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Sen. Carlos Uresti indicted on federal fraud charges

Very bad.

Sen. Carlos Uresti

State Sen. Carlos Uresti, accused of misleading a former client who invested in a company in which Uresti has a financial stake, was indicted by a federal grand jury on 11 charges over his involvement in the alleged investment Ponzi scheme — in addition to a separate indictment alleging bribery.

In the first indictment, the federal grand jury charged Uresti, a San Antonio Democrat, with one count of conspiracy to commit wire fraud and one count of conspiracy to commit money laundering. The indictment also charges Uresti with five substantive counts of wire fraud; two counts of securities fraud; one count of engaging in monetary transactions with property derived from specified unlawful activity; and one count of being an unregistered securities broker.

A separate indictment centered on a contract to provide medical services to a correctional facility in West Texas. That indictment alleges that a colleague of Uresti’s, Vernon C. Farthing III, paid Uresti $10,000 per month as a marketing consultant and that half of the money was given to a Reeves County official to win over his vote to award the contract to Farthing’s company — the culmination of a 10-year scheme involving bribery and money laundering.

[…]

A lengthy investigation published by the Express-News in August first detailed Uresti’s involvement in the company and fraud allegations it faces.

Three months later, Uresti coasted to re-election, winning his San Antonio seat with 56 percent of the vote against Republican and Libertarian challengers. Uresti is among the Legislature’s most powerful Democrats. He is vice chair of the Health and Human Services committee and sits on three other high-profile committees: Finance, Education and Veteran Affairs & Border Security.

In February, the FBI and IRS raided Uresti’s law office. In a statement at the time, the senator said he was cooperating with federal agents as they were “reviewing our documents as part of their broad investigation of the FourWinds matter.”

FourWinds’ purported intent was to buy sand and sell it at a markup to oil and gas companies, but some investors have accused the company’s leadership of misrepresenting its financial health and spending their money on frivolous, personal expenses. It now faces millions of dollars in claims from investors and other companies.

Denise Cantu, whom Uresti represented in a wrongful-death case, said she lost most of the $900,000 she invested in the now-bankrupt company in 2014 at the suggestion of Uresti, according to the Express-News. She has said she was not initially aware that Uresti would get a piece of her investment, though Uresti has suggested otherwise.

With allegations of serious financial mismanagement detailed in bankruptcy court, the FBI last year opened an investigation into FourWinds, the Express-News reported. In August, Uresti told the paper that he was a “witness” in that investigation but not its target.

See here for some background, and read the rest fore more. As with Ken Paxton, I will not call for Sen. Uresti to resign at this time, as they are both still innocent in the eyes of the law. Unlike Paxton, Uresti is not on the ballot again until 2020, so he (in theory, at least) has the time to dispose of this before he has to face the voters again. That’s assuming he gets acquitted or the charges get dropped. As with other legislators who face legal troubles, I’d encourage Sen. Uresti to prioritize getting his personal affairs in order by stepping down from his office, after the session is over. Whether he does or he doesn’t, there are several State Reps in Bexar County who I think would do a fine job in that office. I wish him luck, but I also wish he’ll listen to what I’m saying. The Current has more.

FBI and IRS raid Sen. Carlos Uresti’s office

That’s never a good thing.

Sen. Carlos Uresti

FBI and IRS agents raided the San Antonio law offices of state Sen. Carlos Uresti on Thursday morning — confiscating documents and other items.

A law enforcement source told the the San Antonio Express-News, which first reported the raid Thursday, that it was connected to Uresti’s involvement with a now-bankrupt fracking sand company that he held a financial stake in.

“Law enforcement agents with IRS and FBI are lawfully present conducting a law enforcement operation,” FBI spokeswoman Michelle Lee told the Texas Tribune. “No further details have been released at this time.”

Lee confirmed that no arrests had been made.

Uresti, a San Antonio Democrat and personal injury attorney, has been entwined in a complicated saga involving FourWinds Logistics, which sold sand used in hydraulic fracturing, a process that extracts oil and gas from shale rock.

A lengthy investigation published by the Express-News in August first detailed Uresti’s involvement in the company and fraud allegations it faces.

[…]

FourWinds’ purported intent was to buy sand and sell it at a markup to oil and gas companies, but some investors have accused the company’s leadership of misrepresenting its financial health and spending their money on frivolous, personal expenses. It now faces millions of dollars in claims from investors and other companies.

Denise Cantu, whom Uresti represented in a wrongful-death case, said she lost most of the $900,000 she invested in the now-bankrupt company in 2014 at the suggestion of Uresti, according to the Express-News. She has said she was not initially aware that Uresti would get a piece of her investment, though Uresti has suggested otherwise.

With allegations of serious financial mismanagement detailed in bankruptcy court, the FBI last year opened an investigation into FourWinds, the Express-News reported. In August, Uresti told the paper that he was a “witness” in that investigation but not its target.

On Nov. 4, four days before Election Day, Eric Nelson, the former marketing director for FourWinds, was indicted for his role in an alleged scheme to defraud investors. He later pleaded guilty to one felony charge of conspiracy to commit wire fraud. Federal attorneys accused Nelson of altering company bank statements to “grossly” inflate its account balance. At least two more former FourWinds employees have been indicted since the election: Shannon Smith, who held a 48 percent stake in the company, and Laura Jacobs, who worked as its comptroller. They face similar charges to Nelson’s.

FourWinds had paid Uresti to attract investors before it filed for Chapter 11 reorganization in August 2015 — beset by allegations of fraud and misused funds.

It could be that this action by the FBI and IRS was to collect evidence for the case against FourWinds and its executives. If that’s all it is, and Uresti himself is not implicated in anything criminal, then this will be as bad as it gets for him, and the news will fade in time. If not, well, he’ll probably wind up having something in common with Ken Paxton. I hope for his sake it doesn’t come to that, but we’ll see. A statement from Sen. Uresti can be found here, and the Current has more.

Empower Texans could have some tax problems

Schadenfreude alert:

BagOfMoney

Empower Texans, an organization at the center of the state’s far-right conservative movement, reported no political expenses on its 2012 tax returns to the Internal Revenue Service, despite showing $350,000 in campaign expenditures to state authorities, documents show.

The group, which claims to support fiscal responsibility and greater transparency in government, is best known for funding challengers going after Republicans it believes are too moderate, such as House Speaker Rep. Joe Straus, a San Antonio Republican.

“That is a very serious discrepancy, because it tends to suggest – it’s not, obviously, definitive – but it tends to suggest that the (tax return) was completed in a way that is knowingly incorrect,” said Marcus Owens, who was the director of the division of the IRS that oversees tax-exempt organizations from 1990 through 2000. “Absent some cogent and persuasive explanation of those two, that strikes me as potentially a criminal problem and certainly a civil problem.”

Another attorney well-versed in the IRS’ rules and procedures for nonprofits was equally critical.

“To the degree they are filing reports with the state ethics commission showing political spending, and they’re not showing them on their (tax returns), I find that questionable,” said John Pomeranz, a Washington D.C.-based attorney, who specializes in the law governing lobbying and political activity by nonprofits. “I’m trying to think of a way that could be justified, but I don’t really think it can be.”

[…]

Empower Texans’ nonprofit status makes its tax returns public record. Information from the tax returns reviewed from 2008 until 2012 also raises questions about whether the group has used an affiliated nonprofit, the Empower Texans Foundation, to improperly subsidize its political activity.

According to those records, Sullivan’s salary at Empower Texans fell greatly after the Empower Texans Foundation was created. However, the pay he received from the foundation more than made up the difference. In 2009, the year before the foundation was established, Sullivan made $99,600 in 2009, working 60 hours a week, serving as the president of Empower Texans.

However, in 2011, he made only $38,842 (about $19 an hour), as Empower Texans’ president. But he made $81,600 (roughly $78 an hour) serving as a director on the foundation’s board, tax returns show.

The pattern repeated itself in 2012: Sullivan, again listed as Empower Texans’ president, made $45,633 there, while earning another $81,600 from the foundation.

“That definitely suggests the (foundation) is subsidizing (Empower Texans), and the IRS doesn’t like that,” Pomeranz said.

While the IRS allows affiliated nonprofits to share staff and other costs, it requires that each organization carry its own weight, Owens said. He added that failure to do that could endanger the foundation’s tax-exempt status.

The tax returns, known as 990s, have come into the spotlight as the Ethics Commission considers adopting rules that would require nonprofits, like Empower Texans, to report their donors if at least 25 percent of their expenditures are “politically motivated.”

I know, it’s hard to believe that anyone as honest and forthright as Michael Quinn Sullivan could be playing fast and loose with the rules. Clearly, we need a nice, long, thorough investigation to get to the bottom of this.

Regulating Bitcoin in Texas

Bitcoin regulations. We have ’em.

Texas will not treat Bitcoin and other virtual currencies as legal money, according to a new memo from the Texas Department of Banking. Yet some companies that deal in Bitcoin transactions could draw state oversight, even if they are based outside of Texas.

Texas Banking Commissioner Charles Cooper issued a memo this month outlining the agency’s policies involving virtual currencies like Bitcoin.

“At this point a cryptocurrency like Bitcoin is best viewed like a speculative investment, not as money,” Cooper said in a statement.

In his memo, Cooper provided reasoning that echoed the IRS. Last month, the federal agency announced that, for tax purposes, it would treat Bitcoin as property instead of currency because no government recognizes the virtual currency as legal tender.

“Because neither centralized virtual currencies nor cryptocurrencies are coin and paper money issued by the government of a country, they cannot be considered currencies under the statute,” Cooper’s memo reads.

While Texas does not have a state income tax, the state’s Department of Banking does regulate certain financial transactions and license financial institutions. An exchange of Bitcoin for U.S. dollars between two parties would not draw the agency’s interest, according to the memo.

But some third-party Bitcoin exchanges are already drawing state scrutiny because of the way they handle transactions involving U.S. currency and Bitcoin, according to Daniel Wood, assistant general counsel at the Department of Banking. Cooper’s memo states that such exchanges are involved in “money transmission” because they act as an “escrow-like intermediary” that holds onto a buyer’s funds “until it determines that the terms of the sale have been satisfied before remitting the funds to the seller.”

Such exchanges do not need to be based in Texas to fall under the state’s regulations, Wood said. “If they do business with Texas consumers, we can force them to get a Texas license,” he added.

I’ll admit, I had no idea there was a Texas Department of Banking. I don’t know what effect this will have, but I suppose it’s good to be one of the pioneers in setting this sort of regulatory framework. I personally think that Bitcoin is more toy than currency, though I could see it maybe being useful for campaign contributions. Assuming all disclosure and other requirements are met, of course. What do you think about this?

Hall’s tax troubles, again

This isn’t new news, but it’s getting a lot more play now.

Ben Hall

Ben Hall

Top mayoral challenger Ben Hall agreed to pay the IRS more than $680,000 in back taxes and penalties earlier this year, court documents show.

On Jan. 16, less than a week before Hall made his first campaign expenditures as a mayoral candidate, the challenger and his wife signed a document in U.S. Tax Court agreeing to pay $520,782 in back taxes and about $160,350 in penalties to cover four years of deficiencies, from 2005 through 2008.

The amount was a little more than half of the $1.28 million the IRS claimed the Halls owed when it issued a formal “notice of deficiency” in June 2011.

Over the four years in question, the couple’s combined taxable income was reported as $1.71 million; the IRS alleged the correct figure for that same period was $5.45 million.

Hall said he did at least as much as any reasonable taxpayer would do, hiring an outside accounting firm to handle his returns and employing a qualified bookkeeper in his law office. At tax time, he said, the accounting firm gathered the bookkeeper’s data, crunched the numbers and told him what to pay.

[…]

Taxpayers receiving a notice of deficiency from the IRS have 90 days to protest the amount in U.S. Tax Court, which Hall did. He disputed all or part of $2.3 million of the IRS’ $3.75 million in adjustments to his income, saying the government was trying to tax him twice on some bank deposits and that he was entitled to some deductions they had denied, among other claims. The IRS, in a court filing, rejected Hall’s denials, and the case was set for trial last January. Two days after the trial had been slated to start, the parties signed the settlement agreement.

Of the $160,350 in penalties the Halls agreed to pay, about $103,800 stemmed from a law that docks taxpayers for not taking sufficient care in preparing their returns, said South Texas College of Law Associate Dean Bruce McGovern, one of two tax law experts who reviewed the court documents for the Houston Chronicle. The penalty can be assessed for negligence on the part of the taxpayer, or for “substantially” understating the tax liability. The latter is easier to prove, McGovern said, adding the understatements of tax liability alleged by the IRS in Hall’s case meet the “substantial” standard under the federal tax code.

In Hall’s case, McGovern said, the penalty was levied at 20 percent of the tax owed, the most common level. The remainder of the penalties were for filing the returns late, he said.

News about the IRS case first came to light back in August. The details seem to be a little different in the later version, but my eyes crossed before I could work through it all. What is clear is that Hall has also had issues with his property taxes. Whatever you think of the one or the other, the fact that there’s two of these examples doesn’t look good. The Parker campaign has understandably jumped all over this – I saw their attack ad last night while watching “Castle” – and I’m sure we’ll be hearing a lot more about it over the next four weeks or so. Look, having tax problems isn’t a disqualification for office. Lots of people have had them – mistakes happen, nobody’s perfect, you get the idea. One could even build a narrative around one’s tax troubles, as a story of redemption and overcoming adversity and so on. That’s not the story Hall has been telling, of course. He’ll have to come up with something else to work around this. PDiddie has more.

Dark money

It’s a small step, if it’s allowed to be taken, but the bill to require donor disclosure on so-called “dark money” is a step in the right direction.

BagOfMoney

Senate Bill 346 takes direct aim at the cloak of anonymity that currently shields so-called “dark money” groups – those tax-exempt organizations whose donors drop big bucks to influence elections and ballot measures but have not been required to reveal who is behind the spending.

Under the proposal, non-profits set up under section 501(c)4 of the federal tax code would be required to publicly disclose contributors who pony up more than $1,000 to any “dark money” group that spends $25,000 or more on politicking. Labor unions are exempt.

SB 346 by Sen. Kel Seliger, R-Amarillo, passed on a 99-46 vote.

[…]

A Perry spokeswoman said Monday that the governor will review the final bill if it hits his desk. However, the House lawmaker shepherding the proposal through the lower chamber speculated Monday that its fate could be all but sealed once it leaves the House.

“They’re staying real quiet on it,” Rep. Charlie Geren, R-Fort Worth, said after Monday’s vote. “But they’ll veto it.”

The issue has been a political lightning rod since the U.S. Supreme Court’s 2010 ruling in Citizens United v the Federal Election Commission. That decision paved a path for outside groups like super PACs and 501(c)4s to raise and spend unlimited sums from corporations, labor groups and deep pocketed individual donors.

And while both 501(c)4s and super PACs can accept unlimited sums of cash, only super PACs are required to identify donors.

As a result, super PACs tend to set up sister outfits in the form of a 501(c)4s to funnel money anonymously to candidates or to fund attack ads. That’s how they got the ominous title “dark money” groups.

According to Texas Redistricting, the vote in favor on second reading was actually 95-50, but that’s a nitpick. The bill has now been approved on third reading by a 95-52 margin, and since it was not amended – which is what the real fight in the House was about – it’s on it’s way to Rick Perry. It’s amazing this bill got to a vote at all considering what it went through on the way to the House. The Trib touches on that.

The bill, which would affect major political givers on both sides of the aisle, originally passed the Senate 23-6; a day later, led by state Sen. Dan Patrick, R-Houston, senators voted 21-10 to reverse themselves, some saying they hadn’t understood what the bill required. Seliger said at the time that his colleagues had faced heavy lobbying by major political donors to change their votes.

The Senate’s effort was too late; the measure was already in the custody of the House. State Rep. Charlie Geren, R-Fort Worth, the bill’s House sponsor, has been shepherding the measure through the lower chamber, working to get it passed without amendments so it doesn’t have to return to the Senate.

“Certain groups keep scorecards and continuously bombard the internet. All that’s fine, it’s what this process is about,” Geren said. “The problem occurs when these groups wade deep into the political process … and use a loophole that keeps their donors secret.”

See here and here for more on the history of SB346. Among the fascinating things about this is the fact that it’s happening against the backdrop of the revelation that the IRS targeted some conservative 501(c)(4) groups for investigation. While the national media is saying that no progressive groups were similarly targeted, there is reporting from 2012 that indicates otherwise, and the IRS did the same thing to liberal groups when George Bush was President. It would be nice if Congress tightened the language governing who does and doesn’t qualify for 501(c)4 status so that the decision isn’t simply left up to IRS agents to determine, but we all know how this will play out.

Be all that as it may, you may wonder why legislative Republicans are taking this action. Simply put, they have more to fear from 501(c)(4) groups than Democrats do in this state, with the likes of Empower Texas and other slash-and-burn groups spending copious amounts of money in Republican primaries. Geren in particular has survived numerous such challenges, as has Speaker Straus at this point. The peril will even out as Democrats gain more footing, but as Democrats have more ideological reasons to support legislation like this, there was enough of a coalition to get it passed. I’ll be shocked if Rick Perry doesn’t veto it, as Geren and Seliger expect he will, but at least they made the statement. The Observer and the TSTA have more.

“Non-profit” college sports

Really good read in the Statesman.

One way to view Mack Brown’s recent salary modification, to as much as $5.7 million this year with performance bonuses, is that the University of Texas’s generosity has made him the highest-paid college coach in the country.

But there’s another way to look at it: Brown is also one of the country’s best-compensated nonprofit executives.

As a UT employee, Brown works for a educational charity that, as a nonprofit, benefits from generous tax breaks. His salary, critics say, is the latest symptom of a haphazard public policy that lumps UT’s football program into the same category as its law school and Blanton Museum of Art.

To tax analysts, the issue is not how much money the Longhorns football team makes — $87.6 million last year — or whether the coach deserves his salary. Rather, said John Colombo, a professor at the University of Illinois College of Law, the question is: “Is Texas paying Mack Brown $5 million for his contribution to the educational environment at the university, or because it wants to win football games?”

How policymakers answer is worth millions of dollars to large and successful programs such as UT’s. Federal laws require a nonprofit’s income and expenses both to be tied to its charitable mission. But a number of critics, as well as a recent federal report, say the nation’s biggest college athletics programs are raising and spending money in ways increasingly divorced from education.

“The large sums generated through advertising and media rights by schools with highly competitive sports programs raise the question of whether those sports programs have become side businesses for schools,” a May 2009 study by the nonpartisan Congressional Budget Office noted.

Read the whole thing. I did not realize that pretty much all of the revenue that universities derive from athletics is tax free. There’s a lot of room for reform in there, but given the history and the repeated interference by Congress on behalf of the NCAA when the IRS has tried to declare a particular revenue stream taxable, I wouldn’t hold out much hope. For another perspective on this, read UT President Bill Powers’ blog post called “A Self-Sustaining Athletics Program”, which was published a couple of days before that Statesman story. (Thanks to Jake Silverstein for pointing out Tower’s blog.)

Green’s tax liens

I know some people think that the Mayor’s race is boring, so perhaps they should take a look at the City Controller’s race instead.

The Internal Revenue Service has filed two tax liens on City Councilman Ronald Green for more than $120,000 in alleged federal tax debt and fees, according to public documents unearthed by one of his opponents in the city controller’s race.

Green acknowledged the liens Thursday, but said they were part of an “honest dispute” over income that he mistakenly overlooked several years ago.

“We have been working together over the last couple months to get this resolved,” he said. “I’m aggressively advocating for myself.”

[…]

The IRS liens claim Green owes $38,842.62 from 2002, $35,046.07 from 2003, $39,942.65 from 2004 and $6,211.77 from 2006, according to the documents filed with the Harris County Clerk’s office.

Green, who has his own law practice, said the IRS dispute began when it discovered about $30,000 another attorney reported as having been paid to him in 2002 that he did not report on his return because of an oversight.

“As a small businessman, you do your taxes by collecting many separate 1099s, and unfortunately, this one didn’t get included,” he said. Much of the remaining IRS claims and his dispute with the agency stem from fees and interest it says he owes, Green said.

Texas Watchdog has the documents in question. Green’s explanation seems reasonable to me, though not having been in a similar position myself, I can’t fully judge it. But it is the sort of thing that sounds bad, especially when one is running for a job whose purpose is keeping track of finances, and however reasonable the explanation sounds, the old maxim about “if you’re explaining, you’re losing” comes to mind. The risk for Green is that Pam Holm, whose campaign sent out the press release with copies of those documents that is the basis for these stories, has the money to drop a bunch of mail attacking him for it if she chooses to do so. So does MJ Khan, for that matter. I’m not sure how Green responds if that happens. Green may be “leading” in that Chronicle poll, and that may have influenced the timing of Holm’s charge against him as he says (though really, this is the time that such attacks always come out, precisely because there’s not much time to adequately respond to them), but there’s a ton of undecided voters, and this may well have an effect on them. If he’s got a bullet to fire back, now would be the time to do it.