U. of Arizona's foundation had stake in offshore tax shelter, is suing donor's financial advisers
The University of Arizona Foundation and one of its major donors had a stake in a "sham" offshore tax shelter that the U.S. government later cracked down on, they say in a recent court filing. Now, they are both in federal court accusing a bank that helped set up the deal of defrauding them.
The lawsuit, filed in an Arizona state court this summer and moved to federal court last month, pits the foundation and the donor, Karl Eller, against global financial services giant UBS.
Eller, who made his wealth with a billboard company, and his wife Joan (Stevie) Eller have given more than $23 million to the university. Arizona’s business school is named the Eller College of Management.
In the filing, lawyers say the Ellers and, in turn, the university foundation suffered unspecified damages because the Ellers were duped by a number of financial advisers, including UBS, into investing in a “sham tax shelter.” It is unclear from the filings how much, if anything, the foundation lost, but it is claiming it suffered financial damages. Spokeswomen for the university and the foundation did not comment.
While universities and donors have been known to go after each other in court, it is unusual for a university and a donor to team up in a lawsuit. They are seeking fees, “needless investment expenses,” other costs and punitive damages from UBS.
A spokeswoman for the Arizona foundation declined to comment, citing the pending litigation. A lawyer for the Ellers did not comment. UBS is due to respond to the allegations in a court filing later this month, but several company spokespeople and a UBS outside lawyer had no immediate comment.
According to the lawsuit, in 1999, the Ellers were looking for investment opportunities to both gain returns on their funds and make charitable contributions to the university.
So Karl Eller and his accountant met with representatives of the Quellos Group and eventually found an offshore investment strategy that he thought was attractive for his purposes. (Two of those Quellos representatives were sentenced in 2011 to four years in prison for involvement in tax fraud related to another tax shelter.)
The Ellers eventually decided to opt for a complex financial instrument known as a contingent deferred swap. A later U.S. Senate investigation, cited in the lawsuit, described the deals as ways to generate “phony paper losses for taxpayers, using a series of complex, orchestrated transactions, structured finance, and investments with little or no profit potential.”
The “phony paper losses” could then be used to reduce an investor’s tax burden.
The Ellers ended up creating two investment vehicles for their deal.
UBS and its Cayman Island branch helped fund and administer the deals, according to the lawsuit. The Ellers put at least $41 million into Saguaro Trading Partners and also created a subsidiary, STP Trading Partners, which had $17 million of the Ellers’ money in it. The Ellers later donated 50.4 percent of their interest in STP to the University of Arizona Foundation.
According to the court filing, Karl Eller believed that the deal would “provide both a donation to the University of Arizona Foundation and an opportunity for the University of Arizona Foundation to earn additional returns from the fund.”
But the Ellers and the foundation did not receive the tax benefits from the deals he hoped, in part because the Internal Revenue Service came along.
The lawsuit names only UBS but also accuses others, including Quellos and PricewaterhouseCoopers, of misrepresenting the nature of the deal.
The Ellers allege they were told the deal would “pass muster with the I.R.S.” so that it could benefit the Ellers and the University of Arizona Foundation. The deal didn’t pass muster.
The deal “was, in reality, a sham tax shelter known to be invalid in the eyes of the I.R.S.,” according to the lawsuit.
In 2002, about a year after all of the tax shelter transactions had ended, the I.R.S. announced that it considered credit deferred swaps to be an abusive tax shelter. The I.R.S. then audited the Ellers’ partnerships.
According to the lawsuit, the Ellers and the University of Arizona ultimately settled with the I.R.S. and had to give up tax benefits they had been seeking from the deal and pay a penalty. It is unclear from the filings how much money was lost but the foundation “has suffered damages, including lost return on the investment.”