The Toy King vs. The IRS

Toy industry executive Jeffrey P. Chernick has pleaded guilty to charges of filing a false tax return, the third U.S. client of Swiss bank UBS to plead guilty to tax charges.

Chernick, who owns a corporation in New York that represents toy manufacturers in China and Hong Kong, appeared Tuesday before Judge James I. Cohn in Ft. Lauderdale, Fla., and accepted responsibility for concealing more than $8 million in Swiss bank accounts.

According to prosecutors, Chernick’s 1040 return for 2007 failed to report that he had a bank account with UBS, and the income he earned on the account. The UBS account was opened in the name of Simba International Ltd., a nominee Hong Kong corporation.

Beginning in the mid-1970s, Chernick set up a Hong Kong corporation and opened offshore bank accounts in order to conceal from the IRS commissions paid to him for toy sales, according to prosecutors. In total, he was the beneficial owner of approximately $8 million in offshore assets maintained in accounts in the name of nominee entities, including Simba, at UBS and other Swiss banks.

In 2000, UBS entered into an agreement to begin providing the IRS with information on bank accounts in which the beneficial owner was a U.S. citizen. Around the same time, one of Chernick’s Swiss bankers left UBS for a smaller, less prominent Swiss bank. The banker told Chernick he had left UBS in part because the smaller bank would not be subject to Washington’s scrutiny and could not be pressured by the U.S. government to disclose certain information to American authorities. Following the banker’s advice, Chernick agreed to invest some of his assets with the smaller Swiss bank.

Between 2002 and 2008, Chernick discussed his offshore accounts with the former UBS banker and other Swiss financial service providers. The meetings took place at various U.S. locations, including hotels in New York City. During these meetings, Chernick, the Swiss bankers and Swiss financial service providers would discuss Chernick’s investments held in his offshore accounts, as well as the payment of fees for banking services rendered by Hong Kong and Swiss financial service providers. In July 2008, despite Chernick’s concerns about an ongoing investigation into the activities of UBS, a Swiss financial service provider convinced him not to disclose his offshore accounts, nor to file amended returns or pay the IRS any additional taxes he owed.

In order to have access to the millions of dollars he concealed offshore, he allegedly used credit cards linked to his offshore Swiss bank accounts to make large purchases while traveling abroad.

With the assistance of Swiss bankers and other financial service providers, Chernick also set up a sham $700,000 loan between Simba and a second Hong Kong entity in order to repatriate funds into the U.S. to purchase property adjacent to his home in New York.

Judge Cohn scheduled Chernick’s sentencing for Oct. 30, 2009. He faces a maximum sentence of three years in prison.

Chernick is the latest UBS client to plead guilty to tax charges. In June, Boca Raton accountant Steven Michael Rubinstein pleaded guilty to filing a false tax return, as did Robert Moran, a Ft. Lauderdale yacht broker, in April.

In February, UBS signed a deferred prosecution agreement with the U.S. Justice Department, agreeing to pay $780 million and provide the names of 250 U.S. clients who had been accused of tax fraud. However, the IRS has a lawsuit pending in a Miami court to force the bank to reveal the identities and holdings of an additional 52,000 UBS clients by issuing “John Doe” summonses.

The two sides have delayed the trial and are reportedly in negotiations on a settlement.