MISCONDUCT – former Sullivan partner sentenced to two years in prison for failure to pay income taxes
John J. O’Brien, formerly a partner at Sullivan & Cromwell, was sentenced on January 11, 2012 to two years and four months in prison for failing to pay millions of dollars in taxes related to his rare books business in the West Village (United States v. O’Brien, 11 cr. 652). On March 27, 2009 O’Brien was escorted out of his firm’s offices, after attempting to blame millions of dollars in tax delinquencies on his tax preparer. He was also ordered to pay $2.87 million in restitution by Southern District Magistrate Judge Henry B. Pitman. O’Brien, an M&A specialist, told the court he was “enormously embarrassed” for failing to report partnership income from 2003 to 2008. He had hoped to pay his entire tax bill at one time, but such a time never came.
Starting as an associate at Sullivan & Cromwell in 1992, the New York University School of Law graduate reportedly earned $9.2 million in partnership income between 2003 and 2008. His failure to pay taxes was discovered when the state of California, where Sullivan & Cromwell has offices, contacted the firm to inform it that O’Brien had not responded to previous notices sent to his home. Counsel for O’Brien, Russell T. Neufeld, stated that O’Brien had fallen behind initially due to his involvement in a destructive relationship with a business partner, Michael Phelps, who had persuaded him to invest $3 million into Hudson Street Books, a rare books venture. Neufeld wrote in his sentencing memorandum that O’Brien “is a very unstable, fragile and emotionally needy person” who was ‘particularly unstable’ at the outset of his tax problems; that he had been on medication and was prone to suicide threats and attempts. “The rare books business was a total failure and John O’Brien continued to pour bad money after good – all in an effort to maintain his relationship with Michael [Phelps].” An examining psychologist for the defense also concluded that O’Brien’s “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.” O’Brien was diagnosed as suffering from a “depressive disorder and a personality disorder with dependent traits.” O’Brien’s rise and fall was described by Magistrate Judge Pitman as “a Greek tragedy,” with O’Brien having come out of a working class environment, rising to partnership in one of New York City’s top firms, and now heading to prison.
The Magistrate agreed there was “some evidence [that a] slight mental illness contributed to his crime,” but didn’t credit it as salient. Pitman observed that O’Brien had indeed accepted responsibility by pleading guilty to four misdemeanors – two counts each of failing to file income tax returns and failing to pay income taxes – but noted that O’Brien had “already gotten a substantial benefit” through his plea agreement with the Southern District U.S. Attorney’s office, which could have charged him with felonies that would have resulted in an automatic loss of his law license. The Magistrate did inquire, “What happened to the money?” assuming that O’Brien put perhaps $3 million into Hudson Street Books. This would still have left “more than $5 million in partnership income unaccounted for.” Records show that O’Brien had only $55,000 in cash and owed his elderly parents $150,000 from a loan they had made to him. The Magistrate concluded that O’Brien had “spent a tremendous amount of money” while avoiding taxes.
The U.S. Probation Department recommended a sentence of two years in prison, and Assistant U.S. Attorney Stanley J. Okula Jr., in his memorandum, agreed the sentence should be no less than that. Okula further stated that O’Brien’s downfall “can’t mask or hide the stark facts” that an attorney ensconced at a prestigious firm avoided paying taxes so he could invest in another business. “That’s selfishness and greed,” Mr. Okula said. “If the worst thing that could befall Mr. O’Brien is he would have to pay the money back, there would be no general deterrence.” In a sentencing memorandum, Mr. Neufeld wrote that the evidence before the court showed “a really quite pathetic case of two mentally impaired people in a totally dysfunctional, mutually interdependent and mutually enabling relationship that resulted in John O’Brien becoming so divorced from the reality of his tax obligations that he committed the misdemeanors to which he has pleaded guilty.”
Neufeld also took issue with an assertion by Mr. Okula that O’Brien had avoided taxes to fund a lavish lifestyle, noting, “This is not just some greedy, money-grubbing guy who tried to steal money and get away with it.” He asked that the court take into consideration the price his client had already paid. With perhaps a bit of hyperbole, O’Brien’s counsel said, “If someone could be embarrassed to death, Mr. O’Brien would be deceased at this point.”
But the missing money bothered the judge too much. He refused to accept as nonsensical the notion that the tax shortfall could be blamed entirely on ‘dependence on his partner’ or ‘dependence on his partner’s’ needs. Something else was at work, the judge concluded, as O’Brien had “committed crimes that enriched him by millions of dollars – crimes for which detection and apprehension” were virtually certain. O’Brien is scheduled to commence serving his prison sentence on February 12, 2012.