Manafort Called His Tax Bill a ‘Disaster’ in Email: Trial Update

Kevin Downing, lead lawyer for former Trump Campaign Manager Paul Manafort, left, and Thomas Zehnle, co-counsel for Manafort, arrive at District Court in Alexandria, Virginia, U.S., on Friday, Aug. 3, 2018. U.S. prosecutors shifted away from showcasing Manafort's excesses and toward the core of their fraud accusations against him, offering evidence that he was deeply in debt as he submitted crudely altered financial statements to secure bank loans. Photographer: Tasos Katopodis/Bloomberg

Paul Manafort’s former right-hand man, Rick Gates, testified Aug. 7 about how he helped his boss conceal millions of dollars and defraud banks to get loans. The tension in the courtroom isn’t likely to let up as Gates will face questioning from Manafort’s lawyers, who say that Gates was responsible for any crimes.

Email: ‘How Could I Be Blindsided Like This?’ (1:30 p.m.)

Gates lived up to his billing as Special Counsel Robert Mueller’s star witness, offering a gripping narration on how he helped his boss hide millions of dollars in Cyprus accounts from U.S. tax authorities and cheat U.S. banks once his money started drying up.

Gates, 46, detailed how Manafort set up a labyrinth of Cypriot shell companies to take in payments from wealthy benefactors of Ukrainian President Viktor Yanukovych until 2014, when he lost power. After that, Manafort began to run out of cash to support his lavish lifestyle, and Gates began to help him create false documents to apply for bank loans secured by properties, Gates said.

In April 2015, Manafort sent Gates an email expressing dismay at the U.S. tax bill he faced and his disappointment in his deputy for not managing the problem more effectively. It read: “Rick, I just saw this. WTF? How could I be blindsided like this? You told me you were on top of this. We need to discuss options. This is a disaster.”

Gates, who pleaded guilty and is cooperating with the special counsel, corroborated testimony by other witnesses that Manafort had directed him to falsify documents used to lower his tax bill and obtain bank loans, while also making payments from his boss’s offshore accounts.

He described how vendors contacted him and Heather Washkuhn, Manafort’s bookkeeper, to try to find out when his boss would pay his bills. He also said he worked to deceive lenders with phony documents that allowed Manafort to draw cash out of several properties in New York.

“In large respect, I was the point person for collecting all the documents,” Gates said.

Jurors saw a January 2016 email from Manafort about a property he owned on Howard Street in New York as he tried to get a loan. Gates said Manafort wanted a more favorable tax treatment for the property.

“In order to have the maximum benefit, I am claiming Howard Street as a second home. Not an investment property,” Manafort wrote.

Prosecutor Greg Andres said before the lunch break that he had another hour of questioning before cross-examination begins. He said prosecutors hope to complete their case by the end of the week.

Cyprus Accounts ‘Were Not Reported’ (11:49 a.m.)

Gates testified that Manafort never wanted his name to appear on Cyprus accounts that he used to receive payments from wealthy Ukrainian businessmen who paid him for political consulting work there for Yanukovych and his Party of Regions.

A Cypriot lawyer, referred to as “Dr. K,” worked with Manafort to set up these off-the-shelf corporations, which typically had two directors, Gates said.

The Gates testimony goes to the heart of the case by Mueller, the special counsel, who must show that Manafort controlled the offshore accounts they say he used to hide most of the $60 million he earned in Ukraine from 2010 to 2014. That money began to dry up after Yanukovych lost power in 2014 and fled to Moscow.

Gates said he gave instructions to the Cypriot law firm and to banks on wiring money to Manafort’s vendors in the U.S. to support his opulent lifestyle, paying for landscaping, audio visual equipment and luxury clothes. Manafort told Gates not to notify his bookkeeper about the use of Cypriot accounts to pay his personal expenses because he didn’t want to report that money as income, according to Gates.

“They were not reported on Mr. Manafort’s U.S. business records,” Gates said.

At some point, the accounts moved from Cyprus to the Grenadines, and the process of moving money for Manafort became more complex, Gates said.

Gates also recounted that he and Manafort were interviewed by FBI agents in July 2014 who were helping Ukrainian authorities on a forfeiture investigation, he said. Manafort asked Gates, who was interviewed first, to tell Ukrainian businessman Sergei Lyovochkin about the interview. Gates said he flew to France to notify Lyovochkin that investigations had questions about the status of one of his companies.

By then, most of Manafort’s Cypriot accounts were closed, and he wanted to consolidate them in one institution, according to Gates.

How to Use Shell Companies, by Rick Gates (11:01 a.m.)

Gates, the trial’s star witness, described to jurors how he and Manafort used shell companies and accounts in Cyprus to hide millions.

“The purpose of these entities was to accept payments and make payments,” Gates said in federal court in Alexandria, Virginia, on his second day of testimony.

Gates described Manafort as fully in charge of the consulting operation. It was Manafort who negotiated multimillion-dollar contracts with Yanukovych, the former Ukrainian president, and other politicians there, Gates said.

Through these shell companies, Manafort received payments from Ukrainian businessmen, including Lyovochkin, Rinat Akhmetov, Borys Kolesnikov and Sergei Tihipko.

Clients in Ukraine, Accounts in Cyprus (9:35 a.m.)

Gates, 46, began his testimony Aug. 6 with a detailed 75-minute account of how he spent a decade with Manafort in Ukraine, where he said they were paid by wealthy businessmen there. They wired money into Cyprus accounts, and Gates helped Manafort move it to the U.S., he said.

Prosecutors said they’ll question Gates for about three more hours, and then he’s expected to undergo a grueling cross examination by lawyers for Manafort, President Donald Trump’s former campaign chairman. Defense lawyers have told jurors that Gates, and not Manafort, was the mastermind behind the financial deceptions described by prosecutors.

Gates, who pleaded guilty and is cooperating with the special prosecutor, admitted Aug. 6 that he stole hundreds of thousands of dollars from his boss. Manafort’s lawyers said he stole millions.

Tensions have been high between U.S. District Judge T.S. Ellis III and Mueller’s prosecutors. At one point, the judge suggested that one of Mueller’s prosecutors was crying during a discussion out of the jury’s earshot, according to a transcript of the proceedings. They have clashed repeatedly over the relevance of details about Manafort’s work in Ukraine, where prosecutors said he made more than $60 million from 2010 to 2014.

“I understand how frustrated you are,” Ellis said during the discussion. “In fact, there’s tears in your eyes right now.’’

When Andres, the prosecutor, protested that he didn’t have tears in his eyes, the judge shot back: “Well, they’re watery.”

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To contact the reporters on this story: David Voreacos in Alexandria, Virginia at dvoreacos@bloomberg.net; Andrew Harris in Alexandria, Virginia at aharris16@bloomberg.net; Daniel Flatley in Alexandria, Virginia at dflatley1@bloomberg.net

To contact the editors responsible for this story: Heather Smith at hsmith26@bloomberg.net David S. Joachim, Paul Cox