Federal judge tosses some fraud counts against New Orleans lawyer Michael Arata, Hollywood producer Peter Hoffman; they remain convicted on other counts _lowres

Peter Hoffman (left) and Michael Arata

A federal judge on Wednesday accused prosecutors of employing “mean-spirited hype” in an unusual film tax-credit fraud case, acquitting New Orleans lawyer Michael Arata and Hollywood producer Peter Hoffman of numerous counts of wire fraud on which a jury found them guilty after a lengthy trial in April.

But for all of the criticism he heaped upon the government, U.S. District Judge Martin Feldman upheld the jury’s conclusion that Arata and Hoffman conspired with Hoffman’s wife to defraud the state of more than $1 million in renovating a dilapidated mansion into a post-production film studio at the edge of the French Quarter.

Arata, the husband of New Orleans Deputy Mayor Emily Arata, emerged as the biggest beneficiary of the ruling, as Feldman reversed all four of his convictions for making false statements to the FBI and also acquitted him of seven counts of fraud. Arata now stands convicted of just one count of wire fraud plus the overall conspiracy charge, and he could avoid prison time if officials determine he is eligible for probation.

Hoffman, portrayed by prosecutors as the conniving mastermind of the scheme, also fared well but faces the stiffest penalty — the conspiracy conviction alone carries a sentence of up to five years — when the judge sentences the business partners next month. Feldman acquitted Hoffman of five fraud counts the jury had convicted him of, but he let stand 15 others.

“Today, the court acknowledged that it is undisputed that all tax credits in this case were ultimately earned, validly issued and for a building that was completed exactly as intended by all parties,” said Lance Unglesby, Hoffman’s defense attorney. “Mr. Hoffman will appeal the verdict and decision and is optimistic that he will be vindicated on appeal.”

A spokeswoman for U.S. Attorney Kenneth Polite declined to comment. Polite, in announcing the convictions in the spring, vowed that federal prosecutors in New Orleans would “follow the facts and bring justice to (criminals), regardless of where they live, their wealth or their last names.”

The case centered around the construction of a state-of-the-art studio at 807 Esplanade Ave. and allegations that the business partners conspired to swindle millions of dollars in tax credits under the Louisiana Motion Picture Incentive Act by misleading auditors and state officials about how much they spent repairing the three-story mansion.

The trio received some $1.1 million in tax credits in 2009 that Arata later sold at a profit. State officials retracted but later decided to honor those credits even after the federal charges were filed, but they denied two later applications for additional tax credits amid mounting scrutiny of the project.

The business partners never denied they began the renovation because of a 40 percent tax credit rebate offered at the time for building filmmaking infrastructure, a since-canceled part of a controversially generous subsidy program that the state initiated to attract filmmakers to Louisiana.

To qualify for the film tax credits, applicants were required to spend money in the state and have those expenditures audited by an independent certified public accountant. In this case, prosecutors accused the business partners of trying to manipulate the program by overstating the amount of money they spent and then seeking to confuse and deceive several auditors brought on to vet the finances.

Feldman, who often touts the sanctity of jury verdicts and has said he can count on one hand the number of times he has disagreed with one in his court, seemed bewildered at some of the convictions in light of the evidence presented at the trial.

His 124-page ruling — punctuated with barbs like “Unbridled conjecture cannot support guilty verdicts” — underscored the misgivings he voiced before and after the trial, as prosecutors struggled to answer the question of what harm had actually come from the scheme.

Hoffman ruling

Feldman, in his summary of the testimony, noted that the studio today is “up and running” and that it “ultimately earned at least the amount in tax credits that it received.”

“This is not an ordinary fraud case,” he wrote, accusing prosecutors of “wishfully” suggesting it was black-and-white. “Infrastructure transactions involve complex financial events, not simple cash transactions like buying a T-shirt at Wal-Mart.”

The rules surrounding the state’s film tax credit program were “at best gray” when the renovation began, Feldman wrote, and the law spelling out the incentives was “implemented haphazardly and in a manner rife with disorder.”

Perhaps the most embarrassing blow to the government came in Feldman’s finding that multiple wire-fraud convictions in the case could not stand because prosecutors failed to prove that the emails forming the basis of those charges crossed state lines electronically and thus constituted interstate commerce. At the trial, a paralegal employed by Yahoo!, Arata’s email carrier, was unable under government questioning to explain how the company’s servers functioned.

Feldman reserved his sharpest derision for the government’s efforts to save those wire-fraud convictions, citing a court filing after the trial in which prosecutors pointed the finger at the defendants for failing to offer, in the judge’s words, “a countervailing expert who could show that the email traveled through a server in Louisiana.”

“This incendiary and petulant suggestion as to how the defendants could have strengthened their case fundamentally perverts the American criminal justice system and would destroy the very foundation of constitutional due process,” Feldman wrote, reminding the government that “the defense has no burden to disprove guilt.”

Still, while the business partners denied participating in any conspiracy, Feldman ruled that the jury, in convicting the trio on that count, “could have inferred an agreement from the circumstantial evidence and concert of action.”

Hoffman’s wife, Susan Hoffman, played a minimal role in the project and maintained that she largely relied on her husband to tell her which documents to sign. Jurors acquitted her of 14 counts of fraud, but Feldman, in his ruling, declined to reverse her convictions on one count each of conspiracy, wire fraud and mail fraud. Prosecutors alleged that she greatly exaggerated her role in the project on paper, including an exorbitant fee for project management services that authorities described as a “complete fiction.”

Feldman is scheduled to sentence the defendants Jan. 27, a date that has been postponed four times.

Follow Jim Mustian on Twitter, @JimMustian.