An accountant hired to audit the renovation of a post-production studio on Esplanade Avenue told jurors this week that she became increasingly skeptical of the financial records she received from two partners in the project who now stand accused of inflating its costs to fool the state into issuing film tax credits.
The accountant, Katie Kuchler Davis, said her dealings with New Orleans lawyer Michael Arata and Hollywood producer Peter Hoffman had been frustrating at times, in part because their answers to questions changed frequently and their expenses didn’t always add up. Some records she received were partially redacted, she said, and others were illegible.
Davis said her firm, Malcolm M. Dienes LLC, had not been “auditing for fraud” and was limited to the information Arata and Hoffman submitted. “You can’t catch collusion in normal audits,” she said.
Prosecutors allege that Arata and Hoffman conspired with Hoffman’s wife, Susan, to exaggerate their expenditures on the once-decrepit Whann-Bohn house, a three-story mansion at 807 Esplanade Ave., to qualify for more tax credits than they deserved under the Louisiana Motion Picture Incentive Act, a generous subsidy program that’s been repeatedly gamed in recent years. All three have been on trial since Monday in U.S. District Court on charges of wire fraud, mail fraud and conspiracy. Arata also faces several counts of making false statements to the FBI.
Prosecutors said the partners intentionally kept Davis in the dark about a series of “circular” transactions involving a purported purchase of film equipment that never happened, as well as the source of funding for the studio renovation. The state requires qualifying expenses to be audited and verified by an independent certified public accountant before any tax credits are issued.
The business partners received some $1.1 million in tax credits from the state in 2009 — which Arata later sold — for their work in transforming the rundown Esplanade Avenue into a modern facility that serves the local film industry. However, the state did not issue film tax credits in response to later applications related to the project.
In testimony that began Thursday and ended Friday, Davis said Arata first approached her firm in late 2008 about conducting the audit for the tax credits. She said she did not know then that Arata and Hoffman already had attempted to work with a previous auditor, who prosecutors said caught on to the irregularities and eventually refused to continue working for them.
Arata and Hoffman offered conflicting information about the legal fees Arata supposedly had earned from the project, Davis testified. The partners, she explained, couldn’t initially agree on whether Arata received cash or an equity interest for his services.
The Dienes firm ultimately withdrew an audit that it had prepared for the Esplanade Avenue project, prompting the partners to seek out yet another accountant, Rebecca Hammond, who similarly told jurors Friday that she could not substantiate all of the alleged costs of the renovation.
Davis, in one of several emails viewed by the jury, wrote at the time that she had “lost confidence” in the numbers and complained that “the answers to questions have changed numerous times.”
“The paperwork should support the transactions,” she wrote in one correspondence. “The proof is in the documents.”
Emails showed that Peter Hoffman, president of California-based Seven Arts Entertainment, which spearheaded the project, blamed a subordinate at one point for what he referred to as errors in invoices.
“Ouch. We are not double dipping,” he wrote in one defensive response to Davis.
Jurors also saw an email from Hoffman to Arata in which Hoffman talked about sending follow-up information to assuage Davis “so that she doesn’t get any more suspicious than she already is.”
On cross-examination, Davis acknowledged the state’s film tax credit law had been “a little confusing” in its early years and has since become more straightforward because of changes in the law. Defense lawyers in the case have maintained their clients did nothing wrong and that the renovation project, in the end, would have qualified for more tax credits than the state actually issued.
Jurors have had to endure a tedious — and at times repetitive — display of hundreds of financial records and emails that prosecutors claim spell out a scheme to defraud the state. In one humorous exchange Friday that highlighted the jargon that has dominated the proceeding, U.S. District Judge Martin Feldman felt compelled to explain to jurors that “GAAP” was not a reference to “the store where you buy T-shirts” but to “generally accepted accounting principles,” which a defense attorney had neglected to explain.
Frustrated by the slow pace of the trial, Feldman has sought to stave off redundant questioning from prosecutors and defense attorneys alike. On Friday, Feldman jokingly told defense attorney Lance Unglesby that he would be sending him a bill for his services after the judge interrupted his cross-examination to clarify a few questions for Davis.
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