James Pflueger, One of Hawaii's Wealthiest Residents, on Trial for Tax Fraud After Hiding Assets in Switzerland
BY MALIA ZIMMERMAN - After the Ka Loko Dam breached in the early morning hours of March 14, 2006, in Kilauea, Kauai, releasing 400 million gallons of water on the community below, retired automobile dealer mogul James Pflueger knew he was going to have to pay. The breach took place on Pflueger’s property after his reservoir swelled and the 118-year old earthen dam overtopped and burst, generating waves as high as 40 feet from the 30-acre reservoir. Witnesses said a “tsunami from the mountain” collected trees, cars and debris in its path before crashing into the homes below.
Aurora Solveig Fehring, her husband Alan Gareth Dingwall, and their 2-year-old son, Rowan Grey Makana Fehring-Dingwall, were sleeping in their home when they were swept from their beds to their death. Aurora’s friend, Christina Michelle McNees, who was 7 months pregnant, and Daniel Jay Arroyo, Christina's fiancé who she was set to marry just hours later, were crushed to death by the impact. Timothy Wendell Noonan, Jr., a friend of Aurora’s, and Wayne Rotstein, the Fehring’s caretaker and business partner, were also killed on the Fehring's property.
The breach caused millions of dollars in damage to both private and public property. Families filed lawsuits over lost loved ones and property. Witnesses said Pflueger knowingly covered the dam’s main safety feature, its spillway, when without permits, he illegally flattened a hillside and placed dirt around the reservoir to prepare for home construction.
In 2008, State attorney general Mark Bennett charged Pflueger with manslaughter for allegedly causing the deaths of the seven people. Pflueger could be found liable for the breach and be imprisoned, even though he denied any wrongdoing and blamed others for the breach.
IRS Investigates Pflueger Family, Business
Very few people knew that even before the breach, the IRS was conducting a civil audit of James Pflueger, his son Charles Alan Pflueger and the Pflueger dealerships - a case that would be transferred to the criminal division in 2008.
In 2010, Charles Alan Pflueger, his assistant Julie Ann Kam, and his Chief Financial Officer Randall Ken Kurata were indicted on tax fraud charges. James Henry Pflueger and his accountant, Dennis Lawrence Duban, were also charged with tax fraud.
The Pfluegers were accused of using the dealership to pay personal expenses. Pflueger also was accused of hiding nearly $15 million from the sale of a property in California, called the Hacienda Corporate Plaza, sending the proceeds to a bank account located in Switzerland. His accountant, Dennis Duban, was charged for falsifying Pflueger's tax returns.
While all of the parties, including Charles Alan Pflueger, his two dealership employees and accountant Dennis Duban have pled guilty to reduced charges, Pflueger blamed Duban and the dealership employees for the illegal acts. The case went to trial last Tuesday.
“Significant Funds” Needed for Ka Loko Defense
During his two-day testimony, Pflueger’s accountant Dennis Duban, said Pflueger knew he would need to “generate significant funds” for his defense including lawyers, experts and engineers – and he would also potentially need millions of dollars more to pay a legal settlement. Having racked up $1 million in overdue legal bills in 2007, and no end in sight to the litigation, Pflueger told Duban he needed money.
“He had difficulty meeting bills. The situation became very serious. He could not meet bills on a monthly basis,” Duban told prosecutors.
Pflueger, one of Hawaii’s wealthiest people, was personally worth more than $71 million in 2007 (not including the $15 million the IRS and Duban said Pflueger put in a Swiss bank account), however most of the money was tied up in land.
Pflueger and Duban settled on selling the Hacienda Corporate Center, an upscale commercial property on San Diego’s High Bluff Boulevard, and one of the most lucrative of Pflueger’s half a dozen commercial properties across the United States. The buyer offered $32 million for Hacienda, but after due diligence, lowered the offer to $27.5 million.
“He (Pflueger) was very disappointed, but ultimately agreed to the sale,” Duban said.
To make up the difference, Duban said he and Pflueger agreed manipulate the financial records.
“I told him (Pflueger) I would make sure the tax went away. … What I meant was we would save $4.5 million in taxes," Duban said. That was the difference between the initial offer and the sales price.
Duban said with Pflueger’s knowledge, he raised the land cost basis price from $106,302 to $7,600,022 million, lowering the tax liability and increasing the profit. Federal prosecutors said Pflueger and Duban also filed false tax returns with the state of California, the state of Hawaii and the IRS. In the end, Pflueger walked away with $14,682,751.05 from the sale.
Pflueger Hides Assets from Victims of Ka Loko Dam Breach, IRS, Accountant Said
Pflueger told Duban he wanted to “protect his assets” and shield his money from the families suing him over the breach.
“I understood there were techniques available to protect assets. I told him to contact an attorney, develop a plan and implement the strategies,” Duban said.
Pflueger put the nearly $15 million into his newly created foreign Vista Pacifica Trust in the Wegelin Bank in Switzerland. All of the documents were signed by Pflueger and notarized.
Donna Montgomery, an accountant who worked for Duban on Pflueger’s accounts, said Duban discussed with her the need for confidentiality when the sale of the Hacienda property was imminent.
“Mr. Pflueger requested when the building sold and funds were received that it remained strictly confidential. He wanted to make sure there was money available for the purpose the building was sold – to generate money for legal fees, expert witnesses and engineers in connection with the dam failure,” Montgomery said in testimony.
Nearly $15 million was spent in 20 months and the account was closed in May 2009.
The $15 million paid for $2.6 million in legal fees, as much as $5 million that went to Alan Pflueger and another to $2 million in accounting fees. Pflueger bought himself a Porche for $74,000 and spent $200,000 on cars, according to his accountants. There were many other expenditures that went to family members and personal assets.
John Buckley, who worked for Rochdale’s San Francisco branch, told prosecutors that his company was concerned about Pflueger’s account because there were “frequent and large and early withdrawls over 2 years.”
The trust lost $4 million in investments in 2008 and 2009, Duban confirmed, but he maintained if Pflueger had not withdrawn the money so fast, and it had remained in the stock market, he could have recouped the money after the market rebounded.
Pflueger’s Tremendous Wealth
Hawaii Business magazine listed Pflueger as Hawaii’s 18th wealthiest man. The magazine reported: "In 1989, James Pflueger was paid $33 million for the old lot at 1100 Alakea St. in downtown Honolulu. James Pflueger also owned the lot beneath Capitol Place, which he co-developed with The Kobayashi Group and The MacNaughton Group."
In court documents, the prosecution presented a biography for Pflueger that his accountant prepared so he could obtain a loan to buy property. The document explained how Pflueger obtained his wealth:
“James Pflueger along with his cousins, inherited several thousand acres of land on Oahu and Kauai from his mother and grandmother, along with many leasehold homes that were on the land they owned.
“Over the years, Mr. Pflueger diversified the raw land in Hawaii and other properties he acquired and through a series of tax-free exchanges, developed a real estate portfolio that comprises about a half a dozen trophy properties in the Western United states and a multitude of properties in Honolulu on the North Shore of Kauai. …
“During the 1980s, when Hawaii real estate values exploded during the "Japanese Bubble," Mr. Pflueger had the foresight to exchange many Hawaii based properties, most undeveloped, for mainland developed office and industrial complexes.”
Pflueger founded Pflueger dealerships, which sold Acura, Honda and GMC, among other car brands. In 1999, he turned over the dealership to his son Alan completing the sale in 2001.
Both father and son retained Duban to arrange the dealership transfer. Duban also managed Pflueger’s wealth and helped him choose investment properties.
Prosecution’s Star Witness: Celebrities’ Accountant
Cynthia Foster, Pflueger’s “significant other,” hired Dennis Duban, a CPA who catered to the wealthy including many Hollywood celebrities, after he gave Foster and Pflueger a ride to a mutual friend’s party in California because it was raining.
Along the way, Foster told Duban about a tax problem she had, and Duban did in fact help Foster solve it. Pflueger hired Duban about a year later. Afterward some 25 of their family members retained Duban, and he also took care of accounting for as many of 20 Pflueger entities.
Pflueger’s attorney Steven Toscher, who attempted to discredit Duban while he was on the stand, said Duban was hired to “do the right thing.” Toscher said Duban had tremendous power over Pflueger’s assets and had up to 90 percent of the contact with lawyers over real estate and financial deals.
Duban was also influential with the Rochdale company managing Pflueger’s Switzerland bank account because historically he had invested up to $65 million with Rochdale on behalf of a variety of clients, Pflueger's attorneys maintained.
Duban’s company grosses $8 million annually and has around 20 employees. Pflueger was his tenth largest client in billing volume.
When prosecutors asked what he thought of Pflueger, Duban said: “I respected his vision and ability to make the most of a real estate investment.”
When prosecutors asked Duban why he violated the law and "risked everything" to help Pflueger, he said “I was trying to protect the capital so it would last longer,” explaining …“So many bad things had happened to him (Pflueger), I was trying to do damage control.”
Duban pled guilty to two counts on October 1, 2012, in exchange for prosecutors dropping two other counts related to tax fraud. Duban agreed to testify on the prosecution’s behalf. If he cooperates with the government, he may have his sentence reduced from the recommended range of 57-to-71 months. Duban will be sentenced on April 13.
Prosecution’s Other Star Witness: Intrepid IRS Agent
One of the first items to catch his attention was a helicopter. He also noticed there was some $224,000 in expenses paid to Alan Pflueger and his wife in 2003, and that the majority of expenses were personal.
The Pflueger dealership paid medical premiums for family members who did not work at the dealership. Chigawa tried to issue a summons to Pflueger, but he was unsuccessful, even after sending letters, and visiting the dealership and two of Pflueger’s homes.
Chigawa was able to summons Alan Pflueger, but Alan Pflueger cancelled two appointments and then “pled the 5th” on the accusation that he used the dealership to pay his personal expenses.
There were “enough indicators or badges of fraud” for Chigawa to refer the Pfluegers’ audit to the IRS’ criminal division.
During his testimony, Pflueger’s defense claimed Chigawa only referred the Pfluegers’ case to the criminal division because of the Ka Loko Dam breach, but Chigawa denied that was true.
Later in the trial, prosecutors called numerous witnesses including Pflueger’s personal secretary to prove he used dealership funds to pay for his estranged wife’s expenses.
Nancy Pflueger, who is still legally married to Pflueger but does not live with him, forwarded her bills for her utilities, pool and yard maintenance, fumigation, party rentals and catering to the dealership and those bills were subsequently paid by either Pflueger Honda or Pflueger Acura. The defense did not dispute many of those bill payments.
Federal Tax Fraud Trial Continues
The prosecution, headed by Leslie Osborne, chief of the Fraud and Financial Crimes division for the US Attorney, and Special IRS attorneys Timothy Stockwell and Dennis Kihm, will likely wrap up their case on Tuesday, when the non-jury trial resumes before U.S. District Judge Leslie Kobayashi.
The defense includes a cadre of lawyers headed by Steven Toscher, a Beverly Hills attorney from Hochman Salkin Rettig Toscher & Perez PC, and Edward M. Robbins Jr. The defense includes Hawaii’s former Director of the Department of Taxation, Kurt K. Kawafuchi. They are expected to call a slew of witnesses after the prosecution wraps up.
In opening statements, the defense alleged Pflueger is an unsophisticated businessman who relied heavily on his accountant “to do the right thing” and that he had no knowledge of the tax fraud.
They maintained Pflueger was a “big picture” guy who did not look at line items on his tax returns or in his financial documents.
During the trial, the defense also cross examined Duban’s employee, Donna Montgomery, as to whether she saw any questionable signatures that looked like they could be imitations of Pflueger’s signature, implying Pflueger’s signature on key documents were forged. She cited one questionable place of several documents she reviewed.
State Manslaughter Charges Still Pending
Pflueger still faces the manslaughter charges filed by the state over the deaths of the Kauai residents caused by the breach. He has used his wealth and team of attorneys to delay the trial for several years by filing appeals and challenges and using other means to successfully petition for delays. The trial is now set for the Spring.
Pflueger settled the civil cases against him, but citing financial troubles, he still has not paid the victims from the Ka Loko Dam breach despite agreeing to a settlement.
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