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July 22, 2009 5:51 AM

Indicted Lawyer Slaps Haim Saban with Sensational Civil Suit

Posted by Brian Baxter

UPDATE: July 22, 9 a.m. Additional details from the civil complaint were added to the last few paragraphs of this story.

A civil suit filed in Los Angeles Superior Court on Tuesday reads like a script for a big-screen Hollywood legal thriller. It's a case of the truth being stranger--and far more complicated--than fiction.

Hollywood tax lawyer Matthew Krane is suing his former client, entertainment industry billionaire Haim Saban, over a $36 million fee Krane was paid for referring Saban to an investment fund run by the Quellos Group. The suit charges Saban with attempting to get his hands on the $36 million, and in the process makes several provocative allegations.

According to the nine-page complaint, Krane states that Saban "spent decades trying to avoid paying taxes on the many billions of dollars in income he has received" and that the well-known Democratic fund-raiser used political donations to "demand special treatment and favors."

Saban was the creator of hit TV franchises like the Teenage Mutant Ninja Turtles and the Mighty Morphin Power Rangers. Krane was once a partner at former Los Angeles firm Pollack, Bloom & Dekom--now the Beverly Hills-based firm of entertainment industry player Jacob Bloom. While there he served as Saban's longtime tax adviser. (The L.A. Business Journal has an excellent story on the complicated relationship between Saban and Krane.)

For the past year, Krane has been sitting in a cell at the Metropolitan Detention Center, a federal holding facility in downtown Los Angeles. He faces charges of money laundering and conspiracy, as well as related charges of passport fraud and identity theft in a long-running tax evasion investigation by federal prosecutors. It's from the MDC that Krane's taken up his fight against Saban.

THE SALE

Scene One in this drama is set in 2001, when Saban realized $1.5 billion in capital gains from the sale of his stake in the Fox Family Channel to Walt Disney. Saban tapped Krane--a Harvard-educated lawyer with an exclusive Hollywood clientele, according to the Business Journal story--to help the media mogul avoid hefty capital gains taxes. Krane relied on a tax shelter to do this; that shelter is at the heart of the case filed against Saban.

In surprising testimony in 2006, Saban told the U.S. Senate that his limited formal education prevented him from understanding the shelter was illegal. He ended up paying $250 million in back taxes and penalties.

That would appear to end it for Saban. But Krane's lawyers claim that their client has been dragged into a federal tax investigation of a series of suspect tax shelters that he did not create. They claim that Saban, furious at testifying before a Senate committee, questioned by investigators, and forced to pay millions in tax penalties, used his influence to have Krane charged in the case and block his former lawyer's fee.

Michael Holtz, a partner with L.A. firm Lavely & Singer representing Krane in the civil suit against Saban, tells The Am Law Daily that Krane created a legitimate tax plan to protect at least half of Saban's capital gain from taxes. Krane then sought a partner to protect the remaining 50 percent of Saban's windfall, eventually settling on the Quellos Group, an $18 billion Seattle-based hedge fund. After referring Saban's business to the group, Quellos paid Krane a $36 million finders fee in 2002. (Quellos sold its investment management unit to BlackRock for $1.7 billion in June 2007.)

"My client was paid a fee from Quellos for providing input, assistance, guidance, and advice helping create part of this tax plan that Saban used for his sale of the Fox Family stock," Holtz says. "This is not a situation where a client paid legal fees to a lawyer and then afterward wants their money back because they think they're the victim of malpractice."

For its services, Holtz says, Quellos negotiated separately with Saban for a percentage of the $1.5 billion. Quellos then struck another agreement with Krane, paying him a fee that Holtz describes as "commensurate with the advice, service, and consulting that he provided to them."

THE FRAUD

The Senate subcommittee that Saban testified before issued a report in 2006 that suspected Quellos of engaging in tax evasion. Last month federal prosecutors charged Krane and two former Quellos executives--CEO Jeffrey Greenstein and in-house lawyer Charles Wilk--with 18 counts of tax fraud for signing off on tax shelters designed to save the firm's clients millions by crafting phony securities transactions to pass off as capital losses.

The government maintains that Krane, Greenstein, and Wilk netted $86 million in fees and allowed six clients to avoid paying $400 million in federal taxes. Krane was charged with money laundering for the $36 million fee--prosecutors call it a kickback--that he received from Quellos.

Holtz reiterates that Quellos paid Krane for bringing Saban's business to the firm and for constructing tax structures used by the hedge fund for other high-profile clients. Holtz also argues that several Am Law 100 firms signed off on the tax shelters in question.

The Am Law Daily previously reported that lawyers from Cravath, Swaine & Moore and Bryan Cave advised on the creation of the Quellos tax plans with the firms earning fees of $125,000 and $1.3 million, respectively. Former Cravath partner Lewis Steinberg, who recently joined Linklaters, testified before the 2006 congressional subcommittee that the firm had no knowledge of any alleged wrongdoing.

After Saban offered his own testimony before the Senate, the subsequent subcommittee report portrayed the billionaire as an unwitting victim of Krane's dubious tax advice. Still, in 2007 Saban paid $250 million in tax penalties for trying to avoid taxes on the capital gain realized from the Fox Family Channel sale.

During the federal investigation of the Quellos tax plans, Holtz says, Saban discovered the $36 million fee paid to Krane.

"Years after he received the fee, [Saban] decided that he didn't want Matt to have that money," Holtz says. "Matt Krane is not being accused of any criminal wrongdoing in connection with his portion of the tax plan. What Krane did with his fee is a completely separate issue from whether he did or didn't give Haim Saban a proper tax plan."

Holtz argues that his client is entitled to the $36 million fee for his services and the government should drop its tax charges against Krane.

THE FALLOUT

Late last year Saban filed a civil suit against Krane in Austria seeking to recoup the $36 million fee. Holtz says the suit was filed in Austria because that's where Krane deposited his fee. He defends his client's decision to park the money offshore.

"Matt formed a shell company after he had negotiated his agreement with Quellos that he would get a portion of their fee from Saban," Holtz says. "[Krane] needed to have European members of that company in order for it to be legit, so he hired a friend that he'd done some work with, a consultant in Austria, as a board member."

Holtz says the funds have been in the Austrian account for the past seven years and have not been drawn down. Saban's suit served as the impetus for Krane's civil complaint on Tuesday. Holtz hopes to remove the Austrian proceedings to Los Angeles, claiming that all the parties involved are subject to California law.

But it's federal law that is keeping the 55-year-old Krane incarcerated in the MDC in downtown L.A. The New York Times reports that when law enforcement officials investigating Krane for the tax case searched his West Hollywood home last year, they discovered illegal narcotics and documents relating to a passport application with Krane's photo identifying him as "Christopher Thomas Sullivan."

A judge in that case is keeping Krane locked up in the MDC after ruling that he was a flight risk. A bail hearing is scheduled for later this month. But Krane's new criminal lawyer, Robert Barnes from The Bernhoft Law Firm, no stranger to high-profile tax cases, claims that his client never intended to leave the country and instead feared for his life. (Barnes took over Krane's criminal case from Foley & Lardner's Pamela Johnston this week.)

The lingering hostility between Krane and his former client now extends to the lawyers for both individuals. The civil complaint filed by Holtz and his partner Martin Singer includes allegations that Saban's defense lawyers--led by David Chesnoff from Las Vegas's Chesnoff & Schonfeld--used Saban's political clout to collude with federal prosecutors in Seattle to slap Krane with the money-laundering charge.

"Defendants' attorneys also bragged about special influence over and collusion with prosecuting attorneys for the Western District of Washington in facilitating the prosecutorial charging, arrest, and bail decisions of the federal prosecutors concerning criminal charges brought against Krane," the complaint says, "all in the hopes of depriving plaintiffs of the fee deservedly earned for Krane's instrumental role in putting together the [tax] plan."

Chesnoff's nephew, Adam, is an executive with Saban's company. The lawyer, a former law partner of current Las Vegas mayor Oscar Goodman, declined an Am Law Daily request for comment.

But a spokeswoman for Saban issued a statement late Tuesday calling Krane's suit "frivolous" and a "transparent attempt to distract from Mr. Saban's right to recover the money stolen from him by Mr. Krane."

Meanwhile, prosecutors continue their investigation into what they call one of the largest tax evasion schemes in U.S. history.

Only in Hollywood.

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