Matthew Krane is a Harvard-educated attorney who soared to the top little circle of L.A. entertainment lawyers and who lived in the exclusive Hollywood Hills above the trendy Sunset Strip.
But for the past year, he has been sitting in a cramped cell at the Metropolitan Detention Center, a federal holding facility in downtown Los Angeles. He faces federal charges over money laundering and conspiracy in what a federal prosecutor has called one of the largest tax evasion schemes in U.S. history.
At the heart of the case is a shelter that Krane used to allow his star client, Haim Saban, to evade taxes on capital gains of $1.5 billion Saban made after selling his interest in the Fox Family Channel in 2001. In surprising testimony in 2006, the media mogul 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 several insiders, most of whom did not want to be identified, pointed out that since a trial is in Krane’s future, it is possible but by no means a certainty that Saban or others could be touched by Krane’s ongoing legal troubles.
Actually, Krane’s troubles with tax shelters are only part of his problem. While authorities were investigating the case, they served a search warrant at his West Hollywood home, where they found the fake passport documents, along with crystal meth, date-rape drugs and horse tranquilizers.
The judge in this case, Dale Fischer, has ruled the 55-year-old attorney a flight risk. That’s why he’s remaining locked up, although a bail hearing is scheduled for July 27.
In a statement to the Business Journal, Krane’s attorney, Robert Barnes, denied that his client committed any wrongdoing.
“Allegations of any criminal conduct against Matt are false, and will be proven so at trial” said Barnes, who is best known for defending Wesley Snipes in a high-profile tax fraud case.
A representative for Saban did not return requests for comment. However, in his 2006 statement to a Senate subcommittee investigating the high-level tax scheme, Saban said Krane “assured me that the transaction was legal.”
Meanwhile, another attorney Robert Jason, a former classmate of Krane’s involved in the same tax shelter scheme has pleaded guilty. The plea is under seal, which, other attorneys said, implies that he is cooperating with the prosecution.
Prominent firm
The Business Journal has reconstructed the sharp rise and fall of Krane through court documents and interviews with lawyers who worked with him.
The story begins at Harvard in the late 1970s and early 1980s, when Krane and Jason were both at the Ivy League school, although it couldn’t be determined if they knew each other there.
Krane started practicing as a young tax attorney in the early 1980s. He landed at a prominent Beverly Hills entertainment law firm, then known as Pollock Bloom & Dekom in 1984, and met Haim Saban two years later.
The two hit it off and Krane left the firm in 1993 to become Saban’s trusted tax attorney, adviser and confidant. Saban even made Krane executor of his multibillion-dollar estate and the trustee of his children’s trusts.
Saban was No. 8 on the Business Journal’s list of Wealthiest Angelenos in May with an estimated net worth of $2.8 billion, although that was down by $1.4 billion from the prior year.
(Krane’s Hollywood ties extend beyond Saban. His brother, Jonathan Krane, is John Travolta’s producing partner, with credits including “Swordfish,” “Face/Off” and “Look Who’s Talking.”)
Saban had moved to Los Angeles in 1983. He purchased the rights to broadcast “The Mighty Morphin Power Rangers” outside of Asia in 1985 and eventually licensed them to News Corp. for broadcast on what was then the fledgling Fox network.
The show became an overnight hit and eventually led to a join venture between Saban and Rupert Murdoch’s Fox in 1996. That resulted in the creation of the cable venture Fox Family Channel. Public records show that Krane served as one of two attorneys handling the Fox deal for Saban.
Saban opted to sell his 50 percent stake in the channel in 2001, and Saban and Fox eventually sold the channel to the Walt Disney Co. for $5.2 billion.
During the deal, Saban, expecting to make a hefty sum, called on Krane “to see what he could do in terms of tax planning,” according to court documents. That’s where Krane’s troubles began.
Quellos shelter
In an interview conducted by law enforcement agents in 2007, Saban said Krane advised him to enter into a transaction structured by Quellos Custom Strategies LLC, a unit of Quellos Group, a Seattle hedge fund. Krane allegedly told Saban that the transaction would likely shelter at least some of the nearly $1.5 billion in capital gains from the Fox Family deal.
According to court documents, Krane did not disclose to Saban that he was getting a $36 million finder’s fee from Quellos for advising Saban to put his money into the shelter. One tax attorney said the fee would represent a conflict of interest.
After the Senate started investigating the Quellos’ tax shelter, investigators discovered that Saban had used the shelter and the Senate called for his 2006 testimony. In a 400-page report that details the Quellos tax shelter, Saban is portrayed as a victim of his professional adviser. According to the report, Saban even said that he was not concerned about the details of the highly complex transaction because it had the “Matt Krane stamp on it.”
According to the Senate report, the tax shelter worked through a series of complex trades that used fake transactions to create fake losses “and offset real taxable capital gains of U.S. taxpayers so they could avoid paying taxes.”
Quellos carried out the transactions on the Isle of Man and in the Cayman Islands in an effort to keep them hidden, authorities allege.
However, the Internal Revenue Service declared the shelter invalid and required Saban to pay more than $250 million in back taxes and penalties. Others involved were also required to pay taxes and penalties.
Details of Krane’s role in the Quellos case were revealed last month, when federal prosecutors in Seattle unsealed an indictment charging Krane, along with former Quellos Chief Executive Jeffrey Greenstein and his business partner, Charles Wilk, with conspiring to operate one of the largest tax evasion schemes ever in the United States. They estimated Quellos clients shuffled $1.4 billion overseas to avoid paying hundreds of millions in taxes. (Only about half of Saban’s $1.5 billion in gains went through the tax shelter.)
Prosecutors also charged Krane with conspiracy to launder money in relation to the $36 million fee that he sent to an Austrian bank account.
When federal agents searched Krane’s West Hollywood home in 2008 while investigating the Quellos matter, they uncovered a passport application in a different name but with Krane’s photo attached, an itinerary for travel to Germany and $300,000 in cash (hidden in a VCR, according to one report).
Small group
Meanwhile, Jason last month pleaded guilty to one count of tax fraud in Seattle federal court. Court documents show that his plea is part of the Quellos case.
The Beverly Hills attorney who spent 12 years practicing at the now-defunct Hill Wynne Troop & Meisinger, which also did work for Saban pleaded guilty to filing a false income tax return. Jason reported to the IRS that his total income for 2002 was $616,356, but he later acknowledged that he received an additional $407,000 in income that he did not report.
Further details of the plea have been filed under seal.
Jason’s lawyer, L.A. white-collar criminal defense attorney Jan Handzlik, said his client looks forward to putting the matter behind him. Handzlik wouldn’t discuss the case further and wouldn’t answer questions about Jason’s relationship with Krane.
White-collar criminal defense attorneys not involved in the case said a sealed plea indicates that Jason could be cooperating with the government in its case against Krane and the two former Quellos executives.
Saban may not be out of the woods yet. If Krane’s case goes to trial, one lawyer said, Saban could be called to testify, which could expose further details of any knowledge he may have had about the illegal transactions.
What’s more, it’s also possible that other Hollywood names could emerge as a result of the legal procedures. Although that is not at all a certainty.
L.A. entertainment attorneys contacted by the Business Journal, who requested anonymity because they weren’t comfortable discussing the case, said they were astounded to learn of the charges. They described Krane and Jason as savvy attorneys with the ability to handle the most complicated tax matters.
One high-profile local attorney who had known Krane in the past said that the case presents a contrast with her memories of him as “smart and soft-spoken.”
“This is different from my impression of him as a young attorney,” she said.
