Biglaw, Crime, Gay, Money, Partner Issues, Partner Profits, Sentencing Law, Tax Law, Weirdness, White-Collar Crime

Former S&C Partner Gets Sentenced for Tax Offenses

John J. O'Brien

Last August, John J. O’Brien, who was once a highly regarded and well-liked partner in the celebrated M&A practice of Sullivan & Cromwell, pleaded guilty to four misdemeanor tax offenses. The charges of conviction were mere misdemeanors, but the amounts involved were large, as you’d expect from a well-paid partner at S&C.

O’Brien was accused of failing to file income-tax returns for tax years 2001 to 2008, on almost $11 million in partnership income. In the end, he pleaded guilty to failing to file taxes relating to $9.2 million in partnership income, for tax years 2003 to 2008.

Earlier today, John O’Brien was sentenced. The sentencing hearing provided some interesting additional information about why O’Brien acted as he did.

So is O’Brien trading Biglaw for the Big House? And if so, how long a sentence did he receive?

Here’s a report from the New York Law Journal:

A former Sullivan & Cromwell partner who failed to pay millions of dollars in taxes to help pay for his partner’s rare books business in the West Village was ordered on Jan. 11 to serve two years and four months in prison.

That might seem like a lot of time for misdemeanors. But note that earlier reports about the case stated that the (now advisory) Sentencing Guidelines recommended a custodial sentence in excess of three years.

John J. O’Brien, 48, who was escorted out of Sullivan & Cromwell’s offices on March 27, 2009, after a meeting with firm partners where Mr. O’Brien tried to blame millions of dollars in delinquencies on his tax preparer, was also ordered to pay $2.87 million in restitution by Southern District Magistrate Judge Henry B. Pitman.

We were the first to cover fishiness regarding O’Brien. On April 9, 2009, we wrote as follows:

Multiple sources report that O’Brien’s departure was involuntary. Apparently he was removed from the building by security personnel, sometime last week. His removal came as a shock to many. According to one S&C tipster, O’Brien was known around 125 Broad Street as “a well-respected attorney and incredibly nice individual” — one of the nicest people at S&C.

At his sentencing, John O’Brien exercised his allocution right. What did the former Biglaw partner have to say for himself?

“I put my head in the sand,” Mr. O’Brien, a mergers and acquisitions specialist told the court, saying he was “enormously embarrassed” by failing to report partnership income beginning in 2003 and running through 2008. He said he had intended to pay his taxes “in one fell swoop” to get caught up, but it never happened. “I always knew the day of reckoning was coming,” he said.

It’s interesting that the day of reckoning didn’t come sooner. How was O’Brien’s tax cheating discovered?

[O’Brien] earned $9.2 million in partnership income between 2003 and 2008. His failure to pay taxes was only discovered when the state of California, where Sullivan & Cromwell has offices, contacted the firm and informed it that Mr. O’Brien had not responded to previous notices sent to his home.

The reason he initially fell behind, according to his lawyer, solo practitioner Russell T. Neufeld, was his involvement in a destructive relationship with his partner, Michael Phelps, who persuaded him to sink $3 million into Hudson Street Books, a rare books venture.

Michael Phelps? Why does a celebrity athlete need $3 million from an S&C partner? Sure, Phelps lost some endorsement deals after Bong-gate, but he should still be doing pretty well for himself, right?

Oh wait — wrong Michael Phelps. But given how Phelps allegedly lured O’Brien into criminal conduct, he better be as smoking hot as the Olympic swimmer:

Mr. Phelps, Mr. Neufeld wrote in his sentencing memorandum, “is a very unstable, fragile and emotionally needy person” who was “particularly unstable” during the genesis of Mr. O’Brien’s tax problems, on medication and prone to suicide threats and attempts.

“The business was a total failure and John O’Brien continued to pour bad money after good down its black hole—all in an effort to maintain his relationship with Michael and to try and keep Michael emotionally together,” Mr. Neufeld wrote.

A psychologist who examined Mr. O’Brien for the defense concluded that “his persistent fear of losing Michael has caused him to become so overwrought with anxiety and depression that he lost his ability to make a rational choice.”

(By the way, if you’re interested, you can check out the government sentencing memo and the defense sentencing memo, both via the NYLJ.)

Was Magistrate Judge Henry Pitman persuaded by O’Brien’s claims that mental illness contributed to his crimes? Not completely; Judge Pitman concluded that there was “some evidence slight mental illness contributed to his crime,” but not an overwhelming amount. And His Honor had another issue:

“What happened to the money?” he asked, for assuming that Mr. O’Brien put upward of $3 million into Hudson Street Books, that still left “more than $5 million in partnership income unaccounted for.”

And yet, he said, Mr. O’Brien only had $55,000 in cash in the bank and owed his elderly parents, who were present in the courtroom, another $150,000 from a loan.

“I must conclude that he spent a tremendous amount of money” while simply avoiding taxes, Magistrate Judge Pitman said.

Sorry, but I just don’t get this. My people are skilled at spending money, but $5 million is a lot of cash to blow through. Remember that this case isn’t about alleged underreporting of income, a la former Kirkland & Ellis partner Ted Freedman; it’s about failure to file in the first instance, i.e., complete evasion of one’s tax obligations.

And here’s one other thing I don’t get: apparently O’Brien and Phelps, despite what O’Brien’s own lawyer characterizes as a highly dysfunctional relationship, are still together. Phelps attended the sentencing hearing, and according to Russell Neufeld, counsel to O’Brien, Michael Phelps “is supportive of John and not interested in talking to the press.”

Will Phelps be similarly “supportive of John” now that the money seems to have run out, and O’Brien is headed off to prison for over two years? I hope so — but only time will tell.

O’Brien has traded the metaphorical prison of 125 Broad Street for an actual one. The question now becomes: How many cigarettes does a book of S&C business buy you?

P.S. You can check out John O’Brien’s résumé (which is impressive!) — featuring all the right schools, and some major transactions — in his cached S&C bio, reprinted on the next page (or click here).

Ex-Sullivan & Cromwell Partner Sentenced to 28 Months in Prison [New York Law Journal]

Earlier: Prior ATL coverage of lawyer John O’Brien
Ex-Sullivan & Cromwell Partner Failed To Pay Taxes on Millions
Why Did John O’Brien Leave Sullivan & Cromwell?
Another Sullivan & Cromwell Partner Has Left the Building

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