           In the United States Court of Federal Claims
                                            No. 10-851T
                                     (Filed: October 26, 2018)

***************************************
CHARLES P. ADKINS and JANE E.         *
ADKINS,                               *
                                      *               Remand; Income Tax Refund; Theft Loss;
                  Plaintiffs,         *               IRC § 165; Treas. Reg. §§ 1.165-1, 1.165-8;
                                      *               Securities Fraud; Pump-and-Dump Scheme;
v.                                    *               Reasonable Prospect of Recovery;
                                      *               Arbitration; Restitution; Revenue Procedure
THE UNITED STATES,                    *               2009-20; Burden of Proof
                                      *
                  Defendant.          *
***************************************

John F. Rodgers, Alexandria, VA, for plaintiffs.

Mark A. Ryan, United States Department of Justice, Washington, DC, for defendant.

                                     OPINION AND ORDER

SWEENEY, Chief Judge

        Plaintiffs Charles P. and Jane E. Adkins are victims of a fraudulent investment scheme,
and seek a refund of federal income taxes based on the losses they sustained due to the scheme.
The court held a trial to determine whether plaintiffs properly claimed the theft loss deduction
for the 2004 tax year, whether a small portion of the claimed theft loss is deductible, and the
proper amount of plaintiffs’ refund, if any. In a February 16, 2016 Opinion and Order, the court
concluded that plaintiffs were not entitled to a theft loss deduction for the 2004 tax year.
Plaintiffs appealed that decision to the United States Court of Appeals for the Federal Circuit
(“Federal Circuit”). Concluding that this court misconstrued the regulation concerning the
timing of a theft loss deduction, the Federal Circuit vacated the February 16, 2016 Opinion and
Order and remanded the case for further proceedings.

        After advising the court that no further factual development was required, the parties filed
postremand briefs addressing how the case should be resolved in light of the construction of the
regulation articulated by the Federal Circuit. The court has reviewed the parties’ briefs and, as
set forth below, concludes that plaintiffs are not entitled to a theft loss deduction for the 2004 tax
year. Accordingly, plaintiffs’ complaint must be dismissed.
                                             I. FACTS

        This section contains the court’s findings of fact as required by Rule 52(a)(1) of the Rules
of the United States Court of Federal Claims. 1

        Donald & Co. Securities, Inc. (“Donald & Co.”) was a broker-dealer of securities
registered with the Securities and Exchange Commission (“SEC”) and the National Association
of Securities Dealers (“NASD”). JX 1; 2 JX 45. Donald & Co. was directly owned by a holding
company, THCG, Inc., and indirectly owned by Star Cross, Inc. and Stephen A. Blum. JX 45.
One of the brokers employed by Donald & Co. was Otto Kozak. JX 1. Mr. Adkins began
investing through Mr. Otto Kozak in September 1997, when Mr. Otto Kozak was employed by
E.C. Capital, Ltd., and continued to do so when Mr. Otto Kozak moved to GKN Securities Corp.
in October 1998 and Donald & Co. in March 1999. 3 JX 91. Investment accounts were opened at
Donald & Co. for Mrs. Adkins individually, and plaintiffs jointly, in late 1999. Id.

         Unbeknownst to plaintiffs, Donald & Co. was operating a “pump-and-dump” scheme. 4
Jt. Stip. ¶ 1. Broadly speaking, the pump-and-dump operation was accomplished by Donald &



       1
            The court derives some of these facts from the parties’ Joint Stipulation of Facts (“Jt.
Stip.”), allegations admitted by defendant (“Compl.” and “Answer”), and pertinent statutes and
regulations. The remaining facts are derived from the transcript of testimony elicited at trial
(“Tr.”) and the exhibits admitted into evidence during trial (“PX,” “DX,” or “JX”). Citations to
the trial transcript will be to the page number of the transcript and the last name of the testifying
witness.
       2
          The parties stipulated that the allegations in the indictment—JX 1—are “true and
accurate.” Jt. Stip. ¶ 11.
       3
         Mr. Adkins also dealt with Mr. Otto Kozak’s brother, Robert Kozak. Tr. 430, 432 (C.
Adkins). To avoid confusion, the court refers to the brothers by their full names.
       4
           As defined by the SEC:

       “Pump-and-dump” schemes involve the touting of a company’s stock (typically
       small, so-called “microcap” companies) through false and misleading statements
       to the marketplace. These false claims could be made on social media such as
       Facebook and Twitter, as well as on bulletin boards and chat rooms.
       Pump-and-dump schemes often occur on the Internet where it is common to see
       messages posted that urge readers to buy a stock quickly or to sell before the price
       goes down, or a telemarketer will call using the same sort of pitch. Often the
       promoters will claim to have “inside” information about an impending
       development or to use an “infallible” combination of economic and stock market
       data to pick stocks. In reality, they may be company insiders or paid promoters
       who stand to gain by selling their shares after the stock price is “pumped” up by

                                                 -2-
Co. arranging to purchase large blocks of stock in various companies; encouraging its customers
to purchase these stocks, artificially inflating the stocks’ prices; and then, once the price of a
particular stock was sufficiently inflated, selling the stock that it owned, resulting in gains for the
company and, due to the subsequent decline in the stock price to a normal, uninflated level,
losses for the company’s customers. Id. ¶¶ 4, 12-46. Among the stocks involved in the scheme
were five stocks for which Donald & Co. was a market maker; in other words, it held these
stocks in its own account to facilitate trading in them. JX 1. These stocks, also referred to as
“house stocks,” consisted of Elec Communications Corp. (“Elec”), 5 The Classica Group, Inc.
(“Classica”), MyTurn.com, Inc. (“MyTurn”), 6 Great Train Store Co., and Tera Computer Co.
Id.; Jt. Stip. ¶¶ 16, 23, 30, 37, 44. Donald & Co. owned much of their house stocks via Odyssey
Capital LLC, a holding company. Tr. 391 (C. Adkins); see also JX 1 (noting the existence of a
proprietary trading account funded by Donald & Co. principals in the name of Odyssey Capital
LLC and that Donald & Co. accumulated profits from its fraudulent scheme in Odyssey Capital
LLC accounts at, among other places, Chase Manhattan Bank). Mr. Adkins learned of this fact
in 2003 or 2004. Tr. 392 (C. Adkins).

         Plaintiffs accorded Mr. Otto Kozak a high level of discretion to trade in their accounts.
Jt. Stip. ¶ 8. Some of the trades executed by Mr. Otto Kozak for plaintiffs were done on margin,
JX 91, in other words, using borrowed money. Mr. Otto Kozak also convinced Mr. Adkins to
participate in a private placement offering of Vianet Technologies, Inc. (“Vianet”) stock. 7 Tr.
122 (C. Adkins). On December 14, 1999, $30,000 was charged to Mr. Adkins’s Donald & Co.
account to purchase a subscription in the offering. Jt. Stip. ¶ 85; JX 91 at 1580. Then, on
December 20, 1999, Mr. Adkins prepared a check for $45,000, made payable to Continental
Stock Transfer & Trust Company, to purchase a subscription in the offering. JX 53 at 823. It is
unclear to whom Mr. Adkins sent the check; at trial he testified:

       I sent the $45,000 in only to hear later—and I sent it to the attorney of record
       where you have to send the money. It doesn’t go to the broker. It goes to the
       company and—at some point I guess it has to go to the company. So, again, I
       sent the check in to Otto [Kozak] and he submitted it . . . .


       the buying frenzy they create. Once these fraudsters “dump” their shares and stop
       hyping the stock, the price typically falls, and investors lose their money.

SEC, Pump and Dump, https://www.investor.gov/glossary/glossary_terms/pump-dump (last
visited Feb. 23, 2016).
       5
           Elec was formerly known as Sirco International Corp. JX 91 at 1574.
       6
           MyTurn was formerly known as Compu-Dawn Inc. Jt. Stip. ¶ 12.
       7
           In his testimony, Mr. Adkins used the term “initial public offering.” Tr. 122 (C.
Adkins). However, the documentary evidence in the record reflects that Mr. Adkins was seeking
to participate in a private placement offering. See JX 53 at 823; JX 66 at 1195-96; JX 69.


                                                  -3-
Tr. 122-23 (C. Adkins) (emphasis added). The check cleared plaintiffs’ bank account on January
6, 2000. JX 53 at 822.

        At some point, Mr. Adkins was advised that the private placement offering was
oversubscribed. JX 69. Thus, in a January 25, 2000 letter prepared by Donald & Co. on its
letterhead, Mr. Adkins requested that Vianet transfer the “funds [he] submitted as part of [his]
subscription to [Vianet’s] private placement offering” to an escrow account for use in Vianet’s
new private placement offering. Id. The record contains no evidence indicating whether the
specified funds referred to the $30,000 charge or the $45,000 check. With respect to the latter,
the record does reflect that on December 20, 1999, Donald & Co. charged Mr. Adkins’s account
for $45,000 that it sent, via wire transfer, to plaintiffs’ bank, 8 JX 91 at 1580, and that there was
no corresponding deposit of $45,000 in Mr. Adkins’s investment account, id. at 1578-83.
Ultimately, on March 22, 2000, 19,999 restricted class A shares of Vianet stock were transferred
to Mr. Adkins’s account; the total value of plaintiffs’ Vianet shares at the end of March 2000 was
$129,993.50. 9 Id. at 1592. The record lacks any evidence that plaintiffs have disposed of their
Vianet stock.

        Notwithstanding the issues related to the Vianet private placement offering, the value of
plaintiffs’ investments with Donald & Co. rose to approximately $3.6 million in February 2000.
Id. at 1659. At that time, plaintiffs’ portfolio included a number of stocks, 10 including 66,000



       8
          Although the parties stated in their posttrial briefs that Mr. Adkins demanded the return
of the $45,000, there is no evidence in the record describing such a demand. See generally Tr.
122-25 (C. Adkins) (containing the testimony from Mr. Adkins regarding the Vianet stock).
       9
          On October 19, 2000, an additional 598 restricted class A shares of Vianet were
transferred to Mr. Adkins’s account. JX 91 at 1602. On December 27, 2000, all 20,597 shares
were transferred from Mr. Adkins’s account to Mrs. Adkins’s account. Id. at 1618, 1846. On
January 18, 2002, an additional 31,500 shares of restricted Vianet stock were transferred into
Mrs. Adkins’s account from an unidentified source. Id. at 1883.

        Separately, on February 7, 2001, 4592 shares of Vianet restricted common stock were
transferred into Mr. Adkins’s account. Id. at 1624. An additional 16,803 shares were transferred
into Mr. Adkins’s account on April 4, 2001. Id. at 1627. None of these 21,395 shares of stock
originated from Mrs. Adkins’s account. Id. at 1856-63.

      According to a registration statement that Vianet filed with the SEC, as of May 9, 2001,
Mr. Adkins owned 52,889 shares of Vianet stock. JX 66 at 1211.
       10
           Plaintiffs’ portfolio did not include Classica stock in February 2000. JX 91 at 1663-
64. Plaintiffs did not possess any Classica stock until February 2001, when 1000 shares of
Classica stock (valued at $2620) were purchased for Mr. Adkins’s IRA account at Donald & Co.
See JX 73 at 1354.


                                                -4-
shares of Elec stock valued at $268,158. 11 Id. at 1663-64. However, plaintiffs’ holdings of
MyTurn stock represented most of their portfolio’s value. Id. at 1663. Beginning in February
2000, the value of plaintiffs’ MyTurn stock began to decline. Compare id. (reflecting a value of
$2,936,250 at the end of February 2000), with id. at 1669 (reflecting a value of $2,131,920 at the
end of March 2000), and id. at 1677 (reflecting a value of $1,029,420 in April 2000). As a
result, the equity in plaintiffs’ margin account fell below the required threshold and Donald &
Co. began to issue margin calls to plaintiffs. 12 Jt. Stip. ¶ 86. Mr. Adkins instructed Mr. Otto
Kozak to meet the margin calls by selling some of plaintiffs’ stock holdings, the MyTurn stock
in particular. 13 Id. ¶ 87. Mr. Otto Kozak did not follow this instruction; rather, he convinced Mr.
Adkins to retain the MyTurn stock and meet the margin calls by transferring additional cash
($1,074,181.11) and securities (valued at $1,261,082.37) to Donald & Co. Id. ¶¶ 87-89.

       Some of the securities transferred by plaintiffs to Donald & Co. to meet the margin calls
were Donald & Co. house stocks purchased by plaintiffs through other firms, including Bear,
Stearns Securities Corp. (“Bear Stearns”); May Davis Group Inc. (“May Davis”); and H.J.
Meyers & Co., Inc. (collectively, “third-party brokers”). Id. ¶ 82. Specifically, through these
brokers, plaintiffs purchased MyTurn stock in the amount of $143,617.72, Tera Computer Co.

       11
           The value of plaintiffs’ Elec stock holdings peaked at $448,885 at the end of March
2000. Compare JX 91 at 1669 (reflecting a value of $448,885 at the end of March 2000), with
id. at 1676 (reflecting a value of $262,990 at the end of April 2000), and id. at 1612-13
(reflecting that plaintiffs sold all of their Elec stock for $75,543.94 in December 2000).
       12
            The SEC defines “margin call” in the following manner:

       If you buy on margin and the value of your securities declines, your brokerage
       firm can require you to deposit cash or securities to your account immediately, or
       sell any of the securities in your account to cover any shortfall, without informing
       you in advance. The brokerage firm decides which of your securities to sell.
       Even if the brokerage firm notifies you that you have a certain number of days to
       cover the shortfall, it still may sell your securities before then. A brokerage firm
       may at any time change the threshold at which customers are subject to a margin
       call.

SEC, Margin Call, https://www.investor.gov/glossary/glossary_terms/margin-call (last visited
Feb. 23, 2016).
       13
           Mr. Adkins testified that he did not request that any of the MyTurn stock be sold until
April 2000, and that Mr. Otto Kozak sold 10,000 shares of plaintiffs’ MyTurn stock in January
and February 2000 without plaintiffs’ knowledge or approval. Tr. 189-90 (C. Adkins); see also
JX 91 at 1655, 1658 (reflecting the sale of the shares). However, during a February 28, 2003
telephone interview, Mr. Adkins advised Special Agent Kurt F. Dengler of the Federal Bureau of
Investigation (“FBI”) that he asked Mr. Otto Kozak to sell all of the MyTurn stock in January
2000. DX 38 (rebuttal). The court finds that Mr. Adkins’s statement to Special Agent Dengler,
which was much closer in time to the events at issue, to be more reliable evidence.


                                                -5-
stock in the amount of $26,793.13, and Great Train Store Co. stock in the amount of $40,890.00.
Id. ¶ 83. With respect to the MyTurn stock, plaintiffs purchased 13,200 shares from Bear
Stearns, JX 53 at 865-66 (reflecting that 10,000 shares were purchased on May 25, 2000, and
3,200 shares were purchased on August 17, 2000), and 2,000 shares from May Davis, id. at 868-
69 (reflecting the purchase of 2000 shares, in four 500-share blocks, on September 13, 2000).
One of the May Davis transaction confirmation slips bore the notation that May Davis was a
market maker for MyTurn stock, id. at 868, and all of the May Davis transaction confirmation
slips indicated that plaintiffs’ request to purchase the MyTurn stock was not solicited by May
Davis, id. at 868-69. All of plaintiffs’ purchases of MyTurn stock through Bear Stearns and May
Davis were made at Mr. Otto Kozak’s urging. Tr. 113-16 (C. Adkins).

         By the beginning of 2002, the value of plaintiffs’ investments with Donald & Co. had
dropped dramatically. Compare JX 91 at 1659 (reflecting a value of $3,589,300.84 at the end of
February 2000), with id. at 1783 (reflecting a value of $9848.62 at the end of December 2001).
Mr. Adkins conducted some research and realized that plaintiffs were being defrauded. Tr. 28
(C. Adkins). At the same time, Donald & Co. and its principals—David Stetson, Slava Volman,
Steven Ingrassia, and Marc Freeman—were profiting from the pump-and-dump scheme. See PX
10 (containing plaintiffs’ April 2011 representation that “prior to the collapse in price [of the
MyTurn stock, the Donald & Co.] brokers dumped their own shares at a significant profit”); DX
38 (rebuttal) (containing Mr. Adkins’s February 2003 representation that Donald & Co. and
Messrs. Stetson, Volman, Ingrassia, and Freeman “all owned shares in [MyTurn] and were able
to sell out their positions during the time they refused to sell out [plaintiffs’ MyTurn] position”).
Consequently, on February 7, 2002, plaintiffs submitted a statement of claim to the NASD in
support of their demand for arbitration against Donald & Co. and Messrs. Stetson, Volman, and
Ingrassia. 14 Jt. Stip. ¶ 90; JX 42. In their claim, plaintiffs generally alleged that the respondents

       14
            Plaintiffs were no strangers to the NASD arbitration process. On February 22, 1999,
they submitted a statement of claim to the NASD in support of their demand for arbitration
against Philip E. Teseo and Victor M. Wang, who were brokers for Duke & Company, Inc. DX
15 (rebuttal); DX 17 (rebuttal). Plaintiffs alleged that Mr. Teseo and Mr. Wang defrauded them
of their investments through a pump-and-dump scheme. DX 15 (rebuttal); Tr. 155, 535, 538 (C.
Adkins). The NASD arbitration panel conducted a hearing, and on February 9, 2000, awarded
plaintiffs $572,000 plus interest. DX 15 (rebuttal). On January 21, 2001, Mr. Wang was
charged in federal court with conspiracy to commit securities fraud. DX 19 (rebuttal). He pled
guilty that same date, and was sentenced on December 13, 2002. Id. As part of his sentence, he
was directed to pay restitution in the amount of $11,129,582, most of which was to be paid to the
SEC on behalf of the victims of the fraud. Id. In the meantime, on January 23, 2001, plaintiffs
filed an application to confirm their arbitration award in the United States District Court for the
District of Columbia. DX 14 (rebuttal). The district court, in a July 17, 2001 ruling, confirmed
and entered judgment on the arbitration award. DX 18 (rebuttal) (Adkins v. Teseo, 180 F. Supp.
2d 15 (D.D.C. 2001)). As of the date of trial, plaintiffs had not collected on the judgment. Tr.
158, 500 (C. Adkins). Plaintiffs’ inability to collect on the judgment led Mr. Adkins to believe
that obtaining an arbitration award did not guarantee that compensation would be forthcoming
from the arbitration. Id. at 500.


                                                 -6-
manipulated the value of the MyTurn stock, causing them to incur substantial losses; they made
no allegations concerning the Vianet stock transactions. JX 42. Conspicuously absent from
plaintiffs’ demand for arbitration were three individuals: Messrs. Freeman, Robert Kozak, and
Otto Kozak, id., the three individuals that Mr. Adkins “dealt with” at Donald & Co., DX 38
(rebuttal). Plaintiffs did not name Mr. Freeman as a respondent despite Mr. Freeman being a
principal of Donald & Co., DX 38 (rebuttal); JX 15, and despite Mr. Freeman being identified as
the account representative on statements for three of their investment accounts for the September
2001 to September 2002 time period, see JX 91 at 1634-40, 1774-98, 1874-84. See also DX 38
(rebuttal) (containing Mr. Adkins’s February 2003 representation that Mr. Freeman “owned
shares in [MyTurn] and [was] able to sell out [his] position[] during the time [he] refused to sell
out [plaintiffs’ MyTurn] position”). In addition, plaintiffs did not name Mr. Robert Kozak as a
respondent despite Mr. Robert Kozak refusing Mr. Adkins’s directive to sell shares of MyTurn
stock. 15 Id. And, Mr. Otto Kozak was not named as a respondent despite Mr. Otto Kozak being
plaintiffs’ “main broker” and despite Mr. Otto Kozak refusing Mr. Adkins’s directive to sell
shares of MyTurn stock. Id. Rather, according to Mr. Adkins, Mr. Otto Kozak was assisting
plaintiffs by providing their arbitration attorneys with information regarding Donald & Co. See,
e.g., Tr. 57, 327-29, 381-82, 435-36 (C. Adkins); accord id. at 372, 392. In fact, Mr. Otto Kozak
advised Mr. Adkins and plaintiffs’ arbitration attorneys before the arbitration claim was filed that
he and Mr. Robert Kozak “didn’t have any money . . . .” Id. at 328-29; accord JX 2 (indicating
that Messrs. Otto Kozak and Robert Kozak were represented in their criminal proceedings,
initiated in May 2004, by attorneys appointed by the court pursuant to the Criminal Justice Act
of 1964, which provides for the appointment of counsel “for any person financially unable to
obtain adequate representation,” 18 U.S.C. § 3006A(a) (2000)).

        Donald & Co. ceased operations on July 24, 2002, due to insufficient capital, Jt. Stip.
¶ 62; JX 1, and Donald & Co. was expelled from the NASD on March 18, 2003, Jt. Stip. ¶ 69.

       On March 24, 2003, one of plaintiffs’ arbitration attorneys sent a letter to the NASD
requesting that the NASD adjourn the arbitration hearing scheduled for April 1, 2003, on two
grounds:

              The broker-dealer Respondent, Donald & Co. Securities, Inc. has not
       responded fully to our demands for discovery and is no longer in business. 16 We

       15
           Although Mr. Adkins told Special Agent Dengler in February 2003 that Mr. Robert
Kozak declined to execute his sell order, DX 38 (rebuttal), Mr. Adkins testified that he did not
“recall placing any orders with Robert Kozak,” Tr. 430 (C. Adkins), characterizing Mr. Robert
Kozak as Mr. Otto Kozak’s assistant who sometimes relayed messages to Mr. Otto Kozak, id. at
329, 430, and as someone who “wasn’t really a broker,” id. at 329. Contrary to Mr. Adkins’s
testimony, the documentary evidence in the record indicates that Mr. Robert Kozak was a
broker—he was a registered representative at Donald & Co. from February 1999 to September or
December 2001. JX 1; JX 93.
       16
           Although one of plaintiffs’ arbitration attorneys advised the NASD that Donald & Co.
did not “respond[] fully” to their discovery demands, JX 43, Mr. Adkins testified that “[t]he

                                                -7-
        have been unsuccessful in our attempts to obtain necessary documents elsewhere.
        Thus, we would need additional time for discovery in any event.

                There is a more important reason for an adjournment. One of the
        Claimants, Charles Adkins, has been recently contacted by the Department of
        Justice, which is investigating Donald & Co. and certain persons associated with
        it. (We have no information that any individual Respondent is the subject of the
        Government’s investigation.) Mr. Adkins has cooperated with the Government. I
        have also spoken with Cynthia Monaco, the United States Attorney handling the
        matter, who has advised me that an indictment will be handed down in the case.
        We understand the indictment will be handed down in the near future. At that
        time, Ms. Monaco will ask that all civil litigation involving Donald & Co.,
        including arbitrations, be stayed pending disposition of the criminal case. 17

JX 43 (footnotes added); see also DX 38 (rebuttal) (reflecting that Special Agent Dengler
interviewed Mr. Adkins by telephone on February 28, 2003, regarding the Donald & Co. stock
manipulation scheme). Further, according to Mr. Adkins, the arbitration attorneys advised
plaintiffs that they would be unable to proceed with arbitration without discovery and in light of
the pending indictment; however, they suggested that the arbitration claim be left open in the
event that proceedings in the criminal matter revealed pertinent information. Jt. Stip. ¶¶ 55, 91;
accord id. ¶ 76 (indicating that plaintiffs’ arbitration attorneys advised plaintiffs that “the



[respondents] . . . didn’t reply at all to our discovery requests,” Tr. 28 (C. Adkins). Thus, the
precise nature of Donald & Co.’s response to the discovery demands is unclear.
        17
            Paragraph 80 of the Joint Stipulation of Facts provides: “The prosecutor told
Plaintiffs[’] Arbitration attorney that the criminal indictments would stay the arbitration
proceedings in March, 2003.” Although the parties jointly stipulated to this fact, the court
accords it little weight. The letter from plaintiffs’ arbitration attorney indicates that the United
States Attorney intended to request that all civil litigation be stayed pending the resolution of the
criminal proceedings, not that she advised that all civil litigation would automatically be stayed
pending resolution of the criminal proceedings. In addition, at least one arbitration claim against
Donald & Co. and one of its brokers remained active during the criminal proceedings. See JX 49
(Auderer v. Donald & Co., filed on January 21, 2003, decision for claimants on March 16, 2005).

          Relatedly, paragraph 70 of the Joint Stipulation of Facts provides: “The arbitration
hearing before the NASD was suspended when the criminal defendant employees of Donald &
Company (including Otto Kozak, David Stetson, Slava Volman, and Steven Ingrassia) were
indicted . . . .” Although the parties jointly stipulated to this fact, the court accords it little weight
because it is vague. It is unclear whether the word “when” refers to causation or timing. And,
because the stipulated fact is written in passive voice, it is unclear who or what suspended the
arbitration hearing. Moreover, as demonstrated below, the stipulated fact is inaccurate in that it
provides that Mr. Stetson was indicted.


                                                   -8-
arbitration was trumped” by the indictments). Mr. Adkins did not object to this suggestion; he
testified:

       I only made two payments to my attorneys at the beginning of the case in 2002
       . . . . [T]hey were unsuccessful in getting any documents, and I told them I wasn’t
       going to pay them any more and there’s no real need to pursue it. The attorneys
       were on a contingency basis, so I had paid my money on the front end, and so . . .
       it was really their decision.

              I left it up to them about continuing and not just dropping the arbitration
       proceeding, because they had invested in the case and . . . they hoped, I guess,
       maybe to get something . . . out of the case at some point in time . . . . So, I did
       not object when they just kept postponing the case.

               And, in fact, . . . by 2003, there was no real work on the case, other than
       them responding to the NASDAQ [sic] board about . . . postponing the case. I
       guess in 2003, I think there was a plea to get the arbitrators to compel production,
       but then that was the last real effort of any kind by any of us.

              . . . . I know I paid $2,500 to start the case and another $5,000 in—around
       the end of 2002, and nothing more because it wasn’t going to be productive.

Tr. 70-71 (C. Adkins); accord id. at 231-32; see also id. at 71-72 (containing Mr. Adkins’s
testimony that by the end of 2003, he did not think that plaintiffs would get any money from
their arbitration claim), 226-29 (indicating that between 2004 and 2008, plaintiffs’ arbitration
attorneys requested, upon regular inquiries from the NASD, the continued postponement of the
arbitration proceedings). Thus, plaintiffs did not withdraw their arbitration claim at that time.
See JX 44 (indicating that the arbitration claim was not withdrawn until April 29, 2008).
Notably, three other arbitration proceedings instituted against Donald & Co. and its brokers
during this time period were resolved—in the claimants’ favor—in 2003. 18 See JX 46 (Oleszek
v. Donald & Co., filed on November 5, 2001, decision for claimants on February 28, 2003); JX
47 (Dobin v. Donald & Co., filed on December 18, 2001, decision for claimants on April 14,
2003); JX 48 (Sandburg v. Donald & Co., filed on May 14, 2002, decision for claimants on
March 28, 2003).

        Ultimately, in May 2004, a federal grand jury in the Eastern District of New York
returned an indictment against several principals and employees of Donald & Co.—Mr.
Ingrassia, Mr. Volman, Nicholas Antonelli, Jeffrey Bassin, Carl Cunzio, John Flanagan, Mr. Otto
Kozak, Mr. Robert Kozak, and Patrick McFadden—for conspiracy to commit securities fraud,
securities fraud related to the Elec and Classica stocks, and money laundering conspiracy. JX 1;

       18
         A fourth such arbitration claim was resolved—in the claimants’ favor—in 2005. See
JX 49 (Auderer v. Donald & Co., filed on January 21, 2003, decision for claimants on March 16,
2005).


                                                -9-
JX 2. Messrs. Ingrassia and Volman were also indicted for money laundering. JX 1; JX 2. The
indictment additionally contained two criminal forfeiture allegations. JX 1. The first, which
pertained to the securities fraud charges, indicated that the government intended, upon the
criminal defendants’ convictions, to seek the forfeiture “of any property constituting or derived
from proceeds obtained directly or indirectly as a result of such offenses” pursuant to 18 U.S.C.
§ 981(a)(1)(C) and 28 U.S.C. § 2461(c), or, if necessary, the forfeiture of substitute property
pursuant to 21 U.S.C. § 853(p). Id. The second, which pertained to the money laundering
charges, indicated that the government intended, upon the criminal defendants’ convictions, to
seek the forfeiture of all property involved in the offenses, as well as all property traceable to that
property, pursuant to 18 U.S.C. § 982, or, if necessary, the forfeiture of substitute property
pursuant to 21 U.S.C. § 853(p). Id. Specifically identified as subject to forfeiture were real
property located in Bayshore, New York, and a Carver motorboat, both owned by Mr. Ingrassia.
Id.

        Mr. Adkins read the indictment in 2004. Tr. 378 (C. Adkins). He interpreted its contents
to mean that the government intended to seize any documentation concerning the identity and
ownership of the criminal defendants’ assets, foreclosing plaintiffs’ ability to prove the existence
of a theft loss and locate assets that could be used to reimburse plaintiffs for their theft loss. Id.
at 29-30, 72. Mr. Adkins further interpreted the indictment to mean that the government was
going to seize all of the criminal defendants’ assets, preventing plaintiffs from attaching those
assets to recover their theft loss. 19 Id. at 29-30, 72, 223-24; see also id. at 72 (describing the
indictment as “the last nail in the coffin” with respect to obtaining any recovery on plaintiffs’
arbitration claim). But see JX 62 (containing a January 2010 FBI press release possessed by
plaintiffs regarding a series of pump-and-dump schemes that provides: “In many cases, the
losses were significant. And while running an undercover operation and gathering enough
evidence to put the criminals behind bars, our focus has been on helping victims get some of
their hard-earned money back. . . . So far, more than 100 seizures and forfeitures totaling over
$70 million in cash, artwork, jewelry, homes, cars, and other valuables have been made, and
criminals have been ordered to pay more than $130 million in restitution. We expect millions
more to be forfeited and repaid to the victims.”). Indeed, relying solely on the contents of the
indictment, Mr. Adkins concluded that the government had rendered the criminal defendants
judgment proof. DX 34 (rebuttal).

       Moreover, when Mr. Adkins saw the indictment and learned that only the Elec and
Classica stocks—and not the MyTurn stock—were named in the document, he was upset and

       19
             As described below, certain defendants did agree to the entry of forfeiture money
judgments against them. See also Jt. Stip. ¶¶ 50 (“The United States seized and/or received
assets . . . in connection with forfeiture money judgments . . . entered against [Messrs. Ingrassia,
Volman, and Stetson].”), 51 (reflecting that the government received payments of $300,000 and
$75,000 toward the forfeiture money judgments, and that “[t]he seized Carver Motorboat was not
forfeited in satisfaction of any forfeiture money judgment”). Mr. Adkins testified that when he
used the term “seizure,” he was referring to “a forced forfeiture of their assets . . . .” Tr. 517 (C.
Adkins).


                                                 -10-
called Special Agent Dengler to express his dissatisfaction. Tr. 61-63, 289, 292, 304-05 (C.
Adkins). According to Mr. Adkins, Special Agent Dengler advised him that the FBI and the
prosecutors were focused on the money laundering aspects of the case, and not the securities
fraud. Id. at 293, 296-97, 304-05; accord id. at 292-93, 509 (containing Mr. Adkins’s testimony
that Special Agent Dengler stated that the priority of the FBI and the prosecutors was to put
people in jail, not to recover money for the securities fraud victims 20); cf. id. at 62-64 (indicating
Mr. Adkins’s belief, based on the contents of the indictment and his discussions with Special
Agent Dengler, that plaintiffs would never get their money back because (1) the government’s
focus was on the money laundering, (2) the government was going to take all of the criminal
defendants’ money through seizures and fines, and (3) the government was going to take all of
the criminal defendants’ documents that could support plaintiffs’ arbitration claim).

        Mr. Stetson, another Donald & Co. principal, was charged by information on September
21, 2004. JX 3. He was charged with conspiracy to commit securities fraud, securities fraud
related to the Classica stock, and money laundering conspiracy. Id.; JX 15. The information
also contained two criminal forfeiture allegations. JX 15. The first, which pertained to the
securities fraud charges, indicated that the government intended, upon Mr. Stetson’s conviction,
to seek the forfeiture “of any property constituting or derived from proceeds obtained directly or
indirectly as a result of such offense(s)” pursuant to 18 U.S.C. § 981(a)(1)(C) and 28 U.S.C.
§ 2461(c) (including, but not limited to, $300,000 in United States currency), or, if necessary, the
forfeiture of substitute property pursuant to 21 U.S.C. § 853(p). Id. The second, which pertained
to the money laundering charge, indicated that the government intended, upon Mr. Stetson’s
conviction, to seek the forfeiture of all property involved in the offenses, as well as all property
traceable to that property, pursuant to 18 U.S.C. § 982 (including, but not limited to, $150,000 in
United States currency), or, if necessary, the forfeiture of substitute property pursuant to 21
U.S.C. § 853(p). Id. Mr. Adkins was made aware of the criminal case against Mr. Stetson by his
arbitration attorneys and Mr. Otto Kozak, but did not see the charging document until after 2004.
Tr. 380-82 (C. Adkins).

        In September 2004, Messrs. Ingrassia and Stetson agreed to plead guilty to the securities
fraud conspiracy, securities fraud, and money laundering conspiracy charges. Jt. Stip. ¶ 79; JX
2; JX 3. Mr. Volman agreed to plead guilty to the same charges the following month. Jt. Stip.
¶ 79; JX 2. In agreeing to plead guilty, Messrs. Ingrassia and Volman would receive terms of
imprisonment and supervised release, and would be subject to fines that could exceed $1.75
million, mandatory restitution in an amount to be determined, and forfeiture. JX 13; JX 14.
Although Mr. Stetson’s plea agreement is not included in the record or available via PACER, 21 it

       20
           Mr. Adkins also testified that neither Special Agent Dengler nor anyone from the
government advised him, “in so many words,” that “the purpose of federal investigations is to
put the guys in jail, not to recover your money[.]” Tr. 294 (C. Adkins). This testimony conflicts
with his earlier trial testimony, see id. at 292-93, and his deposition testimony, see id. at 294-95.
The court therefore discounts it.
       21
           PACER is an acronym for Public Access to Court Electronic Records, which “is an
electronic public access service that allows users to obtain case and docket information online

                                                 -11-
appears, based on the judgment entered against Mr. Stetson, that the plea agreement mirrored
those of Messrs. Ingrassia and Volman. See JX 19. With respect to forfeiture, the three criminal
defendants agreed, pursuant to 18 U.S.C. § 981(a)(1)(C), 18 U.S.C. § 982, and/or 21 U.S.C.
§ 853(p), to the entry of forfeiture money judgments against them in which Mr. Ingrassia would
forfeit $100,000 to the United States, 22 Mr. Stetson would forfeit $150,000 to the United States,
and Mr. Volman would forfeit $300,000 to the United States. JX 13; JX 14; JX 23. The three
criminal defendants’ plea agreements remained under seal until August 26, 2005. JX 7; JX 9;
see also JX 11 (reflecting that the transcript of Mr. Volman’s October 20, 2004 plea hearing was
sealed); JX 12 (reflecting that the transcript of Mr. Ingrassia’s September 13, 2004 plea hearing
was sealed). Nevertheless, Mr. Adkins learned in 2004 from his arbitration attorneys and Mr.
Otto Kozak that all of the criminal defendants intended to plead guilty. Tr. 371-72, 380-82 (C.
Adkins).

        In addition to facing criminal penalties for their roles in the securities fraud, Messrs.
Antonelli and Stetson were barred by the SEC from acting as brokers or dealers in securities on
May 14, 2004, Jt. Stip. ¶ 78 (Stetson); Antonelli, Exchange Act Release No. 49702, 2004 WL
1086008 (May 14, 2004), 23 and Messrs. Ingrassia and Volman were barred by the SEC from
acting as brokers or dealers in securities on December 7, 2004, Jt. Stip. ¶ 77. 24 Mr. Adkins
learned of the Stetson, Ingrassia, and Volman SEC orders from his arbitration attorneys, likely in
2004. Tr. 75, 326-27, 329-30 (C. Adkins). He believed that one of the consequences of these
orders was to reduce the three individuals’ earning power, making the collection of any judgment
against them more difficult. Id. at 408.

        By the end of 2004, Messrs. Ingrassia, Volman, and Otto Kozak had not paid plaintiffs
for their losses. Jt. Stip. ¶ 47. Nor had the United States District Court for the Eastern District of
New York entered a restitution order. Id.

        In August 2005, Mr. Freeman was charged by information with conspiracy to commit
securities fraud, securities fraud, and money laundering conspiracy. JX 4. That same month,

from federal appellate, district, and bankruptcy courts, and the PACER Case Locator.” See
Admin. Office of the U.S. Courts, Public Access to Court Electronic Records,
https://www.pacer.gov (last visited Feb. 19, 2016).
       22
          Although Mr. Ingrassia’s plea agreement reflected that he had agreed that a forfeiture
money judgment would be entered against him by March 1, 2005, a review of the criminal
docket indicates that such a judgment was not entered against him. See JX 2.
       23
          The court takes judicial notice of the Antonelli SEC order pursuant to Rule 201(b)(2)
of the Federal Rules of Evidence.
       24
           The SEC did not take action against the other criminal defendants until May 2006.
That month, it barred Messrs. Otto Kozak, Bassin, Cunzio, and McFadden from acting as brokers
or dealers in securities, JX 92; DX 1; DX 2; DX 3, and instituted proceedings against Messrs.
Robert Kozak and Flanagan, JX 93.


                                                -12-
Mr. Freeman agreed to plead guilty to all three charges. Id. As part of his plea agreement, he
agreed to forfeit $50,000 to the United States. JX 20. He satisfied the forfeiture money
judgment prior to his June 2009 sentencing. JX 4. And, as part of his sentence, Mr. Freeman
was directed to pay restitution in the amount of $4,243,858. Id.

        Criminal proceedings against the other Donald & Co. principals and brokers were
ongoing. For example, in August 2005, Mr. Otto Kozak agreed to plead guilty to the securities
fraud conspiracy and securities fraud charges filed against him. Jt. Stip. ¶ 72; JX 2; JX 54.
Pursuant to his plea agreement, he was subject to imprisonment, supervised release, fines that
could exceed $1.25 million, and mandatory restitution in an amount to be determined. JX 54.
Mr. Otto Kozak was sentenced in July 2006. JX 2. As part of his sentence, he was directed to
pay restitution in the amount of $631,482.26. Id. Before he died in April 2011, Jt. Stip. ¶ 56,
Mr. Otto Kozak made restitution payments totaling $255, JX 61. Mr. Robert Kozak also agreed
to plead guilty in August 2005 to the securities fraud conspiracy and securities fraud charges
filed against him. JX 2. He was sentenced in August 2006, and as part of his sentence, he was
directed to pay restitution in the amount of $231,641.80. Id. Another criminal defendant, Mr.
Volman, satisfied the $300,000 forfeiture money judgment entered against him in September
2005, and was sentenced in July 2012. Id. As part of his sentence, Mr. Volman was directed to
pay restitution in the amount of $3,590,466.50. Id.; JX 18. Mr. Ingrassia was sentenced in
December 2009, and was directed to pay restitution in the amount of $4,243,858.44. JX 2; JX
18. And, Mr. Stetson, sentenced in March 2011, was directed to pay restitution in the amount of
$3,590,466.50. JX 3. That same year, Mr. Stetson made a $75,000 payment in partial
satisfaction of the $150,000 forfeiture money judgment entered against him. Id. The restitution
obligations of Messrs. Volman, Ingrassia, Stetson, and Freeman were joint and several. JX 17;
JX 18; JX 19; JX 20. As of January 28, 2014, they had paid a total of at least $7093.27 towards
their obligations. 25 JX 61. Other criminal defendants—Messrs. Bassin, McFadden, Antonelli,
Cunzio, and Robert Kozak—had paid a total of $44,574.63 in restitution (out of a total combined
obligation of $392,223.24). 26 Id.; JX 2.

        The United States Attorney’s Office, having identified plaintiffs as victims of the
securities fraud perpetuated at Donald & Co., Jt. Stip. ¶¶ 57, 93, kept plaintiffs apprised of the
ongoing criminal proceedings, id. ¶ 73. In an August 12, 2005 letter, the office’s Victim Witness
Coordinator advised plaintiffs of the charges filed against the Donald & Co. brokers, that they
had “[t]he right to full and timely restitution as provided in law,” and that they could follow the
criminal proceedings through the Victim Notification System. JX 41 at 657-58; accord Jt. Stip.
¶ 94. Later, in a March 31, 2006 letter regarding sentencing proceedings, the United States
Attorney’s Office advised plaintiffs that they might be contacted by a probation officer to discuss
how they were affected by the securities fraud, and requested that plaintiffs complete and return
an enclosed “Affidavit of Loss” to the probation officer. JX 41 at 662-64; see also id. at 663

       25
            The record lacks any evidence regarding restitution payments made by Mr. Freeman.
       26
          The record lacks any evidence regarding restitution payments made by the remaining
defendant, Mr. Flanagan. Mr. Flanagan was directed to pay $330,215.48 in restitution. JX 2.


                                               -13-
(indicating that if plaintiffs had any questions regarding the attached affidavit, they could call the
probation officer at the specified telephone number). Plaintiffs received the March 31, 2006
letter, as reflected by the fact that they later submitted it—without the associated affidavit—to
the Internal Revenue Service (“IRS”). JX 55; Tr. 109-10 (C. Adkins). However, plaintiffs did
not submit the affidavit to the probation officer; indeed, Mr. Adkins does not recall receiving the
affidavit. Tr. 215-16, 501-02 (C. Adkins). Mr. Adkins does recall speaking with Special Agent
Dengler regarding whether the government needed information from plaintiffs regarding their
losses on the Elec and Classica stocks; according to Mr. Adkins, Special Agent Dengler
responded that the government had a sufficient number of other victims and that it did not need
plaintiffs’ information. 27 Id. at 287-88, 298-99, 301, 304, 510-11. For that reason, and because
(1) the indictment did not mention the MyTurn stock and (2) Mr. Adkins did not want what he
thought would be the accompanying public exposure, plaintiffs decided against officially being
identified as victims. Id. at 288-90, 292, 305-06. It appears that because there was no affidavit
submitted on plaintiffs’ behalf, plaintiffs were not included on the victim lists submitted to the
federal district court for the purposes of receiving restitution from the convicted Donald & Co.
brokers. See, e.g., JX 17 at 297-361 (containing the victim lists attached to Mr. Ingrassia’s
December 2009 criminal judgment that included customers of Messrs. Ingrassia, Freeman,
Antonelli, Flanagan, Volman, Stetson, Robert Kozak, McFadden, and Cunzio, none of which
included plaintiffs). Those lists reflect that the identified victims claimed losses related to three
stocks: Classica, Elec, and “USHS.” Id.

        While the criminal proceedings were pending, plaintiffs attempted to recoup some of
their losses by claiming a federal income tax deduction. JX 36; JX 37; JX 38; JX 39. Pursuant
to section 165 of the Internal Revenue Code (“IRC”) and its implementing regulations, taxpayers
are permitted to deduct a theft loss from their income in the year that they sustained the loss.
IRC § 165(a), (e) (2000); Treas. Reg. §§ 1.165-1(a), (d), 1.165-8(a) (2001). Plaintiffs chose to
claim the theft loss in 2004, and then carry back portions of the loss to the previous three years.
JX 36; JX 37; JX 38; JX 39. At the time they made this decision, they had already filed their
original federal income tax returns for 2001 to 2004. JX 25 (reflecting that the original 2001
return was filed on October 21, 2002); JX 26 (reflecting that the original 2002 return was filed on
October 18, 2003); JX 27 (reflecting that the original 2003 return was filed on October 19,
2004); JX 28 (reflecting that the original 2004 return was filed on October 19, 2005). Thus, in
2006, 28 plaintiffs timely filed amended federal income tax returns reflecting a total theft loss of
$2,118,725. Jt. Stip. ¶¶ 63-66; JX 36; JX 37; JX 38; JX 39. Plaintiffs sought income tax refunds
of $115,736 for 2004, $24,021 for 2003, $71,621 for 2002, and $177,707 for 2001. JX 36; JX

       27
          Mr. Adkins testified that he discussed this topic with Special Agent Dengler both
before and after the indictments were issued. Tr. 299, 301 (C. Adkins).
       28
           The amended tax returns were signed by plaintiffs in March 2006 (the amended 2004
tax return) and May 2006 (the amended 2001, 2002, and 2003 tax returns). JX 36; JX 37; JX 38;
JX 39. However, the official records maintained by the IRS reflect that the amended tax returns
were filed in May 2006 (2004) and July 2006 (2001, 2002, and 2003). JX 25; JX 26; JX 27; JX
28.


                                                -14-
37; JX 38; JX 39. Plaintiffs’ amended tax returns were prepared by Alan A. Gavel of JK Harris
165 Services, LLC. 29 JX 36; JX 37; JX 38; JX 39.

        On April 29, 2008, approximately two years after they filed their amended federal
income tax returns, plaintiffs withdrew their arbitration claim against Donald & Co. and its
brokers. Jt. Stip. ¶ 92. The record contains no evidence that the United States Attorney
requested that plaintiffs’ arbitration proceeding be stayed pending resolution of the criminal
proceedings against the Donald & Co. brokers. See also Tr. 230 (C. Adkins) (reflecting Mr.
Adkins’s testimony that he did not know whether the United States Attorney stayed all civil
proceedings against the criminal defendants). Indeed, at least one arbitration claim against
Donald & Co. and one of its brokers resulted in an award for the claimants while the criminal
proceedings were pending, notwithstanding the fact that neither Donald & Co. nor the broker
ever entered an appearance in the arbitration proceedings. See JX 49 (Auderer v. Donald & Co.,
filed on January 21, 2003, decision for claimants on March 16, 2005).

         Subsequently, on December 12, 2008, the IRS disallowed plaintiffs’ refund claims for
2001, 2003, and 2004, 30 in the total amount of $317,458. 31 Compl. ¶ 22; Answer ¶ 22. Plaintiffs
protested the disallowance at the IRS Office of Appeals. PX 10. The appeal was denied because
plaintiffs “failed to provide sufficient facts, evidence, substantiation and legal arguments to
support the claim.” Id. Plaintiffs retained a new attorney, who was able to reinstate the appeal.
Id.; Jt. Stip. ¶ 58. In their resubmitted appeal, plaintiffs claimed a total theft loss, as calculated
by their accountant Charles A. Bish, of $2,575,958.19. 32 Jt. Stip. ¶ 60. Most of that loss derived
from the Donald & Co. pump-and-dump scheme; $2,336,895.58 of the loss was attributable to
stock purchases made through Donald & Co. and $194,062.61 of the loss was attributable to
stock purchases made via the third-party brokers. 33 Id. ¶ 84; Tr. 122-23 (C. Adkins). The

       29
           Plaintiffs had previously utilized the services of this company to prepare amended tax
returns to claim a theft loss deduction related to the losses they sustained as a result of the actions
of Mr. Teseo and Mr. Wang. Tr. 535, 537, 539-40 (C. Adkins); see supra note 14. The IRS did
not contest the theft loss deduction claimed on those amended returns. Tr. 537 (C. Adkins).
       30
            The record contains no evidence suggesting the basis for the IRS’s disallowance of
plaintiffs’ refund claims. Thus, it is unknown whether the IRS disallowed the refund claims
because (1) it did not believe that plaintiffs’ losses from the pump-and-dump scheme qualified as
theft losses; (2) it concluded that 2004 was not the proper year to claim the theft loss deduction;
(3) it concluded that another, specified year was the correct year to claim the theft loss
deduction; or (4) of some other reason.
       31
           Plaintiffs’ refund claims for those three years actually totaled $317,464. The origin of
the $6 discrepancy in the amounts is unclear.
       32
         During trial, Mr. Bish revised the amount of the theft loss to $2,540,450.63. See Tr.
626-29 (Bish); accord PX 21.
       33
            The court derives the $194,062.61 figure by subtracting from plaintiffs’ total claimed
theft loss the $2,336,895.58 attributable to the Donald & Co. pump-and-dump scheme, Jt. Stip.

                                                 -15-
remaining $45,000 of the claimed loss related to plaintiffs’ investment in the Vianet private
placement offering. Jt. Stip. ¶ 84; Tr. 122-23 (C. Adkins).

        In an April 5, 2011 “Appeals Case Memorandum,” an IRS Appeals Officer, David
Kaplon, concluded, pending the final computations of the Tax Computation Specialist, that
plaintiffs had sustained a theft loss of $2,532,996.01—plaintiffs’ claimed theft loss minus the
portion of the loss attributable to the Great Train Store Co. and Tera Computer Co. stock
purchases through third-party brokers—in 2004, and were therefore entitled to the corresponding
refunds. Jt. Stip. ¶¶ 58-59; PX 10. Mr. Kaplon described his conclusion as a “proposed
settlement . . . .” PX 10. However, the proposed settlement was never finalized. Tr. 465
(Kaplon). As reflected in Mr. Kaplon’s memorandum and attached transmittal form, the IRS
Office of Appeals lacked jurisdiction to settle plaintiffs’ claim because plaintiffs had filed suit in
the United States Court of Federal Claims. PX 10. Indeed, plaintiffs filed suit in this court on
December 10, 2010, seeking a federal income tax refund in the total amount of $317,458.

         Currently, there are no funds available from the convicted Donald & Co. brokers to pay
restitution to plaintiffs. Jt. Stip. ¶ 48. In fact, none of the named victims of the Donald & Co.
pump-and-dump scheme has been fully reimbursed for their losses. Id. ¶ 49. Further, there is no
evidence that the convicted Donald & Co. brokers—aside from Mr. Freeman—possess assets
sufficient to pay restitution or any judgment against them. 34 Id. ¶ 68. And, plaintiffs do not have
“insurance or other vehicle for recovery for [their] loss.” Id. ¶ 74.

                                 II. PROCEDURAL HISTORY

        As previously noted, plaintiffs filed their complaint on December 10, 2010, seeking a
federal income tax refund in the total amount of $317,458. After the close of discovery, the
parties each moved for summary judgment. Initially, the issues presented by the parties in those
motions included whether plaintiffs’ investment losses constituted a theft loss pursuant to IRC
§ 165; if so, whether 2004 was the correct year to allow the theft loss deduction; and, if plaintiffs
sustained a theft loss in 2004, what was the proper amount of the deduction and associated
refunds. During supplemental briefing, defendant conceded that most of plaintiffs’ investment
losses—those attributable to stock purchases made through Donald & Co.—constituted a theft
loss. Thus, the issues remaining for the court’s resolution were (1) whether the $239,062.61 in
losses attributable to stock purchases through the third-party brokers and to the Vianet private
placement offering constituted theft losses under IRC § 165; (2) whether 2004 was the correct
year to allow the theft loss deduction; and (3) if a refund was proper, what was the amount of
that refund.



¶ 95, and the $45,000 attributable to the alleged theft related to the Vianet private placement
offering, id.; Tr. 122-23 (C. Adkins).
       34
          The parties’ fact stipulation does not apply to Mr. Freeman, and the record contains no
evidence regarding Mr. Freeman’s assets.


                                                 -16-
        In a December 11, 2013 Opinion and Order, the court first addressed the losses suffered
by plaintiffs that were attributable to stock purchases through the third-party brokers. Adkins v.
United States, 113 Fed. Cl. 797, 804-06 (2013). It held that any losses attributable to plaintiffs’
purchases of Tera Computer Co. and Great Train Store Co. stock could not constitute a theft loss
under IRC § 165. Id. at 805-06. However, with respect to any losses attributable to plaintiffs’
purchases of MyTurn stock through the third-party brokers, the court held that genuine issues of
material fact precluded the entry of summary judgment. Id. at 805. Similarly, the court declined
to enter summary judgment with respect to the alleged loss attributable to the Vianet private
placement offering due to the existence of genuine issues of material fact. Id. at 806. And,
genuine issues of material fact prevented the court from entering summary judgment as to
whether plaintiffs properly claimed their theft loss in 2004. 35 Id. at 806-09.

        Trial was held in Washington, DC on the remaining issues from November 12 to 14,
2014. During trial, the court heard testimony from plaintiffs, Mr. Kaplon, Mr. Bish, and Special
Agent Dengler, and received documentary evidence. After the parties submitted posttrial briefs,
the court concluded, in a February 16, 2016 Opinion and Order, that plaintiffs were not entitled
to a theft loss deduction for the 2004 tax year and dismissed their complaint. 36 See generally
Adkins v. United States, 125 Fed. Cl. 304 (2016), vacated, 856 F.3d 914 (Fed. Cir. 2017).
Plaintiffs appealed the court’s decision to the Federal Circuit. Concluding that this court
misconstrued the regulation concerning the timing of a theft loss deduction, the Federal Circuit
vacated the February 16, 2016 Opinion and Order and remanded the case for further
proceedings. 37 See Adkins, 856 F.3d at 917-20.




       35
           Because the proper year for the theft loss deduction remained in dispute, the court was
not required to address the final issue: the amount of the refund due plaintiffs. See Adkins, 113
Fed. Cl. at 809.
       36
           Because the court concluded that plaintiffs had not established entitlement to a theft
loss deduction in 2004, it was not required to address whether plaintiffs could recover their
losses resulting from their purchase of MyTurn stock through the third-party brokers or their
alleged $45,000 loss related to the Vianet private placement offering.
       37
           Because the Federal Circuit vacated the court’s February 16, 2016 Opinion and Order,
the findings of fact and conclusions of law contained in that decision are not binding on the court
as law of the case. See Rumsfeld v. Freedom NY, Inc., 329 F.3d 1320, 1332 (Fed. Cir. 2003)
(holding that when a judgment is vacated, the “vacated judgment ‘has no preclusive force either
as a matter of collateral or direct estoppel or as a matter of the law of the case,’” and therefore
the tribunal whose judgment was vacated is “free to come to different factual conclusions the
second time around without revisiting its decision in the earlier vacated decision” (quoting U.S.
Philips Corp. v. Sears Roebuck & Co., 55 F.3d 592, 598 (Fed. Cir. 1995))); accord United States
v. Munsingwear, Inc., 340 U.S. 36, 40 (1950) (observing that vacating a judgment “clears the
path for future relitigation of the issues between the parties”).


                                               -17-
        On remand, the parties filed a joint status report indicating that “no further testimony or
evidence” was required, and proposing a schedule for supplemental briefing. The court adopted
the parties’ proposed schedule. After reviewing the briefs, the court encouraged the parties to
engage in settlement discussions and, on the agreement of the parties, referred the case to the
court’s Alternative Dispute Resolution program. On April 4, 2018, the parties advised the court
that they were unable to reach a settlement. The court provided the parties with a final
opportunity to submit briefs in support of their positions; that briefing concluded on May 30,
2018. The court, finding oral argument unnecessary, is now prepared to rule.

                                        III. DISCUSSION

                                        A. Legal Standard

        The court begins its analysis by determining whether 2004 was the proper year for
plaintiffs to claim their theft loss deduction. As a general matter, a theft loss is allowed as a
deduction in the year in which it is sustained, IRC § 165(a), and taxpayers are considered to have
sustained a theft loss in the year in which they discover it, id. § 165(e). However, taxpayers
cannot deduct a theft loss for which they have been compensated by insurance or otherwise. Id.
§ 165(a). More particularly:

       [I]f in the year of discovery there exists a claim for reimbursement with respect to
       which there is a reasonable prospect of recovery, no portion of the loss with
       respect to which reimbursement may be received is sustained . . . until the taxable
       year in which it can be ascertained with reasonable certainty whether or not such
       reimbursement will be received.

Treas. Reg. § 1.165-1(d)(3), cited in id. § 1.165-8(a)(2); accord id. § 1.165-1(d)(2)(i). In its
decision on appeal, the Federal Circuit explained that this regulation

       merely describes two sides of the same probabilistic coin: a “reasonable prospect
       for recovery” is the inverse of “reasonable certainty” that there will be no
       recovery. That is, the test in Treas. Reg. § 1.165-1(d)(3) may be simplified as
       follows: the proper year in which to claim a loss is the first year in which no
       reasonable prospect of recovery exists anymore, starting with the year of
       discovery.

Adkins, 856 F.3d at 917 (footnote omitted) (citing Vincentini v. Comm’r, 429 F. App’x 560, 564
(6th Cir. 2011) (unpublished decision); Jeppsen v. Comm’r, 128 F.3d 1410, 1414-17 (10th Cir.
1997); Rainbow Inn, Inc. v. Comm’r, 433 F.2d 640, 644 (3d Cir. 1970)); accord id. at 917 n.4
(“The test could be equivalently simplified as: the proper year in which to claim a loss is the
first year in which it can be ascertained with reasonable certainty that there will be no recovery,
starting with the year of discovery.”). “A reasonable prospect of recovery exists when the
taxpayer has bona fide claims for recoupment from third parties or otherwise, and when there is a
substantial possibility that such claims will be decided in his favor.” Ramsay Scarlett & Co. v.
Comm’r, 61 T.C. 795, 811 (1974), aff’d, 521 F.2d 786 (4th Cir. 1974). Courts may analyze

                                                -18-
claims not actually filed or pursued by a taxpayer when determining his reasonable prospect of
recovery. See Jensen v. Comm’r, 66 T.C.M. (CCH) 543, 547 (1993) (analyzing the reasonable
prospect of recovering on a lawsuit that was not filed); Lapin v. Comm’r, 60 T.C.M. (CCH) 59
(1990) (“We cannot infer from petitioner’s inaction toward the [company’s] principals that there
was no reasonable prospect of recovery. The absence of a pending legal action during the year
of an alleged theft loss does not necessarily mean that there was no such prospect.”), aff’d, 956
F.2d 1167 (9th Cir. 1992) (unpublished table decision); Whitney v. Comm’r, 13 T.C. 897, 901
(1949) (“Losses, to be deductible under the revenue laws, must be actual, realized losses, and in
any case where there is a reasonable ground for reimbursement the taxpayer must seek his
redress and may not secure a loss deduction until he establishes that no recovery may be had.”).

        “Whether a reasonable prospect of recovery exists with respect to a claim for
reimbursement of a loss is a question of fact to be determined upon an examination of all facts
and circumstances.” Treas. Reg. § 1.165-1(d)(2)(i); see Adkins, 856 F.3d at 919-20 (stating that
the application of Treasury Regulation § 1.165-1(d)(2)(i) requires a “holistic analysis”). “The
‘reasonableness’ of a taxpayer’s prospect of recovery is primarily tested objectively, although a
court may consider to a limited extent evidence of the taxpayer’s subjective contemporaneous
assessment of his own prospect of recovery.” Jeppsen, 128 F.3d at 1418; accord Boehm v.
Comm’r, 326 U.S. 287, 292 (1945) (observing that a subjective factor, such as a taxpayer’s
“reasonable and honest belief,” cannot be “the controlling or sole criterion”); Montgomery
Coca-Cola Bottling Co. v. United States, 615 F.2d 1318, 1327 (Ct. Cl. 1980) (“The subjective
intent testimony of the [taxpayer] can only be seriously considered to the extent it is consistent
with the objective evidence.”); Parmelee Transp. Co. v. United States, 351 F.2d 619, 628 (Ct. Cl.
1965) (holding that determining a taxpayer’s reasonable prospect of recovering on a claim “is an
objective test looking to the probabilities of the outcome” of the proceedings on the claim).

         Courts have identified at least three objective factors that are relevant to determining
whether taxpayers have a reasonable prospect of recovery. One such factor is the probability of
recovery on the claim. See Parmelee Transp. Co., 351 F.2d at 628 (remarking that a court must
examine the “probability of recovery” from the claim, with a “40 to 50 percent or better chance
of recovery” being considered sufficient to constitute a reasonable prospect of recovery). A
second such factor is the status of the claim, in other words, whether the claim has been settled,
adjudicated, or abandoned. See Treas. Reg. § 1.165-1(d)(2)(i) (“Whether or not . . .
reimbursement will be received may be ascertained with reasonable certainty, for example, by a
settlement of the claim, by an adjudication of the claim, or by an abandonment of the claim”);
see also id. (“When a taxpayer claims that the taxable year in which a loss is sustained is fixed by
his abandonment of the claim for reimbursement, he must be able to produce objective evidence
of his having abandoned the claim, such as the execution of a release.”); Alioto v. Comm’r, 699
F.3d 948, 954 (6th Cir. 2012) (holding that a taxpayer’s testimony regarding his “subjective
understanding that he would not be paid back” did not “meet the requirement of ‘objective
evidence’ to prove abandonment”). And, a third such factor is the availability of civil and
criminal restitution. See Vincentini v. Comm’r, 96 T.C.M. (CCH) 400, 405 (2008) (holding that
it was reasonable to anticipate that a federal district court might order “defendants, if convicted,
to pay restitution to their victims . . . and to forfeit property that could be used to satisfy the
restitution order”), aff’d, 429 F. App’x at 560; see also 18 U.S.C. § 3663A (2000) (requiring

                                               -19-
courts, when sentencing a defendant convicted of a “an offense against property under [title 18 of
the United States Code], . . . including any offense committed by fraud or deceit,” for which the
defendant’s victim(s) suffered a “pecuniary loss,” to order the defendant to make restitution to
his victim(s)).

        The court’s ultimate inquiry is to determine what a “reasonable [taxpayer]” would have
concluded regarding his “prospect of recovering something” in the year that he claimed his theft
loss deduction. Parmelee Transp. Co., 351 F.2d at 628; accord Rainbow Inn, Inc., 433 F.2d at
644 (“The test is whether there was a reasonable prospect of recovery at the time the deduction
was claimed, not later.”). Thus, the “determination of a reasonable prospect of recovery is a
question of foresight.” Jeppsen, 128 F.3d at 1416; accord Ramsay Scarlett & Co., 521 F.2d at
789 (“[T]he standard is to be applied by foresight.”); Ramsay Scarlett & Co., 61 T.C. at 811
(“[W]e do not look at facts whose existence and production for use in later proceedings was not
reasonably foreseeable as of the close of the particular year.”). A taxpayer need not establish
“that there is no possibility of an eventual recoupment” to claim the deduction. United States v.
S.S. White Dental Mfg. Co. of Pa., 274 U.S. 398, 402-03 (1927); accord Ramsay Scarlett & Co.,
61 T.C. at 811 (“[C]laims for recovery whose potential for success are remote or nebulous will
not demand a postponement of the deduction.”). However, if the “prospect of recovery was
simply unknowable” in a particular year, a taxpayer is “not entitled to take the theft loss
deduction” in that year. Jeppsen, 128 F.3d at 1418.

        Taxpayers bear the burden of establishing their entitlement to a theft loss deduction.
Boehm, 326 U.S. at 294; accord Jeppsen, 128 F.3d at 1418 (noting that the taxpayer had a “high”
burden of proving “that it could have been ascertained with reasonable certainty as of [the end of
the relevant tax year] that [his] loss would never be recovered”); Parmelee Transp. Co., 351 F.2d
at 628 (indicating that the taxpayer failed to meet its burden of proving a reasonable prospect of
recovering its loss in the year that the loss was discovered and the theft loss deduction was
claimed); Premji v. Comm’r, 72 T.C.M. (CCH) 16, 21 (1996) (“Petitioners have the burden of
proving that . . . a deductible loss occurred in the year claimed”), aff’d, 139 F.3d 912 (10th Cir.
1998) (unpublished table decision). However, if “a taxpayer introduces credible evidence with
respect to any factual issue relevant to ascertaining the liability of the taxpayer,” the government
“shall have the burden of proof with respect to such issue.” 38 IRC § 7491(a)(1). Although
“credible evidence” is not defined in IRC § 7491, the statute’s legislative history contains the
following definition, relied upon by several courts: 39 “Credible evidence is the quality of




       38
           The burden of proof shifts to the government only if the taxpayer establishes that he
has met the procedural requirements of IRC § 7491(a)(2). In their postremand briefs, plaintiffs
do not address these requirements, and defendant does not contend that plaintiffs have not met
the requirements.
       39
          See, e.g., Thompson v. United States, 523 F. Supp. 2d 1291, 1296-97 (N.D. Ala.
2007); Okerlund v. United States, 53 Fed. Cl. 341, 356 & n.23 (2002), aff’d, 365 F.3d 1044 (Fed.
Cir. 2004); Davis v. Comm’r, 89 T.C.M. (CCH) 1518, 1522 (2005). But see Heger v. United

                                               -20-
evidence which, after critical analysis, the court would find sufficient upon which to base a
decision on the issue if no contrary evidence were submitted (without regard to the judicial
presumption of IRS correctness).” H.R. Rep. No. 105-599, at 240-41 (1998) (Conf. Rep.).

     B. Plaintiffs Discovered the Theft Loss in 2002 and Had a Reasonable Prospect of
                                   Recovery in That Year

        There is no dispute that plaintiffs discovered the theft loss in 2002. 40 And, neither
plaintiffs nor defendant disputes that in 2002, there existed “a claim for reimbursement with
respect to which there [was] a reasonable prospect of recovery . . . .” Treas. Reg. § 1.165-
1(d)(3). Plaintiffs filed their arbitration claim against Donald & Co. and Messrs. Stetson,
Volman, and Ingrassia in February 2002, and by the end of that year, they had neither sought to
adjourn the proceedings nor withdrawn their claim. Accordingly, in light of the ongoing
arbitration proceedings, plaintiffs could not claim a theft loss deduction in 2002. Instead, they
were required to delay their deduction until the “year in which it [could] be ascertained with
reasonable certainty whether or not” they could receive reimbursement for their losses. Id.
Plaintiffs determined that the proper year to claim their theft loss was 2004, and filed amended
federal income tax returns reflecting the deduction. The IRS disallowed plaintiffs’ refund claim,
and the government takes the position in this litigation that 2004 was not the proper year for
plaintiffs to claim their theft loss deduction. Thus, the court’s task is to determine whether
plaintiffs had, in 2004, a reasonable prospect of recovering at least some of their losses.

     C. Plaintiffs Have Not Established That They Are Entitled to Claim a Theft Loss
                                    Deduction in 2004

                                      1. The Parties’ Positions

       In their postremand briefs, plaintiffs rely on the following facts in support of their
contention that in 2004, they had no reasonable prospect of recovering their losses:

        •    In 2003, plaintiffs’ arbitration attorneys requested an adjournment of the
             arbitration hearing against Donald & Co. and Messrs. Stetson, Volman, and
             Ingrassia because (1) Donald & Co. had not provided a full response to their
             discovery requests and (2) they learned that the federal government was
             investigating Donald & Co. and unknown associated individuals, which they
             understood would lead to an indictment and a request that all civil proceedings
             be stayed.



States, 103 Fed. Cl. 261, 266 n.4 (2012) (“The definition was not included in the statute itself, so
the court considers it to be merely informative rather than authoritative.”).
        40
          Indeed, although the parties did not stipulate to this fact prior to trial, they
affirmatively stated in their posttrial briefs that plaintiffs discovered the theft loss in 2002.


                                                  -21-
       •    In 2003, plaintiffs ceased paying their arbitration attorneys and no further
            legal work was done on the arbitration thereafter.

       •    In May 2004, Messrs. Ingrassia, Volman, Antonelli, Bassin, Cunzio,
            Flanagan, Otto Kozak, Robert Kozak, and McFadden were indicted for
            conspiracy to commit securities fraud, securities fraud, and money laundering
            conspiracy; Messrs. Ingrassia and Volman were also indicted for money
            laundering. The indictment contained criminal forfeiture allegations and
            mentioned only the Elec and Classica stocks.

       •    Upon reading the indictment in 2004, Mr. Adkins believed that there was no
            chance that plaintiffs’ losses could be recovered because (1) he believed that
            the government would seize the criminal defendants’ assets; (2) he believed
            that the government would seize the criminal defendants’ documents; (3) he
            had no evidence that the criminal defendants were solvent; (4) the indictment
            concerned the Elec and Classica stocks, and did not mention the stock that
            generated the majority of plaintiffs’ losses—MyTurn; and (5) Special Agent
            Dengler indicated that the FBI’s priority was to put people in jail and not to
            recover money for securities fraud victims.

       •    In May and December 2004, the SEC barred Messrs. Stetson, Ingrassia, and
            Volman from acting as brokers or dealers in securities.

       •    In September 2004, Mr. Stetson was charged with conspiracy to commit
            securities fraud, securities fraud, and money laundering conspiracy. The
            information contained criminal forfeiture allegations.

       •    In September and October 2004, Messrs. Ingrassia, Stetson, and Volman
            agreed to plead guilty to the charges of conspiracy to commit securities fraud,
            securities fraud, and money laundering conspiracy. 41

In short, plaintiffs contend that they would have been unable to recover their losses in 2004
because they understood that (1) arbitration would be fruitless due to the respondents’ failure to
fully respond to plaintiffs’ discovery requests and (2) the criminal defendants would lack any
funds for paying back the losses due to the government’s intent to seize all of their assets and
their inability to be gainfully employed in their chosen profession. Plaintiffs further contend that
even if the criminal defendants were solvent, plaintiffs would have had no way to ascertain the
criminal defendants’ financial situations in 2004 due to their (1) difficulty obtaining discovery
during the arbitration proceedings and (2) belief that the government would seize all of the
criminal defendants’ documents.

       41
           In their opening postremand brief, plaintiffs incorrectly contend that Messrs. Ingrassia,
Stetson, and Volman were sentenced in 2004. These individuals were sentenced in 2009
(Ingrassia), 2011 (Stetson), and 2012 (Volman).


                                                -22-
        In contrast, defendant asserts that plaintiffs’ reasonable prospect of recovering at least
some of their losses in 2004 was simply unknowable. Defendant focuses initially on plaintiffs’
arbitration claim. Defendant asserts that plaintiffs had a viable claim in 2004, relying in part on
the fact that a separate arbitration claim against Donald & Co. and its brokers, filed in January
2003, resulted in an award for the claimants in 2005. Further, defendant argues, plaintiffs could
not have known in 2004 whether—or to what extent—they could recover on their claim, for two
reasons. First, defendant observes that plaintiffs did not know anything regarding the financial
resources of the three individual arbitration respondents—Messrs. Stetson, Ingrassia, and
Volman—as reflected by the lack of evidence in the record (1) regarding the respondents’
financial conditions in 2002, 2003, or 2004; (2) that plaintiffs attempted to ascertain whether the
respondents possessed any assets; (3) that plaintiffs’ arbitration attorneys attempted to ascertain
whether the respondents possessed any assets; (4) reflecting the results of any asset search
undertaken by plaintiffs or their arbitration attorneys; (5) that an arbitration award would be
actually uncollectible; and (6) that the government actually seized the respondents’ documents as
part of the criminal proceedings. Second, defendant notes that evidence in the record indicates
that in 2004, plaintiffs were aware of assets that may have been available to reimburse them for
their losses—bank accounts owned by Odyssey Capital, LLC; real and personal property owned
by Mr. Ingrassia; and profits from the pump-and-dump scheme—but did not seek to attach them.
Defendant argues that in the absence of any evidence that plaintiffs sought or obtained
information regarding the respondents’ financial resources, or attempted to attach the
respondents’ known assets, plaintiffs could not have known in 2004 whether they had a
reasonable prospect of recovering at least some of their losses via their arbitration claim.

        Defendant next addresses the avenues of recovery that plaintiffs did not pursue: claims
against Messrs. Freeman, Otto Kozak, and Robert Kozak. Defendant notes that Mr. Freeman
was one of Donald & Co.’s principals, that Mr. Adkins dealt with all three of these individuals in
conjunction with plaintiffs’ accounts at Donald & Co., and that all three individuals were
involved in the pump-and-dump scheme. Consequently, defendant asserts, plaintiffs had viable
claims against each of these individuals. Nevertheless, defendant remarks, the record lacks any
evidence that plaintiffs attempted to independently ascertain the financial condition of the
individuals, and that with respect to the Kozaks, Mr. Adkins relied solely on Mr. Otto Kozak’s
representation that he and Mr. Robert Kozak did not have any money. Defendant therefore
argues that plaintiffs could not have known in 2004 whether they had a reasonable prospect of
recovering at least some of their losses by filing claims against Messrs. Freeman, Otto Kozak,
and Robert Kozak.

        Finally, defendant observes that another avenue for plaintiffs to recover their losses was
established in 2004 when criminal proceedings were initiated against a number of principals and
employees of Donald & Co. (Messrs. Ingrassia, Volman, Antonelli, Bassin, Cunzio, Flanagan,
Otto Kozak, Robert Kozak, McFadden, and Stetson), namely, restitution. Defendant asserts that
although Mr. Adkins knew in 2004 that the criminal defendants might be required to forfeit
assets and that the criminal defendants intended to plead guilty, the record lacks any evidence
that plaintiffs could have known anything in 2004 regarding the criminal defendants’ restitution
obligations or the criminal defendants’ abilities to satisfy any restitution obligations. Defendant

                                               -23-
further asserts that the record does not contain any evidence that plaintiffs knew in 2004 the
number of victims of the pump-and-dump scheme or the extent of the victims’ losses. Thus,
defendant contends, plaintiffs’ reasonable prospect of recovering their losses through restitution
was simply unknowable in 2004.

      2. Whether There Was a Reasonable Prospect of Recovery in 2004 Was Simply
                                   Unknowable

        Applying the binding precedent of the United States Supreme Court (“Supreme Court”),
the Federal Circuit, and the United States Court of Claims (“Court of Claims”), as well as the
precedent from other federal appellate courts specifically endorsed by the Federal Circuit and
other persuasive precedent, the court concludes that based on the evidence in the record, a
reasonable taxpayer in plaintiffs’ position could not have known, in 2004, whether he had a
reasonable prospect of recovering at least some of his losses. Therefore, plaintiffs have not met
their burden of proving that they were entitled to claim a theft loss deduction in 2004.

        As defendant notes, in 2004 plaintiffs had several avenues by which they could attempt to
recover their losses: (1) the arbitration claim they filed against Donald & Co. and Messrs.
Stetson, Volman, and Ingrassia in 2002; (2) possible claims against Messrs. Freeman, Otto
Kozak, and Robert Kozak; and (3) restitution in conjunction with the criminal proceedings
initiated in 2004 against Messrs. Ingrassia, Volman, Antonelli, Bassin, Cunzio, Flanagan, Otto
Kozak, Robert Kozak, McFadden, and Stetson. The court addresses each avenue in turn.

                                 a. Plaintiffs’ Arbitration Claim

        With respect to plaintiffs’ arbitration claim, the relevant objective evidence in the record
reflects the following:

       •   Plaintiffs filed for arbitration against Donald & Co. and Messrs. Stetson,
           Volman, and Ingrassia in 2002.

       •   Messrs. Stetson, Volman, and Ingrassia were principals of Donald & Co.

       •   Plaintiffs’ arbitration attorneys sought discovery from Donald & Co. and
           Messrs. Stetson, Volman, and Ingrassia, but received little, if anything, in
           response.

       •   The Department of Justice contacted Mr. Adkins prior to March 24, 2003, and
           advised him that it was investigating Donald & Co. and unnamed associated
           individuals.

       •   Prior to March 24, 2003, the United States Attorney handling the Donald &
           Co. investigation advised plaintiffs’ arbitration attorneys that an indictment
           was forthcoming and that upon the filing of the indictment, she would request


                                                -24-
           that all civil litigation, including arbitrations, be stayed pending the
           disposition of the criminal proceedings.

       •   Plaintiffs’ arbitration attorneys advised plaintiffs that they would be unable to
           proceed without discovery and in light of the pending indictment, but
           suggested that the arbitration proceedings remain open in the event that
           pertinent information was revealed during the criminal proceedings.

       •   Other individuals who filed for arbitration against Donald & Co. and its
           brokers in late 2001 and 2002 pursued their claims and received awards in
           their favor in 2003.

       •   In May 2004, the SEC barred Mr. Stetson from acting as a broker or dealer in
           securities, and in December 2004, the SEC barred Messrs. Volman and
           Ingrassia from acting as brokers or dealers in securities.

       •   In May 2004, Messrs. Volman and Ingrassia were indicted on securities fraud
           and money laundering charges; the indictment included criminal forfeiture
           allegations and mentioned only the Elec and Classica stocks.

       •   Criminal charges were brought against Mr. Stetson in 2004.

       •   Plaintiffs’ arbitration attorneys advised Mr. Adkins that all of the criminal
           defendants intended to plead guilty.

       •   Donald & Co. principals funded a proprietary trading account through
           Odyssey Capital LLC.

       •   Donald & Co. accumulated profits from its fraudulent scheme in Odyssey
           Capital LLC accounts at, among other places, Chase Manhattan Bank.

       •   Messrs. Stetson, Volman, and Ingrassia realized significant profits from the
           pump-and-dump scheme.

       •   Mr. Ingrassia owned real property located in Bayshore, New York, and a
           Carver motorboat.

The evidence in the record reflects that Mr. Adkins was made aware of all of these facts in 2004,
either by plaintiffs’ arbitration attorneys, the Department of Justice, or Mr. Otto Kozak, or from
reading the indictment.

        Based on the representations from plaintiffs’ arbitration attorneys regarding the
insufficient discovery responses and the possible stay request, Mr. Adkins believed, by the end
of 2003, that plaintiffs would not recover anything from the arbitration. However, there is no


                                                -25-
evidence in the record that the arbitration respondents’ failure to fully respond to plaintiffs’
discovery requests foreclosed plaintiffs from proceeding with their claim and obtaining an
award. Indeed, other claimants obtained arbitration awards against Donald & Co. and its brokers
during this same period of time. In addition, there is no evidence in the record that plaintiffs
sought to determine whether Donald & Co. or Messrs. Stetson, Volman, and Ingrassia had any
assets that could be used to satisfy an arbitration award. Moreover, the record lacks any
evidence that the United States Attorney ever requested that plaintiffs’ arbitration proceedings be
stayed pending the resolution of the criminal proceedings. Thus, Mr. Adkins’s subjective belief,
in 2003, that plaintiffs would not recover anything from the arbitration is not supported by any
objective evidence. A reasonable taxpayer, armed with the facts known to plaintiffs, could not
have known at the end of 2003 whether a reasonable prospect of recovering on the arbitration
claim existed. 42

        In 2004, Messrs. Volman and Ingrassia—and seven other individuals associated with
Donald and Co. (but not Mr. Stetson)—were indicted for securities fraud and money laundering.
Upon reading the indictment, Mr. Adkins believed that the government intended to seize any
documentation concerning the identity and ownership of the criminal defendants’ assets,
foreclosing plaintiffs’ ability to prove the existence of a theft loss and locate assets that could be
used to reimburse plaintiffs for their losses, and that the government was going to seize all of the
criminal defendants’ assets, preventing plaintiffs from attaching those assets to recover their
losses. However, the record lacks any evidence that the government ever seized any of the
criminal defendants’ documents or records. The record also lacks any evidence that the
government seized any of the criminal defendant’s assets prior to September 2005, when Mr.
Volman satisfied the $300,000 forfeiture money judgment entered against him. Further, the
record is bereft of any evidence that plaintiffs or their arbitration attorneys attempted to ascertain
the financial condition of any of the criminal defendants. What the evidence in the record does
demonstrate is that Donald & Co. principals executed trades through Odyssey Capital LLC;
Donald & Co. accumulated profits in bank accounts owned by Odyssey Capital LLC; Messrs.
Stetson, Volman, and Ingrassia realized significant profits from the pump-and-dump scheme;
and Mr. Ingrassia owned attachable assets. In short, Mr. Adkins’s subjective belief that the
indictment foreclosed any opportunity for plaintiffs to recover their losses from the arbitration
respondents is not supported by the objective evidence in the record. A reasonable taxpayer,
knowing in 2004 that the arbitration respondents possessed assets that might be available to
satisfy an arbitration award, but who had not yet ascertained whether an arbitration award would
be collectible, could not have known in 2004 whether he had a reasonable prospect of recovery.

       42
           In their postremand briefs, plaintiffs suggest that the court could find that 2003 was
the proper year for them to claim the theft loss deduction notwithstanding their claim that the
proper year was 2004. See, e.g., Pls.’ Postremand Br. 11-13 (“Thus the court has been left with
only the alternative years of 2003 and 2004 . . . . Assuming for arguments sake that 2003 is the
year, the Court can still award judgment for refunds for 2001, 2002, 2003 and 2004. . . . [I]f the
Court determined that 2003 was the year of loss, the refund must be granted in full.”). The court
declines plaintiffs’ invitation because, as noted above, whether plaintiffs had a reasonable
prospect of recovering on their arbitration claim was simply unknowable in 2003.


                                                 -26-
         This conclusion is not altered by Mr. Adkins’s knowledge that Messrs. Stetson, Volman,
and Ingrassia intended to enter guilty pleas or that the SEC barred Messrs. Stetson, Volman, and
Ingrassia from acting as brokers or dealers in securities. With respect to the former, knowledge
of an intent to plead guilty does not equate to knowledge of the contents of the plea agreement.
Indeed, plaintiffs did not testify that they knew the contents of the plea agreements, which is
consistent with the fact that the agreements remained under seal until August 2005. With respect
to the latter, the fact that Messrs. Stetson, Volman, and Ingrassia could not work in one
profession does not mean that they could not be gainfully employed in another profession or that
they lacked other sources of income. Thus, plaintiffs, or any reasonable taxpayer, could not have
known at the end of 2004 the impact that the plea agreements and SEC orders would have on the
financial resources of Messrs. Stetson, Volman, and Ingrassia.

       b. Possible Claims Against Messrs. Freeman, Otto Kozak, and Robert Kozak

       The court next addresses the claims that plaintiffs could have made, but did not.
Although plaintiffs pursued arbitration against Donald & Co. and three of its principals, they did
not pursue claims against the three individuals who they actually dealt with at Donald & Co.—
Messrs. Freeman, Otto Kozak, and Robert Kozak. Relevant to plaintiffs’ decision not to file
such claims are the following facts derived from the objective evidence in the record:

       •   Mr. Freeman was a principal of Donald & Co.

       •   Mr. Freeman was identified as the account representative for several of
           plaintiffs’ accounts at Donald & Co. from September 2001 to September
           2002.

       •   Mr. Otto Kozak was plaintiffs’ main broker.

       •   Mr. Adkins dealt with Messrs. Freeman, Otto Kozak, and Robert Kozak.

       •   In February 2002, plaintiffs filed for arbitration against Donald & Co. and
           Messrs. Stetson, Volman, and Ingrassia. Plaintiffs did not name Messrs.
           Freeman, Otto Kozak, or Robert Kozak as respondents.

       •   Messrs. Freeman, Otto Kozak, and Robert Kozak were involved in the pump-
           and-dump scheme.

       •   Mr. Otto Kozak told Mr. Adkins that neither he nor Mr. Robert Kozak had
           any money.

       •   Mr. Otto Kozak assisted plaintiffs by providing their arbitration attorneys with
           information regarding Donald & Co.



                                               -27-
        •   In May 2004, Messrs. Otto Kozak, and Robert Kozak were indicted on
            securities fraud and money laundering charges; the indictment included
            criminal forfeiture allegations and mentioned only the Elec and Classica
            stocks.

        •   During the criminal proceedings, Messrs. Otto Kozak and Robert Kozak were
            represented by attorneys appointed by the court pursuant to the Criminal
            Justice Act of 1964.

        •   Plaintiffs’ arbitration attorneys advised Mr. Adkins that all of the criminal
            defendants intended to plead guilty.

        •   Donald & Co. principals funded a proprietary trading account through
            Odyssey Capital LLC.

        •   Donald & Co. accumulated profits from its fraudulent scheme in Odyssey
            Capital LLC accounts at, among other places, Chase Manhattan Bank.

        •   Mr. Otto Kozak realized significant profits from the pump-and-dump scheme.

The evidence in the record reflects that Mr. Adkins was aware of all of these facts in 2004, and
of the first eight facts in 2002 or earlier. The evidence in the record further reflects that plaintiffs
could not have been aware of the following facts in 2004 or earlier because they relate to events
that occurred in 2005:

        •   Mr. Freeman was charged by information with securities fraud and money
            laundering in August 2005.

        •   Messrs. Freeman, Otto Kozak, and Robert Kozak executed plea agreements
            with the government in August 2005.

        With respect to Messrs. Otto Kozak and Robert Kozak, the evidence in the record
indicates that plaintiffs had claims against the Kozaks when they lodged their February 2002
arbitration claim, but chose not to pursue them. Plaintiffs apparently decided not to name Mr.
Otto Kozak as a respondent due to the assistance he was providing to plaintiffs and their
arbitration attorneys. Further, Mr. Adkins appears to have taken Mr. Otto Kozak at his word that
he and Mr. Robert Kozak lacked any money that could be used to satisfy a judgment against
them. There is no evidence in the record that plaintiffs or their arbitration attorneys attempted to
independently ascertain the financial conditions of Messrs. Otto Kozak and Robert Kozak (rather
than just relying on Mr. Otto Kozak’s representation), either at the time that plaintiffs filed for
arbitration in February 2002 or thereafter. However, a reasonable taxpayer, knowing that the
brokers who he dealt with were involved in the pump-and-dump scheme, would have
investigated Mr. Otto Kozak’s claim of destitution before forgoing the opportunity to recover his
losses from Messrs. Otto Kozak and Robert Kozak. Further, in the absence of any supporting
evidence of the Kozaks’ financial conditions, the reasonable prospect of recovery on such a

                                                 -28-
claim would have been simply unknowable—at least until Messrs. Otto Kozak and Robert Kozak
were indicted in 2004. During the criminal proceedings, the Kozaks were represented by
attorneys appointed by the court pursuant to the Criminal Justice Act of 1964. A reasonable
taxpayer, armed with this knowledge, could have concluded that he had no prospect of
recovering any losses from Messrs. Otto Kozak and Robert Kozak in 2004.

         The same conclusion cannot be reached with respect to Mr. Freeman. Mr. Freeman was a
principal of Donald & Co., served as an account representative for several of plaintiffs’ accounts
for at least one year, and was not charged with any crimes until August 2005. Yet there is no
evidence in the record that plaintiffs considered naming Mr. Freeman as a respondent in the
arbitration proceedings, such as evidence that plaintiffs or their arbitration attorneys conducted
an asset search and discovered that Mr. Freeman lacked any funds to satisfy a judgment. A
reasonable taxpayer in plaintiffs’ position would have pursued a claim against Mr. Freeman in
2002 or thereafter, and would not have had any reason to suspect in 2004 that he would not be
able to recover at least some of his losses through that claim. Thus, at a bare minimum,
plaintiffs’ reasonable prospect of recovery from Mr. Freeman was simply unknowable in 2004.

                                          c. Restitution

       Finally, the court considers plaintiffs’ reasonable prospect of recovering their losses
through restitution—a claim that became available in 2004 upon the initiation of criminal
proceedings against Messrs. Ingrassia, Volman, Antonelli, Bassin, Cunzio, Flanagan, Otto
Kozak, Robert Kozak, McFadden, and Stetson. The following facts derived from the objective
evidence in the record are relevant to the status of plaintiffs’ restitution claim in 2004:

       •   Messrs. Stetson, Volman, and Ingrassia were principals of Donald & Co.

       •   In May 2004, the SEC barred Messrs. Antonelli and Stetson from acting as
           brokers or dealers in securities, and in December 2004, the SEC barred
           Messrs. Volman and Ingrassia from acting as brokers or dealers in securities.

       •   In May 2004, Messrs. Ingrassia, Volman, Antonelli, Bassin, Cunzio,
           Flanagan, Otto Kozak, Robert Kozak, McFadden were indicted on securities
           fraud and money laundering charges; the indictment included criminal
           forfeiture allegations and mentioned only the Elec and Classica stocks.

       •   After he read the indictment, Mr. Adkins called Special Agent Dengler to
           express his dissatisfaction regarding the omission of MyTurn stock from the
           indictment.

       •   Criminal charges were brought against Mr. Stetson in 2004.

       •   Plaintiffs’ arbitration attorneys advised Mr. Adkins that all of the criminal
           defendants intended to plead guilty.


                                               -29-
        •    Donald & Co. principals funded a proprietary trading account through
             Odyssey Capital LLC.

        •    Donald & Co. accumulated profits from its fraudulent scheme in Odyssey
             Capital LLC accounts at, among other places, Chase Manhattan Bank.

        •    Messrs. Volman, Ingrassia, and Otto Kozak realized significant profits from
             the pump-and-dump scheme.

        •    Mr. Otto Kozak told Mr. Adkins before February 2002 that neither he nor Mr.
             Robert Kozak had any money.

        •    During the criminal proceedings, Messrs. Otto Kozak and Robert Kozak were
             represented by attorneys appointed by the court pursuant to the Criminal
             Justice Act of 1964.

        •    Mr. Ingrassia owned real property located in Bayshore, New York, and a
             Carver motorboat.

The evidence in the record reflects that Mr. Adkins was aware of all of these facts in 2004.

        Based on the contents of the indictment and his discussions with Special Agent Dengler
(in which Special Agent Dengler purportedly advised him that the government’s priority was to
put people in jail, not to recover money for the securities fraud victims), Mr. Adkins believed
that plaintiffs would never recover their losses because (1) the government’s focus was on the
money laundering, (2) the indictment did not mention MyTurn stock, and (3) the government
was going to take all of the criminal defendants’ assets through seizures and fines. However, the
record does not contain any objective evidence indicating that plaintiffs could have known, in
2004, that restitution would not be a viable avenue of recovering at least some of their losses.

         In 2004, plaintiffs knew that criminal charges had been brought against Messrs. Ingrassia,
Volman, Antonelli, Bassin, Cunzio, Flanagan, Otto Kozak, Robert Kozak, McFadden, and
Stetson, and that all of these individuals intended to enter guilty pleas. Although individuals
convicted of securities fraud are required to pay restitution to their victims, and plaintiffs knew
that all of the criminal defendants intended to enter guilty pleas, plaintiffs did not know, in 2004,
the charges to which the criminal defendants would be pleading guilty or any details regarding
the expected restitution awards (such as the amount of the awards, the number of victims entitled
to restitution, or whether the liability would be joint and several among the criminal defendants).
Further, aside from Messrs. Otto Kozak and Robert Kozak, plaintiffs did not know whether the
criminal defendants had the wherewithal to satisfy their restitution obligations. 43 As noted

        43
           Ultimately, it turns out that the convicted criminal defendants do not possess the
financial resources to make full restitution to their victims, but this is information that plaintiffs
did not know, and never attempted to ascertain, in 2004.


                                                 -30-
above, the record lacks any evidence that plaintiffs attempted to ascertain the financial condition
of any of the criminal defendants, and there is no evidence that the government seized any of the
criminal defendants’ assets prior to September 2005 such that the assets would be unavailable for
restitution. Rather, the evidence in the record reveals that Donald & Co. principals executed
trades through Odyssey Capital LLC, Donald & Co. accumulated profits in bank accounts owned
by Odyssey Capital LLC, Messrs. Volman and Ingrassia realized significant profits from the
pump-and-dump scheme, and Mr. Ingrassia owned attachable assets. Thus, a reasonable
taxpayer, knowing in 2004 that at least some of the criminal defendants possessed assets that
might be available to satisfy a restitution award, but who had not yet ascertained whether the
criminal defendants had sufficient funds to make restitution, could not have known in 2004
whether he had a reasonable prospect of recovering at least some of his losses via restitution. 44

        This conclusion is not altered by Mr. Adkins’s knowledge that the SEC barred Messrs.
Antonelli, Stetson, Volman, and Ingrassia in 2004 from acting as brokers or dealers in securities,
or by Mr. Adkins’s knowledge that the indictment mentioned the Elec and Classica stocks, but
not the MyTurn stock. First, as previously noted, the fact that Messrs. Antonelli, Stetson,
Volman, and Ingrassia could not work in one profession does not mean that they could not be
gainfully employed in another profession or that they lacked other sources of income. Second,
the omission of the MyTurn stock from the indictment is immaterial because plaintiffs owned at
least one of the stocks mentioned in the indictment during the relevant time period, and because
the record lacks any evidence that plaintiffs were advised that they would be precluded from
obtaining restitution related to their MyTurn losses even though the stock was not mentioned in
the indictment. 45 Thus, plaintiffs, or any reasonable taxpayer with plaintiffs’ knowledge, could
not have known at the end of 2004 whether the SEC orders or the omission of MyTurn stock
from the indictment would impact their ability to obtain restitution.

                                           d. Summary

        In short, in 2003, plaintiffs, or any reasonable taxpayer with plaintiffs’ knowledge, could
not have known whether they would have been able to recover their losses via (1) the arbitration
claim they filed against Donald & Co. and Messrs. Stetson, Volman, and Ingrassia or (2) a
possible claim against Messrs. Freeman, Otto Kozak, or Robert Kozak. Further, in 2004,
plaintiffs, or any reasonable taxpayer with plaintiffs’ knowledge, could not have known whether
they would have been able to recover their losses via (1) the arbitration claim they filed against
Donald & Co. and Messrs. Stetson, Volman, and Ingrassia; (2) a possible claim against Mr.
Freeman; or (3) restitution from Messrs. Ingrassia, Volman, Antonelli, Bassin, Cunzio, Flanagan,
McFadden, or Stetson. In other words, plaintiffs’ reasonable prospect of recovering their losses

       44
           Notably, although plaintiffs were officially notified in August 2005 of their right to
restitution, they chose not to exercise that right, foreclosing their opportunity to recover any of
their losses in this manner.
       45
         Indeed, a victim list made public in 2009 indicated that victims who owned a stock not
mentioned in the indictment—USHS—were allowed to seek restitution.


                                                -31-
was simply unknowable by the end of 2004. Therefore, in accordance with the relevant
precedent, plaintiffs have not established that they were entitled to claim a theft loss deduction
for the 2004 tax year. 46

                          3. Plaintiffs’ Other Arguments Lack Merit

       Plaintiffs raise two additional arguments in support of their contention that 2004 was the
proper year to claim a theft loss deduction. Neither has merit.

                                 a. Revenue Procedure 2009-20

        First, plaintiffs urge the court to follow the guidance set forth in Revenue Procedure
2009-20 to find that 2004 was the proper year for the theft loss deduction. Revenue Procedure
2009-20, published by the IRS on April 6, 2009, addresses the tax treatment of losses from
“Ponzi” schemes—schemes “in which the party perpetrating the fraud receives cash or property
from investors, purports to earn income for the investors, and reports to the investors income
amounts that are wholly or partially fictitious,” and in which “[p]ayments, if any, of purported
income or principal to investors are made from cash or property that other investors invested in
the fraudulent arrangement.” Rev. Proc. 2009-20, 2009-14 I.R.B. 749, 749. The procedure
creates “an optional safe harbor under which qualified investors . . . may treat a loss as a theft
loss deduction” in the year that one or more of the lead figures of the fraudulent arrangement
“was charged by indictment or information (not withdrawn or dismissed) under state or federal
law with the commission of fraud, embezzlement or a similar crime that, if proven, would meet
the definition of theft for purposes of” IRC § 165. Id. at 749-50.

        Plaintiffs’ attempt to analogize the fraudulent arrangement addressed in Revenue Ruling
2009-20 to the pump-and-dump scheme at issue here is unavailing. As noted above, in a Ponzi
scheme, the perpetrator reports fictitious earnings to investors and makes payments to investors
from others’ investments rather than from the investors’ own accounts. In the pump-and-dump
scheme perpetrated by Donald & Co., plaintiffs’ earnings and losses were not fictitious (in that
plaintiffs actually owned the relevant stocks and the value of those stocks actually fluctuated),
and the payments they received were drawn from their own accounts at Donald & Co., not the
investments of others. While Ponzi schemes and pump-and-dump schemes are both fraudulent
arrangements that serve to deprive investors of funds they invested, the IRS has clearly

       46
            Because plaintiffs have not demonstrated that they sustained their theft loss in 2004,
the court need not resolve whether plaintiffs could recover their losses resulting from their
purchase of MyTurn stock through the third-party brokers or their alleged $45,000 loss related to
the Vianet private placement offering. These claimed losses were part of plaintiffs’ 2004 theft
loss deduction. Moreover, even if the alleged loss related to the Vianet private placement
offering should be treated separately because it was not mentioned in plaintiffs’ arbitration claim,
plaintiffs presented no evidence regarding whether they had a reasonable prospect of recovering
on a claim for reimbursement of the alleged loss in the year that they discovered the loss or
thereafter.


                                                -32-
differentiated the two types of schemes by choosing to create a safe harbor tax treatment for
Ponzi schemes and not for pump-and-dump schemes. Thus, the court declines plaintiffs’
invitation to adopt a safe harbor in this case analogous to the one created in Revenue Ruling
2009-20. 47

                          b. Defendant’s Failure to Produce Evidence

        Second, plaintiffs argue that defendant failed to assert or prove that a year other than
2004 was the proper year for them to claim the theft loss deduction. Indeed, plaintiffs repeatedly
contend in their postremand briefs that defendant failed to produce any evidence in support of an
alternative year. In doing so, plaintiffs misapprehend the burden of proof applicable in this case.

        As described above, the Supreme Court and the Court of Claims have held that taxpayers
bear the burden of establishing their entitlement to a theft loss deduction, with the Court of
Claims specifically providing that taxpayers bear the burden of proving the lack of a reasonable
prospect of recovery in the year they claim the theft loss deduction. Thus, it was up to plaintiffs
to establish that 2004—the year that they claimed on their amended tax returns—was the proper
year to claim the theft loss deduction. Because, as the court has concluded, plaintiffs failed to
produce credible evidence that they had no reasonable prospect of recovery in 2004, the burden
never shifted to defendant to prove that 2004 was not the proper year for plaintiffs to claim the
theft loss deduction. Defendant was permitted to rely on the insufficiency of evidence offered by
plaintiffs to support its position that plaintiffs were not entitled to a theft loss deduction in 2004.

                                        IV. CONCLUSION

        Unquestionably, plaintiffs are the victims of a theft and have not subsequently recovered
their losses. What remains in dispute is whether plaintiffs claimed the theft loss deduction in the
proper year, in other words, the year that they sustained the loss. Plaintiffs claim that they
sustained the loss in 2004 because by the end of that year, they had no reasonable prospect of
recovery. However, the evidence in the record reflects that plaintiffs had three avenues to
recover their losses in 2004—an open arbitration claim against Donald & Co. and three of its
principals, a possible claim against a fourth Donald & Co. principal, and criminal restitution—
and that plaintiffs’ reasonable prospect of recovery via these avenues was simply unknowable in
that year. The evidence in the record further reflects that plaintiffs had two avenues to recover
their losses in 2003—the open arbitration claim and possible claims against the individuals with
whom plaintiffs dealt with at Donald & Co.—and that plaintiffs’ reasonable prospect of recovery
via these avenues was simply unknowable in that year.

       47
           Moreover, to the extent that plaintiffs are requesting that the court directly (rather than
by analogy) apply Revenue Procedure 2009-20 to this case, the court declines to do so because
(1) the pump-and-dump scheme at issue in this case does not meet the procedure’s definition of
“[s]pecified fraudulent arrangement,” see 2009-14 I.R.B. at 750, and (2) the procedure only
“applies to losses for which the discovery year is a taxable year beginning after December 31,
2007,” id. at 751.


                                                 -33-
        Indeed, the record contains evidence that other individuals were able to obtain awards
against Donald & Co. and associated individuals via arbitration, both in 2003 before the
government initiated criminal proceedings against Donald & Co. principals and employees, and
in 2005 while those proceedings were pending. The record also contains evidence that many of
the criminals who participated in the pump-and-dump scheme had financial resources available
to pay part or all of a judgment against them (e.g., the proceeds of the scheme, real property, and
a boat). In contrast, the record lacks any evidence that plaintiffs or their arbitration attorneys
sought to determine whether they could actually recover their losses from the criminals involved
in the pump-and-dump scheme by ascertaining the criminals’ true financial conditions. The
record also lacks any evidence that the government seized, or planned to seize, the criminal
defendants’ assets or documents in such a way that would prevent plaintiffs from recovering
their losses via restitution or otherwise. And, the record lacks any evidence that in 2004,
plaintiffs knew, or could have reasonably ascertained, the number of victims of the pump-and-
dump scheme or the extent of those victims’ losses. In sum, absent objective evidence that
plaintiffs had no reasonable prospect of recovering their losses in 2004, the court is foreclosed
from relying on Mr. Adkins’s subjective belief—premised on faulty assumptions—that the
criminal proceedings in 2004 eliminated all of plaintiffs’ avenues of recovery. Although the
court is sympathetic to plaintiffs’ plight, plaintiffs have failed to marshal the objective evidence
necessary satisfy their burden of proving that they had no reasonable prospect of recovering their
losses in 2004.

       In sum, plaintiffs have not established their entitlement to a theft loss deduction for the
2004 tax year. Accordingly, the court DISMISSES plaintiffs’ complaint WITH PREJUDICE.
No costs. The clerk is directed to enter judgment accordingly.

       IT IS SO ORDERED.

                                                       s/ Margaret M. Sweeney
                                                       MARGARET M. SWEENEY
                                                       Chief Judge




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