A federal jury in New Orleans on Monday convicted three business partners of cheating Louisiana’s oft-criticized film tax credit program, delivering U.S. Attorney Kenneth Polite’s office a victory after a two-week trial that featured reams of accounting records.
The verdict marked the latest black eye for a generous subsidy program that has been repeatedly bilked by filmmakers, and it could give a boost to continuing calls for legislative reform of the Louisiana Motion Picture Incentive Act.
The high-profile defendants — Hollywood producer Peter Hoffman, his wife, Susan Hoffman, and New Orleans attorney Michael Arata — were all found guilty on charges of conspiracy and mail fraud.
Arata, the husband of New Orleans Deputy Mayor Emily Arata, also was convicted on seven counts of wire fraud and four counts of making false statements to the FBI.
Peter Hoffman, the founder of the California-based Seven Arts Entertainment, was convicted on 19 counts of wire fraud, and his wife was convicted of one count of wire fraud.
It was not a complete victory for the government: Michael Arata was acquitted of 12 counts of wire fraud, while Susan Hoffman was acquitted of 14 counts of wire fraud.
The defendants appeared to be in a state of shock at the verdicts, and all three left the federal courthouse without commenting. Their attorneys also offered no reaction.
Peter Hoffman faces a maximum of 405 years behind bars, according to Polite’s office, while Arata faces a maximum of 185 years and Susan Hoffman faces 45 years. All three defendants are almost certain to receive far shorter sentences than that — if they don’t qualify for probation — under federal sentencing guidelines.
U.S. District Judge Martin Feldman set sentencing for Aug. 19.
Polite, in a prepared statement, said the prosecution had sent the message “that our state’s business, especially our growing film industry, will no longer fall prey to fraud and corruption.” He vowed to “follow the facts and bring justice to (criminals), regardless of where they live, their wealth or their last names.”
The trial centered on a multimillion-dollar construction project in which the business partners converted a derelict mansion at 807 Esplanade Ave. into a state-of-the-art post-production studio that is used today by the local film industry.
Jurors heard sharply conflicting versions of the renovation, with prosecutors presenting it as a nefarious scheme and defense attorneys maintaining it was a legitimate if complicated venture that ultimately benefited the state.
The defendants acknowledged the project would not have been feasible if it hadn’t qualified for a 40 percent rebate, paid in tax credits, that the state offered at the time under a program to promote filmmaking infrastructure that since has been phased out. The state, in order to entice filmmaking activity, still covers 30 percent of the cost of any movie made in Louisiana.
In order to qualify for tax credits under either program, applicants must make expenditures in Louisiana and hire an independent certified public accountant to audit and verify the project costs.
The three defendants were accused of trying to swindle the state out of millions of dollars in tax credits by misleading auditors and state officials about the amount of money they spent refurbishing the antebellum mansion, a three-story home on the edge of the French Quarter.
The business partners received some $1.1 million in tax credits in 2009, which Arata, 49, later sold for profit. State officials retracted, then decided to honor those credits even after the feds brought charges against the three, in part because the credits already had been sold. But they denied two later applications for additional tax credits in light of mounting concerns over the project.
Prosecutors walked jurors through a scheme in which they said the defendants greatly inflated the expenditures involved in the renovation. For instance, the business partners reported paying more than $1 million for film equipment that never surfaced, and they grossly exaggerated the compensation contractors received to finish the project. The defendants also submitted incomplete or redacted accounting records to the auditors that masked a series of “circular” wire transfers, prosecutors said.
In perhaps the most lively chapter of the proceedings, Peter Hoffman testified that he had been under pressure to submit qualifying expenses for the project by the end of 2008, when the film infrastructure law was scheduled to “sunset.” To that end, he said, he filed cost reports that were forward-looking, an estimate of what the project likely would cost in the end, even though much of that money hadn’t yet been spent. He claimed it had been clear to state officials that much of the work cited in the project was not complete.
“I don’t know how anybody could have not understood what we were doing here,” he said.
But Christopher Stelly, executive director of Louisiana Entertainment, a division of the state’s economic development agency, contradicted that testimony, saying the state wouldn’t issue tax credits in cases where “money wasn’t actually spent.” In an unprecedented situation, he said, the state disallowed the tax credits it had issued for the post-production facility but then, in an effort to protect “innocent taxpayers who had purchased these credits,” decided to reinstate them.
The 25-count indictment accused the defendants of using email accounts and postal services to send “materially false and misleading” documents over 17 months, making their payments appear to be legitimate. Prosecutors said the scheme also included the use of “shell companies.”
“It was all smoke and mirrors,” Assistant U.S. Attorney Chandra Menon told jurors during opening statements, adding the defendants had “exploited every human being that they could” in their quest to loot taxpayer dollars.
Prosecutors portrayed Peter Hoffman, 65, as the ringleader of the conspiracy, with Arata, an actor and former Tulane University football player, playing a supporting role by tapping local connections. By contrast, Susan Hoffman, who is separated from Peter Hoffman but remains a good friend, found herself on the periphery of the project’s finances, even though she played a decisive role in the interior design of the renovated mansion.
In the middle of the trial, the lead FBI agent on the case, Robert Blythe, admitted overstating in his earlier grand jury testimony Susan Hoffman’s participation in the conspiracy when he claimed she had signed several loan documents that apparently contained her forged signature. Still, prosecutors maintained she’d been aware of the fraud scheme and used connections — including a close relationship with the project’s general contractor — to further it.
Jurors heard from some two dozen government witnesses.
One accountant hired to audit the Esplanade Avenue project’s expenses, Katie Kuchler Davis, expressed frustration about receiving conflicting information from Arata and Peter Hoffman about legal fees Arata incurred during his work on the project.
Another witness, Michael Daigle, a forensic auditor working for the state, told jurors the project’s finances were so jumbled that multiple audit reports were “withdrawn” after firms lost confidence in the validity of the expenses.
“I’ve been doing this for 40 years, and this the first time I’ve seen this,” Daigle testified. “This is very unusual.”
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