The $130 Million Celebrity Scam

Two Wall Street firms are accused of a huge tax-shelter fraud

The deal seemed ideal for show business personalities and other wealthy investors. Two Wall Street firms promised to put their money into safe, high-yielding Government securities. Moreover, said the brokerage houses, they would manage the accounts so that customers would get large income tax deductions. Among the 88 investors enticed into laying out at least $600,000 apiece in cash and notes to one of the firms were Actor Sidney Poitier, Television Producer Norman Lear and Composer Henry Mancini.

Last week a federal grand jury in New York City charged managers of the two small Wall Street companies, Sentinel Government Securities and Sentinel Financial Instruments, with perpetrating the largest criminal tax fraud in U.S. history. The defendants were alleged to have supplied investors with more than $130 million in bogus income tax deductions for the years 1979 and 1980. The previous record case: last September's indictment of Oil Trader Marc Rich and two of his associates for concealing more than $100 million in taxable income.

Charged were Michael Senft, 44, the firms' general partner, and Walter Orchard, 35, who had served both companies as chief tax trader. According to the 63-count indictment, Senft, Orchard and three other defendants provided their unwitting customers with tax write-offs without actually buying or selling any Government securities. Instead, the grand jury charged, the firms simply falsified documents to make it look as if trading had occurred, and then presented the phony records to their clients.

The indictment also accused Senft of doctoring his own returns. It alleged that he reported no taxable income in 1980. In fact, the jurors said, he had some $1.86 million in taxable earnings that year and owed more than $900,000 in taxes.

Although unaware that they were claiming questionable deductions, the Sentinel customers benefited mightily from their investments. Lear, who created such TV hits as All in the Family, Good Times and The Jeffersons, deducted $1.8 million on his 1980 federal return. Poitier wrote off $657,184 the same year. The largest amount claimed by an individual, some $3.5 million, was taken by George Scharffenberger, chairman of City Investing, a New York-based financial concern. Said he: "There's still a trial to be held, and they deny the charges very vigorously. We'll have to wait and see how it all comes out."

Other customers, however, were shaken by the charges. Said Lear: "I was stunned to learn of the indictment. This investment was highly recommended by my financial advisers as part of ongoing investment and tax-planning activities. It was considered both good and proper and involved several prudent investors. I hope we weren't mistaken."

Some customers said they had been attracted by the prestigious company that the Sentinel concerns kept. Sentinel was a client of the prominent Wall Street law firm of Cadwalader, Wickersham & Taft, which has also counseled the likes of Holiday Inns, Occidental Petroleum and the Federal Home Loan Mortgage Corporation. Peat, Marwick, Mitchell, one of the Big

Eight accounting firms, audited financial statements for both Sentinel companies. Said Ray Le Flore, an attorney for Barr Bros., a New York bond dealer that invested some $600,000 with Sentinel: "The offering circular would never have caught the attention of anybody at this level but for the good company in which it was viewed."

Ralph Engelstad, owner of Las Vegas' Imperial Palace casino, did extensive financial homework before investing $2 million, by having his accountant Ira Bradshaw carefully scrutinize the Sentinel offering. Said Bradshaw: "From every possible angle it seemed a viable investment."

Engelstad and the other Sentinel clients could see their tax deductions turn into nightmares if the defendants are convicted and the write-offs are disallowed. Although the Sentinel customers do not face any criminal liability, the Internal Revenue Service could force them to cough up back taxes. The investors, who have already lost some of their principal, could owe the IRS as much as $65 million, or half of the $130 million they thought was protected in a tax shelter. This file is automatically generated by a robot program, so viewer discretion is required.