, for instance, he filed a personal income-tax return for 2008 claiming a $440, 000 theft-loss deduction stemming from an expansive Ponzi scheme known as VesCor Capital.[14] Orrock then filed amended returns for 2004 through 2006, seeking to claim the remainder of the loss in excess of his 2008 tax obligation as deductions for these prior years-thereby ostensibly wiping out his tax debt for those years.[15] After the IRS eventually began auditing these four years of returns in 2010, Revenue Agent Patrick Von Ahn contacted Jared Parrish, the attorney for the receivership established by court order after the Securities and Exchange Commission (SEC) initiated an action against the VesCor entities. Parrish informed Von Ahn in early 2012 that Orrock was never an investor in VesCor.[16] Parrish also provided a copy of a cease-and-desist letter that he had sent Orrock several years earlier after Orrock began claiming that VesCor investment victims had assigned their claims to him.[17]The letter, sent in October 2008, informed Orrock that the SEC did not recognize assigned claims in a receivership and that some of his actions violated the court order establishing the receivership.

         In April 2010, Orrock submitted an Offer in Comprise (OIC) form to the IRS, offering to settle his outstanding tax obligation for tax years 2000-07 and 2009 for just $25, 000.[18] In the section asking Orrock to explain his circumstances, he wrote: “I am 63 years old this year and filed bankruptcy a few years ago. My income has declined due to the Nevada economy[, ] and my health has been marginal[, ] which limits the amount of time I can work.” And in the following section asking Orrock to specify his “source of funds, ” he wrote: “From paycheck each month. I just started a new job.”

         As part of his OIC, Orrock also submitted a Form 433-A, which asks more probing questions about a taxpayer's income and assets.[19] Under a section asking for employment information, Orrock listed Great White NV, Inc. as his employer, representing that he had worked for this entity for only one month and received bi-weekly paychecks. That same section directed Orrock to complete two subsequent sections if he or his spouse was self-employed, but Orrock left both sections blank. The next section asked Orrock whether he was a beneficiary of a trust, to which he answered no. And under sections asking about Orrock's assets, he listed only $200 in cash on hand, $700 in checking, personal items he valued at $500, and two cars he valued at a combined $7, 500. One subsection asked about any investments Orrock held, instructing him in bold font to “[i]nclude all corporations, partnerships, limited liability companies[, ] or other business entities in which [he] is an officer, director, owner, member, or otherwise has a financial interest . . . .” Orrock listed stock in “Pro-Brokers Inc.” and “GWI, ” but listed both entities as “defunct” and thus claimed $0 in equity. Orrock signed both the OIC and the attached 433-A under penalty of perjury. Later that year, the IRS returned the OIC to him, explaining that it could not consider his offer while “other investigations”-i.e., the audits of him-were pending because the result could affect his tax liability.

         As the audit of Orrock progressed, the IRS also attempted to collect on his outstanding tax obligation. Days after Revenue Officer Harkema sent Orrock a notice of intent to levy on his bank accounts in April 2011, he filed a bankruptcy petition, which caused an automatic stay of all enforcement efforts under the Bankruptcy Code.[20] But Orrock never participated in the bankruptcy proceedings, so the petition was dismissed several months later. Harkema therefore resumed collection efforts, and Orrock eventually filed two new bankruptcy petitions in November 2011 and May 2012, triggering anew the automatic stay. Those petitions, too, were ultimately dismissed after Orrock again failed to participate in proceedings. The grand jury indicted Orrock in 2016.

         B. Ample evidence demonstrated that Orrock submitted a falsified offer in comprise and concealed the sources and size of his income through a web of nominee bank accounts.

         Count one charged Orrock with evasion of payment of tax under 26 U.S.C. § 7201, which required the government to prove: (1) “the existence of a tax deficiency”; (2) “an affirmative act constituting an evasion or attempted evasion of the tax”; and (3) that Orrock acted willfully.[21] “A tax deficiency occurs when a defendant owes more federal income tax for the applicable tax year than was declared due on the defendant's income tax return”[22] or when a defendant fails to pay the tax that he declares.[23] A defendant acts willfully when he “knew federal law imposed a duty on” him and “intentionally and voluntarily violated that duty.”[24] The Supreme Court has instructed that an

affirmative willful attempt may be inferred from conduct such as keeping a double set of books, making false entries of alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling of one's affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or to conceal.[25]

         Conversely, a good-faith misunderstanding of the law negates willfulness.[26] The defendant's belief need not be objectively reasonable to be held in good faith, but the jury can consider any admissible evidence in assessing whether the defendant knew of his legal duty to pay a certain amount of tax.[27]

         Court three charged Orrock with attempt to interfere with administration of internal revenue laws. Under 26 U.S.C. § 7212(a), it is a felony to “corruptly or by force . . . endeavo[r] to obstruct or imped[e] the due administration” of the Internal Revenue Code. “An act is ‘corrupt' . . . if it is performed with the intention to secure an unlawful benefit for oneself or for another.”[28] The government must establish “a ‘nexus' between that act and a particular administrative proceeding, such as an investigation, an audit, or other targeted administrative action. That nexus requires a ‘relationship in time, causation, or logic with the [administrative] proceeding.'”[29] An administrative proceeding or action “does not include routine, day-to-day work carried out in the ordinary course by the IRS, such as the review of tax returns.”[30] The defendant must also “act with knowledge or [have] reason to know of a pending or imminent IRS proceeding, such as an IRS audit.”[31]

         The government argued in closing that much of Orrock's conduct that constituted tax evasion also satisfied the elements of attempt to interfere with administration of internal revenue laws and that both charges largely centered on the falsehoods and omission that Orrock included in his OIC. Although Orrock submitted the OIC in 2010 based on his claim that he had insufficient assets to pay his tax debt in full, the government convincingly demonstrated that Orrock received substantially more income that year than he reported on the OIC and had access to significant unreported assets.

         For instance, Orrock's firm, Great White NV, received a wire transfer from a company called Silar for $25, 000 for “services and fees rendered” in April 2010-the same month that Orrock submitted the OIC-and ultimately received a total of almost $240, 000 from Silar that year.[32] Though Orrock contends that such income is attributable to his company rather than to him as an individual, the jury could, as discussed above, have reasonably concluded that Great White NV was one of Orrock's many nominees and that he personally benefitted from these funds. Indeed, the evidence at trial showed that, although Orrock had been operating for years through his company “Great White Investments”-which he declared “defunct” on his OIC-he registered “Great White NV” with the Nevada Secretary of State just two weeks before submitting the OIC and then issued himself a paycheck. Because the evidence at trial showed that Orrock was the sole owner/manager of his many companies and that he reported only business income-and no W-2 income-on his 2010 income-tax return, it was reasonable for the jury to conclude that Orrock created Great White NV to conceal the sources and size of his income. Similarly, it was reasonable to conclude that Orrock intentionally failed to complete the sections asking about his business assets for the same reason.[33]

         Another critical misrepresentation in the OIC involves the trust fund Orrock ostensibly created for his children. Although he stated on Form 433-A that he was not the beneficiary of a trust, the evidence at trial demonstrated that the funds in his children's trust largely went to benefit Orrock personally. Indeed, Orrock withdrew over $100, 000 from the trust in 2010 alone, and the government demonstrated that much of these funds were spent on personal expenses, including dining, bars, travel, gas, and goods. But Orrock reported meager assets on his form totaling only a few thousand dollars in cash and goods. He asserts that he held funds in this trust and transferred money to his then-wife's accounts because unspecified parties were threatening his life at the time and that he was attempting to safeguard assets for his family rather than avoid tax obligations.[34] Orrock made similar vague assertions before and during trial, [35] but he hasn't explained how the alleged threats are relevant to any of the three counts. I assume that he offered them to undermine the conclusion that he acted willfully or corruptly under counts one and three, respectively. But Orrock presented little evidence at trial about the alleged threats; he chose not to testify and merely asked his ex-wife during cross examination whether his life was threatened during their marriage, without any further factual development. And regardless, Orrock's explanation is incredible because it doesn't address why concealing assets from the IRS would further a plan to safeguard these assets from these phantom menaces.

         Beyond the OIC, there was also evidence that Orrock attempted to evade taxes and obstruct the audit and collection efforts by shifting the flow of money through his web of nominee bank accounts. For instance, the evidence at trial showed that, beginning in late 2011, the company Silar began making wire transfers totaling nearly $190, 000 to Competition Grand Prix, Orrock's go-kart facility.[36] While being cross examined by Orrock, Robert Leeds, Silar's principal, testified that he or Silar were investors in Competition Grand Prix and may have also routed settlement funds designated for third parties through the go-kart company. Orrock hardly touched on this testimony during his closing argument, but the obvious intended implication was that, unlike the wire transfers in 2010, the 2011-12 transfers were not consulting-fee payments to Orrock and therefore weren't income that he was attempting to conceal through Competition Grand Prix. But the government convincingly argued that this conclusion was not plausible because Leeds testified that Silar had formalized business practices and followed Generally Accepted Accounting Principles-and yet there were no records demonstrating that this flow of funds to Competition Grand Prix was anything other than payments to Orrock and no explanation for why sophisticated Silar would invest in a go-kart track in Las Vegas.

         The government also presented the jury with spreadsheets summarizing the cash flow through accounts held by Orrock's then-wife Valerie. Although she had originally been depositing checks issued by Great White NV and Pro-Brokers, [37] the checks began coming almost exclusively from Competition Grand Prix around the same time that the company began receiving wire transfers from Silar.[38] It was therefore reasonable for the jury to conclude-as the government argued at closing-that Competition Grand Prix was merely another strand in Orrock's vast web of nominees that he was using to conceal his income from the ongoing IRS audit and collection efforts.

         Finally, Orrock makes much of the theft-loss deduction stemming from the VesCor Ponzi scheme that the IRS ultimately denied, arguing that he was gifted an assigned claim by a VesCor investor named Garn Ford. Orrock again fails to tie this argument to an element of any of the counts, but I assume that he seeks to demonstrate that he claimed the deduction in good faith and therefore did not willfully evade his taxes. But the jury heard almost nothing about this purported assignment, as Orrock gave notice shortly before trial that Mr. Ford had passed away. Orrock merely asked Parrish, counsel to the VesCor receivership, whether Ford was on the list of VesCor investors, and Parrish responded that he would have to double check the records. And when Orrock asked Parrish whether an assignee steps into the shoes of an assignor, I sustained the government's objection that the question called for a legal conclusion.

         But even if the jury had learned more about the purported assignment-or assumed that it occurred based on Orrock's questions-it was reasonable for them to conclude that Orrock did not claim a theft loss based on a good-faith misunderstanding of how that deduction works. Parrish's testimony established that he informed Orrock in 2008-almost a year before he submitted the returns claiming the deduction-that the SEC did not recognize the assignments. Although the SEC's position on a receivership is not dispositive of the validity of a tax deduction, this exchange would have placed Orrock on notice that his purported assignment may not be valid. And even though an unreasonable belief does not negate good faith, the jury could validly have relied on the fact that Orrock was a long-time tax attorney and former IRS employee in concluding that he ...


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