The Bernhard case
|A riveting new civil suit raises serious allegations about Louisiana’s entertainment industry tax credit program.|
The civil suit filed last month by the Crawford Lewis law firm against former attorney James “Tres” Bernhard is something of a page-turner, laying out an elaborate scheme of fraud and theft that involved the transfer of movie industry tax credits.
According to the suit, Bernhard—son of The Shaw Group’s founder and CEO Jim Bernhard—allegedly pocketed funds from the transfer of tax credits that either didn’t belong to him or didn’t exist, while forging emails, checks, and even a judge’s signature in the process.
But while the case is riveting—not in the least because of Bernhard’s high-profile family connection—more intriguing than the allegations are the questions it raises about the state’s entertainment industry tax credit program. What kind of weaknesses existed within the program to allow millions of dollars to change hands before certified tax credits could be transferred to the buyers? More importantly, has the state done anything to address those problems?
“If you’re going to have a tax-credit program, you have to have prophylactic measures to make sure the public dealing in the tax credits knows what they’re dealing with,” says attorney Mary Olive Pierson, who represents Crawford Lewis in the suit. “The way the program is run, with this lackadaisical attitude about what a tax credit looks like, is a target-rich environment for what went on.”
While some may disagree with that assessment—and Pierson has a vested interest in saying so—there’s no question the tax credit program has had its share of controversies. There have been civil lawsuits over the way the credits are awarded, like developer Robert Day’s case, which went all the way to the Louisiana Supreme Court. And there have been criminal cases, like the one that sent the state’s former film recruiter, Mark Smith, to prison.
There was also a recent Legislative Auditor’s report that questioned movie tax credits received by New Orleans’ world-renowned Mardi Gras float builder, Blaine Kern Artists.
The Crawford Lewis suit is the latest indicator of how some gray areas in the program have made it vulnerable to problems. According to the suit, Bernhard joined the firm in 2007 as a self-described expert in state and federal tax credits.
One of the cases he was assigned involved a tax credit brokerage called Take Two Credits, whose owner, Steve May, was upside down on a tax credit transfer. The lawsuit claims May had paid more than $5 million in cash for tax credits he then sold to investors. Problem was, according to the suit, May never received the credits from the two Baton Rouge companies from whom he’d purchased them, DMG Holdings and Nerjyzed Entertainment.
As an attorney helping to resolve the dispute, Bernhard devised a solution, according to the suit. May’s brother, Brian May, would form a company—Factor Holdings—to cover Take Two’s obligation to the investors and to assume its rights to pursue the tax credits from DMG and Nerjyzed. Bernhard allegedly told Factor it would need to put up $1.3 million to begin settling the claims, and in late 2010 it did, depositing $1.3 million in the Crawford Lewis account.
But Bernhard never paid off the investors, according to the suit. Instead, he diverted a substantial amount of the funds “to a number of his own personal creditors … and instead of settling claims with all of the third party investors, as reported to Factor and Crawford Lewis, Bernhard convinced at least one third party investor” to accept fake tax credits.
The suit goes on to allege that Bernhard lied to Crawford Lewis, telling the firm’s partners he had recovered funds for tax credits, showing them a fake judgment with a forged judge’s signature and going so far as to create a fake checking account with bogus checks. He also allegedly created a fictitious email account, sending emails in the name of a court-appointed receiver to himself, promising more funds would be forthcoming. Says Pierson: “It wasn’t a bright scheme.”
The suit maintains that Crawford Lewis didn’t find out about any of the alleged activities until March of this year, at which time it began an internal investigation.
Bernhard is now at an undisclosed medical facility in the Dallas area and has permanently surrendered his law license in lieu of facing disciplinary action from the state Office of Disciplinary Counsel.
Meanwhile, Crawford Lewis has turned over information to federal and state law enforcement agencies, and attorneys are working with the firm’s clients to make sure none of them use bogus tax credits against their state tax bills, due this month.
“It’s very important not to put a bad tax credit on your return because it can be very costly,” Pierson says. “We wanted to make sure that people who were planning to use these tax credits were contacted and advised about the condition of them.”
Whatever becomes of the allegations against Bernhard, the suit indirectly suggests that DMG and Nerjyzed also have questions to answer. Those companies allegedly failed to deliver $7 million worth of movie and digital media tax credits to Take Two, which had paid more than $5 million in cash for them. The suit alleges that after pursuing the credits for more than one year, neither company had transferred them to Take Two.
Roy Maughan, an attorney representing the companies, disputes those figures and says his clients haven’t done anything wrong.
“I think what is being stated is owed is way overstated,” says Maughan. “It appears some people are trying to say this is the fault of Nerjyzed or DMG. Well, I think the people who are saying that are the people who worked with Mr. Bernhard, and now they’re trying to pass on that fraud to someone else.”
But Maughan concedes his clients have not transferred all the tax credits that were owed because of what he calls “accounting issues.” Those issues, he suggests, have to do with the companies not getting from the state—at least in a timely fashion—as many credits as they were precertified to receive.
Why that happened, he says, is a combination of factors that includes changes and tightening of the rules within Louisiana Economic Development and also a lot of misunderstanding among people in the industry.
“It was a combination of rule changes, new procedures by the state, reduced amounts of credits being given and, in this case, fraud and manipulation,” he says.
Sources familiar with the situation say civil lawsuits against Nerjyzed and DMG are being prepared. Regardless, the whole situation suggests problems persist within the administration of the tax credit program, which most agree has been tremendously positive overall but somewhat faulty in certain aspects of its execution.
While one of the problems stems from ambiguity in the way the rules are written, say those who deal in the industry, perhaps the biggest problem stems from the inherent purpose of the tax credit program, which encourages risk-taking and betting on projects that have yet to materialize as a way of generating, essentially, what amounts to venture capital.
That comes into play with the transfer of precertified tax credits, which, as their name implies, have been given preliminary approval from the state but will only exist on paper until a project has been completed and all its expenses verified, many times over. Certified credits can be bought and sold, too, and are, usually at a discount of between 10% and 15%.
But precertified credits can come at bargain basement prices—as much as 40% off—and eventually be used against state taxes dollar for dollar. But they’re a huge gamble.
“It’s an extremely risky business,” says Tom Clark, an attorney at Adams and Reese and an expert in movie and digital arts tax credits. “You’re banking on getting tax credits that may never materialize or may take several years to materialize.”
Which is what Maughan says happened in the case of DMG and Nerjyzed. Back in the mid-2000s, when the program was getting started, getting precertification from the state was relatively simple, and lots of brokers were trading in credits.
Since then, the state has made it a lot more difficult to get precertification for projects as a way of making sure projects that are pre-certified come to fruition and result in the transfer of legitimately earned tax credits.
“They’re doing a lot more vetting on the front and the back end,” Clark says.
Still, he believes the state could do an even better job of making investors aware of the rules and clarifying what is a legitimate expenditure and “what would ultimately lead to a certified tax credit.”
For its part, LED says the Crawford Lewis case does not at all reflect weaknesses within the tax credit program.
“LED obviously cannot take responsibility for third-party individuals making promises to investor, or creditors who then pay money upon an expectation that tax credits will materialize and be transferred to them,” says LED Secretary Stephen Moret.
Perhaps. But attorneys representing very different interests in the Crawford Lewis case agree on this one point: The state should do more to clarify the rules governing its program.
Says Pierson: “LED should be interested in maintaining controls over these transfers.”
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