He beat federal prosecutors on felony tax fraud charges once before, and former Seven Arts Entertainment CEO Peter Hoffman says he’ll do it again. Indicted in April for allegedly masterminding a fraudulent film tax credit scheme in Louisiana, Hoffman told Deadline that he believes the U.S. Attorney’s office has “targeted” him because of his acquittal in another federal tax fraud case dating back to 1997. He said his attorneys will file a motion to dismiss the charges in Louisiana on Wednesday.
Hoffman, the once high-flying master of foreign tax breaks, has had a bad year. Last June, he stepped down as CEO of Seven Arts Entertainment, although he remains its chief counsel and a member of its board of directors, and four months later, the company announced that it had lost more than $33 million over the previous two years on revenues of only $5.5 million.
On Friday, the company he founded saw the value of its stock plummet 15%. At the start of trading Friday, it was already one of the cheapest stocks on the NASDAQ exchange, going for just 1/5th of a penny per share – down from a high of $517.84 just two years ago. At Friday’s closing bell it got even cheaper, falling another 6.79% in afterhours trading. Anyone still holding onto the stocks from two years ago has essentially lost all of their investment, and Hoffman was one of the company’s largest shareholders.
Hoffman’s latest legal problems began in March of 2012 when the U.S. Attorney’s office in New Orleans slapped the company with a subpoena for the discovery of documents relating to Louisiana film infrastructure tax credits that Seven Arts had received to refurbish a dilapidated old mansion in New Orleans’ French Quarter and convert it into a modern post-production facility.
Built in 1859, the once-elegant three-story mansion at 807 Esplanade Avenue had been abandoned for years and had fallen into a severe state of disrepair before it was purchased by Seven Arts in 2007. After major repairs and restoration, it reopened as Esplanade Studios in July 2012. It did so, according to a 2013 Seven Arts corporate presentation, after the company had “obtained over $8 million in Louisiana and federal tax credits in connection with 807 Esplanade.”
Federal prosecutors, however, say it was all a big scam. In April, federal prosecutors filed a 22-count indictment against Hoffman, his former business partner, New Orleans-based actor and film producer Michael Arata, and Hoffman’s ex-wife, Susan Hoffman, a film producer who lives in New Orleans.
Together they are accused of securing $1.13 million in Louisiana tax credits without having done the work they told Louisiana state officials they were going to do to turn the rundown old mansion into a state-of-the-art post-production house and residence for visiting film crews.
In addition to charges of conspiracy and wire and mail fraud, they stand accused of filing “materially false and misleading film infrastructure tax credit applications and supporting documents” with the state of Louisiana “that fraudulently claimed that certain expenditures had been made relative to 807 Esplanade when, in truth and in fact, the expenditures had not been made as claimed.” In order to conceal their alleged fraud from state auditors, the indictment charges that they “conducted circuitous bank transfers to create the appearance of payments” for construction work that was never done and for film equipment that was never purchased.
Arata, the husband of New Orleans’ deputy mayor, is also accused of making false statements to an FBI agent – charges he has flatly denied.
Hoffman insists that the film tax credits were, in fact, properly used to develop the property, and in his defense offered a 15-page brochure for Esplanade Studios as “Exhibit 1.” The brochure contains numerous photos that appear to show that the once-decaying old mansion has been restored to its pre-Civil War glory, complete with modern editing bays and production offices, sound mixing and recording studios, and elegant residences for cast and crew. The brochure states that the crew of HBO’s True Detectives spent five months at the Esplanade Studios in 2013 using its digital dailies services, editorial suites, offices and residences.
“What’s fraudulent about doing exactly what we said we were going to do?” Hoffman asked. “It’s been in business for two years. We were doing great. These charges have scared some people away, but we’ve still got people working there. This is really crazy.”
“The U.S. Attorney’s office does not like state tax credits,” he said. “They think they know better than the state of Louisiana. They don’t get it.”
Hoffman maintains that it is the government, not he, that is involved in a conspiracy, and that his current legal problems are rooted in the fact that he was acquitted in 1997 on felony tax fraud charges brought against him by the U.S. Attorney’s Office in Los Angeles.
“My belief is that they are targeting me because of my prior tax case,” he said. “They believe I was improperly acquitted. These guys have said repeatedly that although I won my last case, I’m ‘the one who got away.’ They are convinced that I am a bad guy, and that I’m some Hollywood sharpy who came to Louisiana to take advantage of the poor Louisiana taxpayers. It’s a complete fantasy.”
In the late-1980s, Hoffman was Hollywood’s guru of off-shore tax havens, including the “Dutch Sandwich,” a legal method of tax avoidance involving Dutch and Netherlands Antilles shell corporations “sandwiched” together to shelter foreign income generated by American movies. During Hoffman’s tenure as president and CEO of Carolco Pictures, the “Dutch Sandwich” was used by the company to avoid or defer taxes on foreign revenues from such films as Total Recall, The Doors, Rambo III and Terminator 2: Judgment Day.
In 1988, the same year Hoffman joined Carolco, the IRS launched a probe into its byzantine financing structures and generous executive loans made to Hoffman and Carolco founders Andy Vajna and Mario Kassar. At one point, the IRS was seeking more than $41 million in back taxes and penalties from Vajna, and more than $68 million from Kassar, and all three men became subjects of a federal criminal investigation.
Federal prosecutors put Hoffman on trial in 1997, hoping that he’d be convicted and become a cooperating witness against his two former business partners, but it didn’t work out that way.
Hoffman was acquitted on two counts of felony tax fraud, and the jury deadlocked in his favor on two others, including a charge that he’d taken more than $1 million in loans from his deferred-compensation account at Carolco in order to avoid paying taxes on the money as income.
The case was settled when Hoffman paid a $5,000 fine and pleaded guilty to one misdemeanor charge of sending a false tax return to the IRS that understated his 1989 income by $33,000. In a stinging rebuke to federal prosecutors, a federal judge called the prosecution’s case “misguided and doomed,” saying that Hoffman had “suffered more than an individual should over a tax dispute.”
No charges were ever brought against Vajna and Kassar. Vajna eventually settled his case with the IRS when he agreed to pay more than $6.5 million in back taxes, and the 14-year-long saga finally came to an end in 2002 when Kassar agreed to pay the IRS nearly $45 million in back taxes and penalties.
Hoffman, who sees his current difficulties as just a continuation of that old dispute, believes that he will come out on top this time just as he did before.
“We’re going on the offensive,” he said, “and at the end of the day, this is going to be as small an item in my rearview mirror as the ‘97 case was.”