Wealth International, Limited (trustprofessionals.com) : Where There’s W.I.L., There’s A Way

W.I.L. Offshore News Digest :: July 2009, Part 3

This Week’s Entries :

MERCEDES, URUGUAY: A TASTE OF TUSCANY

“Clews Views” is a regular column appearing in the Caribbean Property Magazine e-zine, written by Carter Clews. The column offers his best take on “best buys” throughout Latin America for “middle-income type” people. Clews’s articles we have covered in the Offshore Digest so far this year are:

Costa Rica and Panama are conspicuously absent, so far anyway. Now Mr. Clews turns to Uruguay, “one of the smallest, most obscure countries in South America.” Perhaps, but Uruguay has drawn some attention from the expat community. Among its advantages is a low population, of 3.5 million spread out over a country the size of Missouri, and perhaps “the most thoroughly integrated European population” this side of the Atlantic. Importantly, unlike some highly promoted Latin American destinations, real estate prices are still reasonable.

Uruguay is one of the smallest, most obscure countries in South America. Tucked between the dominating land mass of prodigious Brazil and the equally overwhelming state of Argentina, tiny Uruguay is often overlooked. And if those who have arrived on its soil from outside its borders are lucky, it will remain so for decades to come.

Imagine Italy – only a stone’s throw away; America’s Old West – alive anew; lamp lit colonial cities with quaint, cobblestone streets; pristine beaches as far as the eye can see; and a relaxed way of life so placid and pleasant you thought it was long ago relegated to talismanic tales of bygone times. Welcome to Uruguay.

Were I still enjoying my earlier incarnation as a filmmaker, that would be the Long Shot (LS), the Establishing Shot – the look from afar offering you a distant glimpse of where the story is about to be told. Next we would move you in for the Medium Shot (MS), giving you a more revealing look at the topic at hand. And then, we would go to the Close Up (CU), where you would see in vivid detail the subject (person, place, or thing) around which the story would revolve.

So, now that you have had the LS, let’s first move in to the MS to see more – in this case, the scope and scan, the beauty and the bounty, of Uruguay. And then, I want you to join me in getting up close and personal with the picturesque town of Mercedes, the dreamlike riverside destination on western Uruguay’s Argentinean border where the urban and outback meld into one.

Uruguay, with a population 3.5 million spread out over a country the size of Missouri, is (and has been almost since its first constitution in 1830) a democratic republic. It has, of course, had its occasional totalitarian “hiccups,” as have most countries in Latin America and elsewhere. But, for the most part, the people of Uruguay have been free to live their own lives, elect their own leaders, and develop a society uniquely Uruguayan.

Uruguay, in fact, may house the most thoroughly integrated European population this side of “The Continent.”

One of the most uniquely Uruguayan aspects of this captivating country is the composition of the population, itself. Uruguay, in fact, may house the most thoroughly integrated European population this side of “The Continent.” Throughout the 1800s and 1900s Spanish, Italian, English, German, French, and Eastern European immigrants descended upon Uruguay as if it were their second home.

Italians, in particular, seemed to have gravitated towards this obscure oasis of opportunity. In fact, 1/4 of the population is now of Italian descent. Hence, a seemingly inordinate number of restaurants in the Uruguayan capital of Montevideo serve the best spaghetti this side of Roma’s Piazza Navona.

(Allow me to add parenthetically that the only other place I have witnessed this phenomenon is on Roatan Island, Honduras. For some reason, direct flights carry travelers from Milan, Italy, to Roatan. And they, in turn, carry with them a distinctively Italian flair. My recommendation: go to the West End’s Blue Lagoon restaurant and ask Daniella to bring you the linguini with pasta pomodoro. But, I digress).

As one would expect, Spanish is the official language of Uruguay – though, believe it or not, it is generally spoken with an Italian accent. Many Uruguayans, particularly in Montevideo, where about 2/5 of the population lives, also speak English, so visitors, expats, and resettlers should have no time making yourselves understood.

The literacy rate in Uruguay is nearly 100%. The lifespan is almost exactly that of the United States (73 for men, 79 for woman). Health care is state of the art. The climate is mild and somewhat humid, with the temperature ranging from the mid-50s in July, the coldest month, to the mid-70s in January, the warmest month. Crime is ... well, let us just put it this way: Even in most sections of Uruguay’s inner cities, you can still sleep with the windows open and doors unlocked (which, of course, you can still do in most U.S. cities too – if you value neither life, nor limb).

Should you decide to move to Uruguay, you have two choices as to the type of environment you want to enjoy, since the country is basically divided into two rather distinct regions: the coastal plains and the interior lowlands.

If you imagine Uruguay as your balled-up right fist with your curled-up fingers facing you (which is what the topography roughly resembles), the coastal plains extend in a relatively narrow arc from the tip of your thumb (where the Uruguay River dividing Uruguay from Argentina begins) to the area around your little finger (where the Rio de la Plata runs) to the bottom of your hand up to your wrist (which is the southern region of Uruguay bordered by the Atlantic Ocean).

The coastal plains cover about a fifth of Uruguay. The southern Atlantic shorelines are graced by some of the most beautiful beaches in all of Latin America. The western and southwestern plains house small family farms and flourishing plantations. The town of Mercedes is in the coastal plains, and we will return there in just a moment for a lengthier visit.

Uruguay’s interior lowlands cover the bulk of the country with vast, verdant plains, interspersed with rolling foot hills and winding rivers. Sprawling cattle ranches, reminiscent of America’s frontier days, stretch out across this fertile region. Small cities and rustic towns punctuate the fresh-faced landscape. Uruguay’s largest river, the Rio Negro, runs through the interior lowlands. And its highest point, the Cuchilla Grande mountain range (1,600 feet at its peak) originates in the lowlands near the Brazilian border.

The Medium Shot of Uruguay: A breathtakingly beautiful land where its friendly, contented, “countrypolitan” people live in splendid isolation, far from the strife and stress that so beset their neighbors.

So, that, in sum, is your Medium Shot of Uruguay – a breathtakingly beautiful land where its friendly, contented, “countrypolitan” people live in splendid isolation, far from the strife and stress that so beset their neighbors to the north, south, east, and west. Now, let’s quickly move from the MS to the CU – to the coastal city of Mercedes to see if the sum applies to its parts.

Mercedes, Uruguay, (population 42,000) lies along the placid Rio Negro. It is a colorful colonial town of enduring charm justly earning its moniker, “The City of Flowers.” Long known as a livestock center serving the vast ranches to its east, Mercedes offers a slow pace for languid living, though for those seeking a faster pace, bustling Montevideo (to which you can get by highway, air, and rail) is just 170 miles south. And the Fray Bentos-Port Unzué Bridge, joining Uruguay and Argentina, is only 25 miles northwest.

For most that travel to Mercedes, it is the gracious riverfront promenade that will likely capture their attention – and your heart. Featuring an intricately carved array of sculptures, Mercedes’ distinctive rambla conjures up the aura of an outdoor museum. From dawn to dusk, the promenade is peopled with families picnicking, swimming, or tending to their boats in the nearby marina. As darkness descends, the promenade gives way to lovers strolling under the moonlit night, making their own “stardust memories to haunt their reveries.”

It was in here that Uruguay’s legendary Gen. Jose Gervasio Artigas issued the Mercedes Proclamation, on April 11, 1811, igniting the spark of independence from Spain. “The country was born here,” the citizens of Mercedes proudly proclaim. And the city’s historic sites attest to that fact.

As a visitor to (or, perhaps, one day a citizen of) Mercedes, you will doubtless want to visit one of the city’s most famous historic venues: the Viscount of Maua’s Castle. Built by Irineo Evangelista de Souza (who ironically was the father of Brazil’s railroad system) in the mid-1800s, the Castle offers a surprisingly fascinating paleontological museum. And it also offers a fine family-owned winery whose imbibitions rival those of the more famous vineyards in nearby Argentina.

Now, don’t laugh. The prestigious Los Angeles Times recently noted Uruguay’s emergence as a “wine tourism destination” in a lead article headlined “No Corking Uruguay’s Rising Status as Wine Country.” So, when you get to the Castle, put away your prejudices and prepare to heartily imbibe as you wander the estate’s spacious grounds.

But, do not get too pixilated, because you will also want to spend time at Mercede’s other most noteworthy tourist attraction: the cathedral of Nuestra Señora de las Mercedes (Our Lady of Mercy). Located in the heart of the city, this imposing edifice with its majestic façade and towering domes was constructed in 1788 and has been declared a National Historical Monument of Uruguay.

But, do not be fooled, all in Mercedes is not leisurely afternoons at the winery and deific diversions at Our Lady of Mercy. As WelcomeToUruguay.com proclaims, “Mercedes is a joyful and lively city.” Its International Jazz Street Festival, though still in its infancy, draws jazz artists and aficionados from throughout Latin America and the U.S. Its Power Boat F1 Great Prize race is a world class event. And its Grito de Ascencio (Ansencio’s Scream) carnival is considered one of the nation’s most festive celebrations commemorating the Treinta y Tres Orientales who staged the revolution leading to Uruguay’s independence from Brazil.

A beautiful apartment overlooking the water could cost you as little as $50,000. And, a house only blocks from the promenade could cost you even less.

So, for those who have decided that the laid-back life in a shorefront village where the occasional baying of cattle intermingles with the lapping of the waves may be your cup of tea (or, better yet, glass of wine), Mercedes, Uruguay, may be all that you could ever hope for. And more. For less. A beautiful apartment overlooking the water could cost you as little as $50,000. And, a house only blocks from the promenade could cost you even less.

I earlier referenced our visit to Uruguay in general, and Mercedes in particular, in filmic terms, taking us from a distant Establishing Shot to the far more revealing Close Up. So, let me finish our sojourn with a line from one of my own favorite films, An Affair to Remember. The romantics among us will recall that Deborah Kerr’s character, Terry, wanted to meet Cary Grant’s Nick at the top of the Empire State Building, because, in her words, “It’s the closest thing to Heaven we have in New York City!”

Mercedes may not be what the cosmopolites would consider the “closest thing to Heaven” they have in Uruguay. Most would point to Montevideo, Colonia del Sacramento, or the chic-chic beachfront Punta del Este. But, if your idea of heaven is to hang your hat in splendid repose and enjoy the company of newfound friends and nature’s finery somewhere “under the Tuscan sun,” benvenuto a Mercedes, Uruguay.

REINVENTING YOUR LIFE? TRY ROATAN!

Another first-person expatriation tale, this time about a couple who ultimately chose to move to Honduran Bay Island Roatan. The number of destinations where these stories culminate is in the end finite, but the recapitulations of the mental adjustments and search processes that resulted in the move are uniquely individual and interesting.

Have you ever thought about running away from home, as an adult, I mean? Perhaps you would call it reinventing yourself, or chasing a dream. My bet is you have. I did, and I’ve referred to my great escape in all those terms, depending on the situation I was describing and my level of euphoria or gloom at the time.

Avid scuba divers, my husband and I started our adventure about 15 years ago with a “wouldn’t it be great if we could live in the tropics” attitude, followed by “yeah, right – ha!” Once we had said it out loud, however, we started meeting people on our dive trips who had moved to other countries and they seemed happy in their very different lives, more relaxed and content with their lives.

I remember, in particular, one 30-ish woman who had married a Mexican man who operated a dive shop in Mexico. This woman had an MBA and a very bright future, by American standards, yet she had completely uprooted from her anticipated lifestyle and moved to a resort town, helping her new husband with his business and looking forward to starting a family in her new home ... and there was no sign of corporate pressures. I can say without a doubt that she left a lasting impression on me. She was happy, genuinely happy, with life.

And so, our dive trips also became investigative trips. We looked at our vacations as prospective permanent destinations. We looked at property, talked with locals and tried each place on for size. We looked at the Eastern Caribbean, Mexico ... and then we took a dive trip to Roatan, an island 30 miles off the northern coast of Honduras in the Western Caribbean.

Part of our planning for a possible overseas relocation was to develop lists; after all, it is a big world, and I was a task-oriented executive, so we had to narrow down the possible islands. Our lists looked like this:
  1. What we need to have available.
  2. What we would like to have available.
  3. Deal-breakers if not available.
  4. What the island must not have.
  5. What we would prefer the island not have.
  6. Deal-breaker if the island has it.
It was difficult to come up with the categories, let alone the content, but as we researched and traveled around, it became easier. For example, easy access to travel to the U.S. was a need; no poisonous snakes was a prefer not to have; great scuba diving was desirable; a proneness for natural disasters was a deal breaker. The lists became longer each time we went over them, so ultimately we had to make some compromises, and sub-categories became too complex. We were over-analyzing and making ourselves crazy. We were in danger of talking ourselves completely out of our dreams. And, we quickly realized there was a list category we had not considered – “how does it feel?”

Roatan landed on the positive side of our list system, but was not particularly high on the list of islands to visit. I was working part time as a dive instructor while we were in this process of elimination, and our dive shop had a trip planned there. So we went to Roatan.

The diving was wonderful, the island beautiful and the vacation enjoyable.

The diving was wonderful, the island beautiful and the vacation enjoyable. All good attributes – but not really enough reasons to uproot our lives. We asked at the resort about available properties and were referred to the owner’s brother, who “sold real estate.” He met us at the hotel and handed us off to the owner of a real estate company, who arranged to show us some properties.

We looked at many, many properties, most of which were outside our budget parameters, but that did not deter our realtor, who seemed determined to show us every property she had listed, and none that any other realtors had. On the second day of listening to a non-stop diatribe of stories about who does what on the island and who is related to whom, we found it. Until this point, and compounded by the realtor’s determination to confuse and redirect our focus, we had not been completely sure exactly what we were looking for, but when we saw it, we knew.

We had looked at land on the more desolate east end of Roatan; tiny pieces jammed in between the main road and mangroves; hacked our way through jungle-type forest; climbed hills with magnificent views at the top, but no way to get there; a house in the worst possible part of the local town in which the doors did not close all the way and two people had to pass each other sideways once inside ... you name it, we saw it.

The main town of Coxon Hole is close to the airport on the western third of the island. The grocery store, police department, municipal buildings, banks and almost all of the needed amenities are all in Coxon Hole. While it was not a particularly attractive part of the island and the road was dusty in summer and obviously muddy in rainy season, it was functional and the people were friendly. Leaving the main part of town, we started to drive up a fairly steep road which flattened out after 200 feet and opened into a local barrio, a settlement of local folks.

Now, remember this was almost 12 years ago and so it had much more of the charm of the Wild, Wild West than today, but it was an adventure – our adventure and our dream, so we forged ahead in the hands of our realtor, who seemed unfazed by the surroundings, which were wooden huts and homes nailed together with pieces of goodness knows what. I thought this may be the origin of the Three Little Pigs story, and some huffing and puffing could blow them all down, but people were going about their daily lives with nothing more than a curious look in our direction and the occasional wave.

Half a mile up this dirt road the barrio ended, and we drove another 100 feet and stopped. We observed that we had driven several hundred feet in elevation as we climbed out of the car and walked along a narrow trail beside a barbed wire fence. 20 feet along the trail the wire was partly down so we climbed over it and onto what we realized was the crest of a small hill. In front of us were several rocky outcrops and all around were undergrowth and ant hills. I am not a big fan of ants, especially when they are dining on my feet, and I have a phobia about snakes, which would normally kick into gear if I had to walk through dense foliage.

But this time none of those natural instincts kicked in. All around us were fruit trees, rocks and different types of trees. As we walked further into the property we became aware of the view ... oh, my ... we could see all the way to the western end of the island and across the Caribbean to the mainland of Honduras, 30 miles away. The town of Coxon Hole was below us to the right and the airport was 90 degrees to the left. Looking up the dirt road we saw the radar dome at the top of the hill, which we learned is one of the highest points on the island.

We walked all over the fenced property, which was 2.3 acres with a valley down the middle and hundreds of trees, some bearing fruits I had never seen before, and all around was the smell of nature. The land was fenced, but unchanged from its natural form. As we topped the highest part of the property, I was mesmerized. To the south were the mountains of the mainland in the distance, the islands of Cayos Cochinos and the Roatan airport close by. To the east I could see most of the high spine of Roatan as the island winds toward her sister island of Guanaja. To the west the view was all the way to the western tip of Roatan, across Gravels Bay and Flowers Bay where a large cruise ship was docked at the international pier. And to the north I was looking across a valley at more mountains and valleys as the main road winds from the south side of the island to the north side.

This was when I knew we would move here. We had found our magical place, the one the forgotten list was all about – it felt right. And so we signed a contract to purchase our 2.3 acres. Phase One was complete. We learned several things from Phase One, some during the process, but most of our lessons came some time after we had moved to Roatan and started our new life.

12 years ago there were very few people recognizable as realtors, and as we found out later, some were not exactly honest, and ours did not have our best interests at heart. We trusted and relied on our realtor, as we would in the U.S., but selling real estate in Central America was very different 12 years ago. There was no licensing, no education and no oversight. Our main problem, we later found out, was that we didn’t know what we didn’t know, and did not know who to ask, beyond our realtor. And so we trusted people we shouldn’t have trusted – who knew?

Foreigners may own up to 3/4 of an acre of land in their own name, on land which is within 40 kilometers of all borders.

Under Decree 90-90 in Honduras, foreigners may own up to 3/4 of an acre of land in their own name, on land which is within 40 kilometers of all borders. This includes all the islands, of course, and our property was 2.3 acres, so we needed to form a Honduran corporation which would own our property. This took us into Phase Two of our new life adventure: moving to Roatan and building our home. Next month I will tell you about our journey through the next phase of our amazing adventure, and how we made it to Phase Three ... how do we make a living in Paradise?

Next month you will also hear how I reinvented myself and created a niche on the island. I will tell you about more challenges we faced and how we overcame them; some lessons were learned the hard way, and my personal mission became to help others avoid some of our hiccups along the way.

Today, the real estate business has also evolved. Now realtors are licensed and we have a board of realtors ... most of us are international members of the National Association of Realtors in the U.S. Yes, I became a realtor (along with several other creations). I figured if I did not like what happened to me, I should dig in and set about helping to make change.

Remember I said my mission became to help others avoid the pitfalls we encountered? One way I now do this is by offering Investment tours: three day events where I bring in experts in many fields to help guide you through the process of reinvention and relocation. ...

I know how difficult it can be, and I am committed to simplifying the process for you so you can get on with the job of enjoying your life! Let’s get together soon so I can introduce you to Roatan, my island, and maybe yours, too! Come and see how your life can be so much more enjoyable and much simpler.

RICH BRITONS HELP TO DRIVE UP HOUSE PRICES IN TAX HAVENS

“New breed of British tax refugee” is driving up prices in Isle of Man, Channel Islands, Monaco, Gibraltar. “This is the broadband age, when voting with your feet is a very viable option for many.”

An interesting short note from the Guardian reports that the British government’s high taxes on the wealthy are having exactly the effect in this day and age on the margin one would expect: Many are voting with their feet and leaving. This is showing up in real estate slump-resisting price increases in properties in tax havens favored by Brits.

Summarizing the findings of a survey, an offshore tax specialist notes: “This is not the 1960s, when currency controls and limited communications made it difficult to relocate yourself and your business.” Which raises the question: How far behind are currency controls? One would expect even those who have elected to stay put for now to have already moved their liquid assets out of reach.

While house prices across Europe have plunged in recent months, a stream of wealthy tax exiles is continuing to push up property prices in offshore tax enclaves across the continent.

According to a new survey, tax havens from Gibraltar to the Isle of Man are bucking the slump, with many wealthy Britons helping to drive up prices.

The survey, by the Sovereign Group, an international offshore tax specialist, points to Monaco – home to businessmen including the Topshop boss Sir Philip Green – where prices have risen by up to 30%, while in neighboring Provence they have fallen back rapidly. In Gibraltar a local estate agent reported “a marked increase in interest for properties,” in contrast to the nearby Costa del Sol, where home values have been in near-freefall.

Nearer home, Jersey’s chief government statistician said prices were up 7%. In neighboring Guernsey, however, apartment prices are down, although house prices are stable. The Terra Firma private equity boss Guy Hands has recently relocated to Guernsey for tax reasons.

On the Isle of Man, prices this year are up 4% and one local agent said: “Enquiries from UK applicants have risen strongly.”

20% of new business in his London office was coming from people looking to move offshore. Many are planning to take their businesses with them.

“The facts speak for themselves here,” said Howard Bilton, chairman of the Sovereign Group. “Property prices in the south of France and southern Spain are languishing in the worst slump they have seen in many years but on their outskirts are two little areas – Monaco and Gibraltar – where the market is extraordinarily resilient. We believe, and all our local sources are telling us, that much of this disparity is because of interest from a new breed of British tax refugee.”

Bilton said 20% of new business in his London office was coming from people looking to move offshore. Many are planning to take their businesses with them. “This is not the 1960s, when currency controls and limited communications made it difficult to relocate yourself and your business,” he said. “This is the broadband age, when voting with your feet is a very viable option for many.”

JUDGE DELAYS HEARING ON SWISS BANK SECRECY

In the latest round of the battle royale between the U.S. and Swiss governments, with the IRS and UBS bank as the stalking horses, a judge has delayed the next court hearing about three weeks, giving the Justice Department and the Swiss government more time to negotiate a settlement. As the piece below well puts it: “The case pits the U.S. government’s interest in stopping tax dodgers and collecting needed revenue against Switzerland’s tradition of bank secrecy, a cornerstone of the Swiss economy.”

The parties have agreed that any settlement “would necessarily include a provision requiring UBS to provide the Internal Revenue Service information on a significant number of individuals with UBS accounts,” according to the U.S. Justice Department. UBS and the Swiss government continue to demand that no “fishing trips” be allowed. Last week the Swiss government claimed it would seize the UBS client date and thus block UBS from complying with any U.S. court order mandating a wholesale disclosure.

A federal judge [on July 13] agreed to delay a hearing in a U.S. government challenge to Swiss bank secrecy, giving the Justice Department and the Swiss government about three weeks to negotiate a settlement.

The U.S. government had been scheduled to square off ... against Switzerland’s largest bank over an IRS demand that the bank – UBS – turn over information about thousands of Americans suspected of using secret Swiss accounts to evade taxes.

Stepping back from a legal and diplomatic showdown, the U.S. government joined UBS and the Swiss government yesterday in asking a federal court in Miami to postpone the hearing so they can continue settlement talks.

The parties have agreed that any settlement “would necessarily include a provision requiring UBS to provide the Internal Revenue Service information on a significant number of individuals with UBS accounts,” the Justice Department said.

UBS earlier this year admitted that it schemed to defraud the U.S. government by helping American clients hide money from the IRS – for example, by holding their assets in the names of offshore companies. To avoid immediate criminal prosecution, UBS agreed to pay $780 million. In addition, the Swiss turned over information on about 250 account holders.

Since then, in a separate court action, the IRS has been trying force UBS to disclose information about Americans believed to have held 52,000 undeclared accounts, including the identities of the account holders.

The Swiss have resisted the demand as a “fishing expedition” and a violation of Swiss law, and last week the Swiss government said it would block UBS from complying, even if it were ordered to do so by a U.S. court.

The case pits the U.S. government’s interest in stopping tax dodgers and collecting needed revenue against Switzerland’s tradition of bank secrecy, a cornerstone of the Swiss economy.

A federal judge in Miami, Alan Gold, had given the U.S. government a deadline of noon yesterday to say how far it would ask the court to go to compel UBS to disclose the information. For example, the judge asked whether the government would seek an order freezing UBS assets in the United States or placing the bank’s vast U.S. operations in receivership.

In a court filing yesterday, the Justice Department said the question was premature, and it did not respond directly. Instead, it said the U.S. government would seek “appropriate steps,” including “monetary sanctions sufficient to bring UBS into compliance.”

Swiss officials had argued that the case could damage relations between the two countries. The Swiss government had also been using as a bargaining chip a pending treaty amendment that could grant the U.S. increased access to account information in future cases of alleged tax evasion. Whether the proposed treaty language would be of much practical use to the United States is a subject of debate.

Meanwhile, UBS has been shutting down all Swiss-based accounts of American depositors, in some cases telling them they must travel to Switzerland if they want to collect their money. Those actions have already given clients and potential clients reason to question whether they can count on Swiss banks to discreetly hold their money over the long term.

Swiss officials had been talking openly about ongoing efforts to settle the UBS case. Without denying it outright, the Justice Department had suggested that talk of such efforts was unfounded.

Today, a judge agreed to delay the hearing until August 3, as the parties requested.

In a statement, UBS said the negotiations will involve the two governments.

STANFORD FINANCIAL GROUP CFO PLEADS NOT GUILTY IN $7 BILLION FRAUD

Second-highest ranking executive in group will change plea to guilty soon, says legal representative.

In the most recent twist in the U.S. prosecution of the Stanford Financial Group principals, #2 man and CFO James Davis has said he will plead guilty to being an accomplice in the alleged $7 billion swindle.

With no apparent explicit plea bargain involved, Davis “continues to cooperate with the investigation and continues to assist the prosecution’s attempts to find the billions that Stanford sent to Switzerland and other banks in Europe,” according to Davis’s attorney. The details should be interesting.

Davis presents himself as having been on a “tight leash” administered by Stanford. Of course he could have walked away any time. Meanwhile Stanford’s attorney, disputes Davis’s assertion that Stanford masterminded the fraud scheme, claiming Davis is trying to minimize “his own responsibility for the crimes he apparently committed without the knowledge or approval of Allen Stanford or the vast majority of Stanford executives or employees.”

James M. Davis, accused of helping financier R. Allen Stanford swindle investors in a $7 billion fraud, pleaded not guilty to criminal charges in a U.S. court and was released on bail.

Davis, 60, who was chief financial officer at Stanford Group Co., one of the companies implicated in the alleged plot, will change his plea to guilty at a hearing before U.S. District Judge David Hittner in Houston within the next two weeks, his lawyer said.

“We don’t have an agreed sentence,” David Finn, Davis’s attorney, said after today’s arraignment. “It’s going to be completely the judge’s call.”

Davis, who prosecutors said faces as many as 30 years in prison, was released by U.S. Magistrate Judge Calvin Botley on $500,000 bond with a $5,000 cash deposit, with his in-laws and son as co-signers. Finn entered today’s (July 13) plea on Davis’s behalf, repeating his intention to change the plea after the government has time to notify victims, as required by federal law.

Stanford and four other people were indicted by a Houston federal grand jury for their roles in an alleged scheme that included the sales of certificates of deposit through Antigua-based Stanford International Bank Ltd. Stanford has denied all charges of wrongdoing.

Davis, the 2nd-highest ranking executive in the Stanford Financial Group of Companies, was charged separately from the other defendants and waived indictment. During most of today’s proceeding, Davis rocked back and forth on his heels with his hands clasped before him, appearing somber in a black business suit. He left the courthouse holding hands with his wife, Lori, without speaking to reporters.

“Feels Awful’

“Jim Davis continues to cooperate with the investigation and continues to assist the prosecution’s attempts to find the billions that Stanford sent to Switzerland and other banks in Europe,” Finn said in a July 1 e-mail.

Davis “feels awful,” Finn said today. “He knows he did wrong. He fessed up from the beginning.”

Davis has spent hundreds of hours, including most of last week, meeting with the Federal Bureau of Investigation and the Justice Department, Finn said. “We are focused on finding the money, on who knew what and when,” he said.

Dick DeGuerin, Stanford’s criminal-defense attorney, disputed Davis’s assertion that Stanford had masterminded the fraud scheme.

“I am sure David Finn and his client will say anything to lessen his own responsibility for the crimes he apparently committed without the knowledge or approval of Allen Stanford or the vast majority of Stanford executives or employees,” DeGuerin said today in a statement released by his office.

Shared Apartment

Stanford and Davis shared an apartment while attending Baylor University in Waco, Texas. The men reconnected after a gap of about 10 years, when they bumped into each other at a wedding and Stanford offered Davis a job.

Stanford “put the choke chain on and kept the leash tight ever since,” Finn said of the men’s partnership. “To make something like this work, you have got to be able to manipulate people, to make sure the accountants do not account, the auditors do not audit and the regulators do not regulate.”

Indicted with Stanford on June 18 were Stanford Group’s chief accounting officer, Gilberto Lopez; its global comptroller, Mark Kuhrt; and an Antiguan finance regulator, Leroy King, who is accused of taking bribes in exchange for lax oversight of Stanford International Bank.

Lopez and Kuhrt have pleaded not guilty. King has not yet been extradited from his country to face charges.

30 Years

Davis was charged with conspiracy to commit mail, wire and securities fraud, as well as mail fraud and conspiracy to obstruct a U.S. Securities and Exchange Commission investigation.

“Davis plans to plead guilty to all three counts, which carry a combined statutory maximum sentence of thirty years, pursuant to a plea agreement with the United States,” prosecutors said in a July 9 court filing.

In that document, prosecutors asked Hittner for permission to notify potential victims about the Davis plea through postings on the Web sites of the Justice Department and a receiver appointed by the court hearing the SEC case. The victims would be allowed to comment on the agreement. ...

Davis began cooperating with the government shortly after the SEC sued him, Stanford and the firm’s chief investment officer on February 17, claiming they misrepresented the safety and nature of the Antiguan bank’s investment portfolio.

WHY SEVERAL UNIONS INVESTED IN ONE CROOKED FUND

Why did so many unions invest in a crooked Chicago private equity fund? And why does this keep happening?

During manias all investors are suckers for a good story which lacks plausibility when looked at closely. Exhibit A: Bernie Madoff. But the pattern of getting involved in crooked funds by union pension funds seems to happen regularly in good times and bad. Somehow investment funds for union officials, which are separate from those the officials run for the rank and file, avoid this suicidal tendency. What is going on?

Forbes looks at a recent case involving yet another crooked fund. There is a lot of smoke and some obvious fire. Neither the smoke nor the fire would necessarily have been revealed if already limited disclosure requirements for union officials vis a vis their ties to investment managers and the purchase and sale of assets are scaled back – as the Obama administration is proposing to do. We can think of reasons for that proposal, but we do not have to think very hard.

There is not much mystery about why the Detroit branch of the United Brotherhood of Carpenters invested $77 million in a crooked Chicago “private equity” fund called AA Capital a few years ago. AA Capital’s cofounder, John Orecchio, bribed the union’s former executive secretary-treasurer Walter R. Mabry, according to a recent federal indictment of a third man allegedly involved in the scheme. (Orecchio himself was not indicted.)

That does not necessarily explain why Millwrights Local 1102 wired $8.3 million of its $150 million pension fund to the same crooked fund, however. Or why International Operating Engineers Local 324 and the Michigan Teamsters Joint Council 43 also invested with AA Capital.

All told, six regional union funds entrusted $164 million with Orecchio, a former ABN Amro investment banker, between 2002 and 2005. Orecchio allegedly blew much of the money on personal expenditures, Super Bowl tickets, a Detroit strip joint he owned and a disastrous investment in a sport-drink company affiliated with the Ultimate Fighting Championship franchise owned by the Fertitta brothers of Las Vegas.

Merrill Lynch was a financial advisor to several of the unions and has been accused by the Millwrights of promoting AA Capital. Merrill denies the charges and says the union trustees insisted on investing in AA Capital.

The bigger question: Why does this keep happening to union pension funds? And why does it not happen to funds for union officials, which are separate from those the officials run for the rank and file?

Take the Operating Engineers. The pension fund for top officials in its Washington headquarters has $85 million for 401 participants, or $209,000 apiece. It is 108% funded. Local 324’s $1.4 billion rank-and-file fund has 18,000 participants, or $79,000 per head, and is 81% funded. Some of the difference can be explained by boneheaded investments like the $60 million Local 324 put into AA Capital or the $28 million it sank into rebuilding a Detroit office building that it sold for $4.5 million in 2004.

None of the unions would discuss their investment in AA Capital, so it is not clear how they all came to believe in Orecchio’s abilities as a private equity manager. Orecchio, who recently attempted suicide, did not respond to calls made to his attorney for comment. In court filings he has acknowledged having caused $60 million in losses. Mabry was sentenced to jail on unrelated felony charges in 2006.

The Carpenters first invested in AA Capital in 2002, when Orecchio had a deal to develop a Hard Rock casino in Biloxi, Mississippi. In its lawsuit against Merrill Lynch, the Millwrights union, which is associated with the Carpenters union, says a Merrill senior vice president promoted AA Capital. Orecchio, in turn, is accused of plying Merrill’s brokers with entertainment, including lap dances by strippers. Merrill says it did not advise the unions to invest in AA Capital and made no fees or commissions from it.

The Hard Rock investment was profitable only because Hurricane Katrina wiped out the site. According to the May 28 indictment of Joseph R. Jewett, a “consultant” allegedly hired at the insistence of Mabry, the union boss got a $267,000 payoff that he rolled into other AA Capital investments. Jewett denies the charges.

Next, the Carpenters and the Operating Engineers invested through AA Capital $32 million in Xyience, the UFC-sponsoring sport-drink company run by a twice-convicted felon named Russell Pike. The outfit ended up in bankruptcy. A receiver recovered about $9 million.

Union members would not know anything about these shenanigans if they had not erupted into litigation and a federal indictment. And if the Obama Administration has its way, even some of the limited disclosure forms that require officials to reveal their ties to investment managers and the purchase and sale of assets will be dialed back. It would “not be a good use of resources,” the Administration said.

“Can you imagine the IRS saying requiring tax returns is not a good use of resources?” asks Elaine Chao, labor secretary in the Bush Administration. “These are disclosures that potentially would deter embezzlement.”

THE ANATOMY OF A WRONGFUL CONVICTION

U.S. federal prosecutors follow lead of Stalin’s secret police head, Laverty Beria, who famously declared: “Show me the man, and I will find you the crime.”

LewRockwell.com economics, political and legal columnist William L. Anderson wrote frequently and effectively on the legal travesty that was the Duke University lacrosse team alleged rape case. He has frequently written on the out-of-control nature of the U.S. Department of Justice prosecutors, and how their only concern is adding a notch to their belt – “putting up the numbers” – and not at all with justice. A column earlier this year argued that ending the immunity of judges, prosecutors and police was essential to give victims of legal misconduct at least some remedies against injustice:

“We cannot make police, prosecutors, and judges into honest people. However, we also have to understand that the very immunity that protects these government employees also provides a powerful incentive for fundamentally dishonest people to seek these careers. What other line of work (other than being an elected politician) permits those duly employed to lie, to kill, to kidnap, and to engage in other acts of oppression and bullying with almost no consequences for such behavior?” ...

“No, we cannot make sociopaths like [Duke case prosecutor] Michael B. Nifong honest people. However, we can take away their legal immunity and make them vulnerable to the same sanctions that the rest of us face. That would provide a small amount of justice in a system in which the participants no longer care about being just.”

In April Anderson wrote “The Federal Railroading of Victoria Sprouse,” which described how former mortagage broker Ms. Sprouse became an early member of what is sure to become a large class of designated scapegoats for the housing bust and associated business casualties, and what interest besides career advancement was served by her conviction:

“What we are seeing in the Sprouse conviction is the beginning of a coming wave in which business and financial failures are going to become criminalized. The last thing the government wants Americans to believe is that government policies ... had anything to do with the economic meltdown that goes on around us.”

This time Anderson dissects exactly how the amoral prosecution, abetted by the judge and with unquestioning help from the news media and jury, made the conviction a foregone conclusion.

When Rudy Giuliani was a federal prosecutor in New York 20 years ago, his staff members used to play a game in which they would pick a high-profile and popular person like Mother Teresa and figure what federal crime they could pin on her or him. No one could escape and in the end, no person that they named was able to slide away without having committed at least one crime for which a stretch in prison was in order.

This game was immensely helpful as they sought to find ways to charge Michael Milken, the successful investment banker, and prosecutors found that leaks to the press served as a great weapon in their favor. Leaking grand jury information is a felony punishable up to five years in prison, but prosecutors don’t indict themselves, and the New York Times was more than eager to aid and abet a felony, especially when prosecutors needed all of the favorable press they could obtain.

Michael Milken ultimately went to prison, pleading guilty to a set of six “charges of crimes” that prosecutors had never brought against anyone before, and have not again since Milken pleaded 19 years ago.

Milken ultimately went to prison, pleading guilty to a set of six “charges of crimes” that prosecutors had never brought against anyone before, and have not again since Milken pleaded 19 years ago. (Prosecutors had told Milken that unless he would plead guilty, they would go after all his family members and imprison as many as they could.)

Most Americans never have seen a federal court, much less have found themselves in the federal dock, and they are not familiar with how the system works. Indeed, when they read of another federal guilty plea or see a federal conviction in the news, they usually assume that the person was guilty of something, otherwise, he or she would not have been charged in the first place.

Thus, it was that on April Fool’s Day earlier this year, a federal jury in Charlotte, North Carolina, convicted real estate attorney Victoria Sprouse of a number of charges related to alleged mortgage fraud. Local television reporters declared that she was convicted of “forging documents” and helping to “mastermind” schemes to defraud lenders. It was the lead story on the Six O’Clock News in Charlotte, and the triumphant prosecutor, Matthew Martens, told TV cameras that the jury had sent the message that Charlotte “would not tolerate mortgage fraud.”

Local news media still promotes the Big Lie even after the trial was over.

Not surprisingly, the TV and print journalists got it wrong. The government never charged Sprouse with forging documents, and, in fact, Sprouse herself says that she did not know that the documents that she signed were forged until one of the prosecution witnesses told the jury he had forged them. Yet, the local newsies still promoted the Big Lie that Sprouse had forged documents – even after the trial was over.

It is not unusual for journalists to get it wrong in federal crimes. Most journalists I know have no idea of the legal structure of federal law and they really do not care, anyway. They love to get illegal leaks from prosecutors, and they enjoy covering the “perp walks” and experiencing all of the trappings of “justice” that come from covering the federal courts, and they love receiving those “leaks” from the prosecution and federal law enforcement that tell the world, “I am important. The Big Cheeses in the Government talk to Me!”

The federal courts have become an American version of the “Bread and Circuses” routine that once kept the Romans happy as the government around them became increasingly tyrannical and arbitrary.

The federal courts have become an American version of the “Bread and Circuses” routine that once kept the Romans happy as the government around them became increasingly tyrannical and arbitrary. Caligula might have written his edicts in tiny print on signs placed so high that no one could read them, but as long as the gladiators were fighting in the arena and “free” wheat was available at the granary, they really did not care.

Americans today are much like the Romans, who reveled in cruelty. They are happiest when they can watch others suffer, and if they can help inflict the pain, all the better. From hapless people in Iraq to the people raped in prison, Americans enjoy the show – as long as these things are happening to others and not themselves. Let these things happen to them, however, and they cry bloody murder.

I make these comments as I revisit the Sprouse conviction. When I wrote the first time about it, I received a score of nasty “f*ck you” emails and others, while not obscene, that made fun of Sprouse. She was charged, so she was guilty. Others told me that they followed the case and also were convinced of her guilt, so I could not know of what I speak. After all, they read the Charlotte Observer and watched local TV news, so and who can argue with the Great Wisdom of a local talking head?

Given that, I am going to lay out what happened and how it happened and why I am convinced – utterly convinced – that this was a wrongful prosecution and conviction. I am not alone. Real estate professionals in Charlotte supported her, and I also have heard from attorneys and other professionals intimately familiar with the case who have agreed wholeheartedly with my assessment.

The key to understanding this case is not necessarily knowing the testimony that backed the prosecution; it is in knowing how the prosecution effectively rigged this trial.

However, one asks, how was she convicted? If I am inferring – “insisting” is a better word – that she was victimized by a wrongful conviction, and I did not sit throughout the trial, then how is it that I believe that jurors abandoned their duty and served as little more than a Greek Chorus for the prosecution? Am I simply listening to one side of the story and forgetting that Sprouse was accused of participating in multi-million-dollar fraud scheme? The key to understanding this case is not necessarily knowing the testimony that backed the prosecution; it is in knowing how the prosecution effectively rigged this trial.

The prosecution, led by Martens, convinced a jury that Sprouse knowingly signed forged and fraudulent documents and other legal papers that had false information which would permit the buyers of houses and property to obtain those things without having the required income or down payments or other things that the lender required one must have. The buyers were planning to “flip” the properties, that is, sell them quickly and make a profit.

In bringing these charges, Martens and his staff agreed that Sprouse had received no payoffs or other quid pro quo compensation, her office receiving only the standard $500 fee for closing (with perhaps $40 to $50 actually accruing to Sprouse as income after she paid her staff and other office expenses). However, that fact did not stop Martens from repeatedly telling the jury and the press that Sprouse “made millions” from illegal sales, although even the most optimistic prosecution math did not come close to that figure.

(I should add that the Charlotte journalists, both print and broadcast, repeated Martens’ claims as though they were ex cathedra and never once thought to question the prosecutor’s fuzzy math. When I emailed some of them about the monetary discrepancies, they reacted as though I wanted to do away with the First Amendment. How dare I question their worship of the prosecutor!)

It is important to understand that the outcome was fixed long before the trial, and not by any criminal or regulatory violations.

It is important to understand, however, that the outcome was fixed long before the trial, and not by any criminal or regulatory violations on behalf of Sprouse. Martens arranged for the government to forbid Sprouse from selling, disposing, or mortgaging any of her property in order to raise money to pay for her attorney, Pete Anderson. Because all her assets were forbidden to be sold or mortgaged she did not have any other funds by which to pay, the judge declared her “indigent” and then permitted a maximum of $25,000 for her legal fees.

If Sprouse could be denied adequate counsel then a conviction was as good as done.

The prosecution’s strategy was obvious. If Sprouse could be denied adequate counsel, as $25K is not going to buy anything more than an attorney who wants to plead out right away, then a conviction was as good as done.

What happened afterward is most important – and sealed the outcome. Anderson told the judge at a hearing in which she petitioned to have one of her properties sold so she could raise legal fees that he still wanted to represent Sprouse, given his knowledge of the case. That is where Martens dropped a bombshell.

Martens told the judge that it would take 4-to-6 weeks to present the government’s case. Anderson argued that since it would take his firm five months to prepare for trial with another month to six weeks in a trial would mean his firm would have to spend six months for a relatively tiny fee, which the firm could not afford. Thus, he begged off the case and the judge appointed two attorneys who then tried to force Sprouse to plea to a deal that would have given her 20 years. Sprouse, believing she had not committed any crimes and wanting her Constitutional day in court, refused, and from then on, she and her counsel were at odds.

The prosecutor – an officer of the court and one who is bound to tell the truth while carrying out his duties – lies to the judge.

There are a number of reasons why this development was significant, and why Martens had orchestrated it. First, and most important, when Martens actually presented the “evidence” during the trial, he took less than four days. One does not boil 4-to-6 weeks of material into four days; instead, Martens – an officer of the court and one who is bound to tell the truth while carrying out his duties – had not told the judge the truth.

Second, one asks why Martens was hell-bent on eliminating Anderson. The main reason was that Martens had put Rick Graves on trial two years ago on tax fraud charges, and a federal jury did something remarkable: It acquitted him. Graves’ attorney was none other than Pete Anderson, and he easily demolished Martens’ weak case.

In the Sprouse situation, Martens did not want to face a well-respected attorney who believed in the innocence of his client – and who already had bested Martens before in a case involving flimsy charges. Thus, he got rid of the competition and was able to play a role in the appointing of attorneys who clearly wanted to curry favor with the prosecution.

(Most court-appointed attorneys plead out their clients, bill hourly, and pocket the money. The key is cutting deals with prosecutors and letting the court know that the defense is not going to be a problem and will “play ball” with the prosecution. Sprouse’s court-appointed attorneys fell into that category.)

A key issue in this case was whether or not Sprouse knew the documents were fraudulent and that she was knowingly signed off on transactions that were different than what was on the paper. The only prosecution witness to declare that Sprouse “must have known” about the fraud stated in a deposition under oath in a civil case saying that he never told Sprouse about what he was doing because he believed she was honest and would have refused to sign anything she thought was fraudulent and stopped the closings.

The key was to make sure that a key piece of exonerating evidence never would be presented during trial.

Now, one would think that this would be a key piece of evidence in the trial, and that is correct. The key was to make sure that this document never would be presented during trial, and Martens and Sprouse’s court-appointed attorneys did just that.

First, the man who made that original statement under oath was a key witness for the prosecution. In exchange for leniency (Martens offered him a plea bargain to serve two years in prison), the man gave very different testimony in Sprouse’s trial than what he had given before. (Of course, in the earlier testimony, there was no coercion from a prosecutor, so if one is going to choose which statements to believe, instinct tells us that the first set of statements is going to be truthful.) He never said that he knew for sure, since he did not tell her as such, and he knew of no one else who had done it, but that was enough to convince the jury.

Obviously, this leads one to ask why the original deposition was not entered into testimony, as it contained vital exculpatory information. The reason, as noted before, is that Sprouse had a pair of attorneys who deferred to the prosecution. They were angry with her because she would not plead out, as neither of them was experienced in white-collar criminal trials. The extra time spent in court would be an added expense and would destroy any potential profitability they could get from their $25,000 payment.

Even though Sprouse begged to participate in her defense, her counsel said no. She wrote the judge begging that she at least be permitted to participate in her defense, as her counsel was refusing to file motions and even review the evidence, but the judge was not inclined to grant her request.

Why would the defense attorneys be so passive? To fight would not be to seen as “cooperative” with the prosecution, and the opportunity to gain easy money in future deals would be lost.

Why would the attorneys be so passive, especially in the fact of a prosecutor who clearly was railroading someone? To fight would not be to seen as “cooperative” with the prosecution, and the opportunity to gain easy money by cutting future deals with Martens and his staff.

Sprouse even pointed out the information from the deposition to her attorneys. Excited, she showed it to her counsel, but they were noncommittal, and it was clear that the document meant nothing to them. It never was presented in court or presented as defense evidence, and neither attorney cross-examined the witness as to his earlier exculpatory statement made under oath, never using material from that deposition at all.

In the end, Martens’ main piece of “evidence” was the fact that Sprouse had signed the documents, something Sprouse agreed she had done. However, Martens then claimed that because Sprouse had signed the incriminating documents, then that was proof that she must have known they were fraudulent. If one thinks this is a non sequitur, one is correct.

There were other incidents of outright incompetence and worse. The counsel did not interview their own witnesses until just before trial, they rarely objected to anything, and they pretty much let Martens run the proceedings. During the breaks, Martens’ investigators harassed defense witnesses and threatened them, but Sprouse’s attorneys did not object or tell the judge.

Martens clearly enjoyed himself. During one session, he asked his investigator how she felt about investigating Sprouse. The transcript said she “enjoyed it,” and that exchange drawing a rebuke from the judge.

Then there was the jury. One elderly juror slept much of the time and it was clear that many did not understand the complexities of the case. Federal “crimes” are like that in that most of them are “derived” from other acts. Unlike in state courts, where jurors are aware that a law clearly has been broken and that the person charged is accused of having committed the crime, in federal court, all parties generally agree with what was done, but the jury is supposed to interpret the law as to whether or not the act or acts were criminal.

This clearly favors the prosecution, as it does not take long for the jurors’ eyes to glaze over and for them to assume that the person on trial has to be guilty; otherwise there would be no charges in the first place. Thus it was with Victoria Sprouse.

In summary, the prosecution managed to make sure that Sprouse could not have the representation she wanted, an attorney who saw through the tactics of the prosecution and believed strongly in the innocence of his client. Martens falsely told the judge that the presentation of the evidence would take 4-to-6 weeks when it did not even take 6 days.

The prosecutor, a protégé of Michael Chertoff, induced perjury and the jurors swallowed the lies whole, as did the local media.

Martens used a witness who had testified under oath in a civil case that Sprouse did not know that the documents in question that she signed were fraudulent. To get past this obvious problem, Martens was able to use the prospect of a lighter prison sentence to entice the witness to change his testimony. To put it another way, Martens suborned perjury and the jurors swallowed the lies whole, as did the local media.

Lest anyone think I am too hard on Matt Martens, perhaps it would be helpful for the readers to know that his mentor in the federal government was Michael Chertoff, who served as the secretary of the Department of Homeland Security. Chertoff is a man who favors the use of torture and other “enhanced interrogation techniques” in order to pry words out of recalcitrant prisoners and is not concerned with anything as “trite” as “legal ethics.”

When she learned she had been indicted, she and her first attorney, Anderson, made arrangements with the U.S. Marshals Service to turn herself in at 9 a.m. At 6 a.m. on the morning she was to turn herself in, Martens sent heavily-armed federal agents to her house and they pounded so hard on the door that they almost broke it. Included in the government’s Big Show arrest to grab an unarmed person who already was getting ready to turn her in were two Mecklenburg County police, two federal marshals, two FBI agents, the IRS investigating agent, the postmaster investigating agent, and the North Carolina Department of Insurance investigating agent.

After the trial, Sprouse asked to be free on bond pending her sentencing and appeal. Martens objected, telling the judge, “Your honor, she is going to spend a better part of the rest of her life in prison, so she should start serving her time now.” He also declared that she was a risk to flee because her boyfriend had a German passport, and that perhaps she might even commit suicide, given that she had wept on the stand and had the temerity to say that the government had “ruined her life.”

Most Americans today do not care that people who practice such cruelty are in positions of power.

Chertoff’s star student has learned his craft very well. Unfortunately, most Americans today do not care that people who practice such cruelty are in positions of power. Perhaps most Americans do not realize – and maybe they really do not care – that men like Matt Martens and his mentor, Michael Chertoff, would gladly have prosecuted the late Mother Teresa herself had they believed they could have benefited from their actions.

Because federal prosecutors are immune to any legal challenges, their quest to incarcerate innocent people will proceed unencumbered, as they seek political and personal gain and to maintain the all-important “numbers” in their offices.

Giuliani’s lieutenants were playing a simple parlor game, but it enabled them to find ways to prosecute people on Wall Street who had not committed crimes. Today’s federal prosecutors, however, have gone even one step beyond that, and one can be sure that because they are immune to any legal challenges, their quest to incarcerate innocent people will proceed unencumbered, as federal prosecutors seek political and personal gain and to maintain the all-important “numbers” in their offices.

The prosecution of Victoria Sprouse was a “selective prosecution.” As the prosecutors’ parlor game demonstrated, the name of the game is selecting beforehand who to prosecute and convict and then manipulate the law and juries to give them what they want.

Harvey Silverglate, one of the country’s finest civil libertarian attorneys, has noted in his forthcoming book Three Felonies a Day that much of current federal criminal law much more closely mirrors the law of the former Soviet Union than it does anything we have inherited from Great Britain. Indeed, one wonders why Martens and Chertoff do not have busts on their desks of Stalin’s secret police head, Laverty Beria, who famously declared: “Show me the man, and I will find you the crime.”

BLAME MICHAEL JACKSON

Much can and has been said about the life of Michael Jackson – his rise and strange decline and fall. As this perceptive article on Boston.com by Ty Burr put it:

“Jackson was – and remains – a quintessential example of modern pop culture, the doomed superstar naif. ... In 1923, the poet William Carlos Williams wrote ‘the pure products of America go crazy,’ and in this he predicted Judy Garland, Marlon Brando, Elvis Presley, Phil Spector, Brian Wilson, Kurt Cobain [we would add, barring a major comeback and return to psychological health, Whitney Houston] – any public figure whose inability to handle stardom becomes an inherent facet of their stardom.“

Burr concludes:

“You are forgiven if you felt this coming a long time ago, in your bones – the early death of another uneasy mass idol. ... What happens now? What always happens: The great industry of pop-culture mourning cranks up, the end-stage of every superstar career. ... Somber quotes are offered from those who loved him and profited by him while he was alive. Newspaper writers like me wonder what it all means. ... So who are we grieving for? The star he carved himself into, or the person we wanted him to be?”

The grieving itself is no doubt genuine. Who and what the grieving is for is another matter. And note that while Jackson certainly had some help along the way, he was one of the greatest talents of our age. No subsidies, quotas or favoritism was needed. He did not gain popularity by stealing from the public’s pockets and pontificating about the good he was doing as he redistributed the proceeds, thereby earning the adoration of the beneficiaries. No, Jackson earned his fame and fortune, as did he earn, unfortunately, subsequent infamy and financial difficulties. The bad medicine combination of Jackson’s loose screws and public obsession with him greased the skids of the slide, but Jackson has the ultimate power over that denouement.

David “Spengler” Goldman, writing in the Asia Times, believes the grief over Jackson’s death is due to Jackson embodying the desire of the baby boom generation to never grow up: “In his self-disfigurement and eventual self-destruction, this fey child-man fought madly against maturity with a reckless abandon that his fans secretly admired. They loved him, not in spite of his personality failures, but because of them.”

Spengler’s forté is fulminating against the decadence, illusions, godlessness, and failings of Western civilization. Jackson personified all of those, so his death was an ideal vehicle for another missive along those lines. Here he tackles the baby boomers flight from “awful” reality: “America’s cult of youth persists, despite the rapid aging of its population. During the next 10 years, the country’s elderly dependent ratio will rise to 25%, after holding steady for three decades at around 19%.”

Spengler sees the cult of youth behind the dot-com mania: “The eternal adolescence that Michael Jackson so ably represented in fantasy turned into the foundation for the great investing wave of the 1990s. The best minds America could train worked hundred-hour-weeks in pizza-box-strewn lofts to launch the next site for web-based greeting cards or virtual-reality sex. ... The sort of things the world really needed – hardier seeds, safer nuclear energy, more efficient electrical batteries – never turned up on the radar screen.”

And after the dot-com crash: “Undaunted, Americans stopped speculating in technology stocks and speculated instead in houses. The Peter Pan syndrome continued to afflict the American economy. Rather than save, as aging people should, they borrowed more to acquire bigger houses. The housing bubble prolonged America’s collective adolescence for a few more years, for it allowed Americans to spend money on toys rather than saving for the retirement that came rushing at the baby boomers like an oncoming express train.” As a consequence, “Youth culture disoriented the entrepreneurs of America so thoroughly that conventional wisdom – including that of the Vatican and the Barack Obama administration – now ignores the entrepreneur as a source of economic growth.”

And what awaits us? “America’s demographics look frighteningly similar to Japan’s at the beginning of its ‘lost decade’ of 1990-2000. Japan’s population had just began to age dramatically. In 1990, the elderly dependency ratio stood at 17%, but it had risen to 25% by 2000.” Spengler blames Japan’s deflation partly on older, savers supporting it. We intrude below to question that theory and the idea that deflation is such a bad thing.

The conclusion: “The hangover from America’s obsession with perpetual youth will last for a decade or more. Judging from the rock-star adulation accorded to Obama, Americans have not yet learned their lesson, which is: after a certain age, no, you can’t.”

That we can align align with, without reservations.

Public mourning for Michael Jackson crowded out other news last week, including the long-awaited papal encyclical on economics. Somehow that seems appropriate. Since 1985, this pontiff has argued that markets can be no better than the moral character of their participants. What we call “youth culture” for lack of a better word ...

The public’s grief was unfeigned and profound, for Jackson embodied the desire of a generation, that is, never to grow up. Oscar Wilde’s Dorian Gray had a portrait that revealed his inner decay, and Michael Jackson had a nose. If one image captures the spirit of the times, it is that nose, which narrowed, shrank and finally fell in, in emulation of the failing youth of his fans.

They forgave Jackson his dysmorphia and even his alleged pedophilia, for Jackson only expressed in extreme form his generation’s refusal to age. In his self-disfigurement and eventual self-destruction, this fey child-man fought madly against maturity with a reckless abandon that his fans secretly admired. They loved him, not in spite of his personality failures, but because of them.

America’s cult of youth persists, despite the rapid aging of its population.

America’s cult of youth persists, despite the rapid aging of its population. During the next 10 years, the country’s elderly dependent ratio will rise to 25%, after holding steady for three decades at around 19%. Still, the baby boomers flee from the awful reality. Between 1997 and 2007, the number of cosmetic procedures per year rose 10-fold, from 2 million to 10 million, according to the industry association. Its polling data states that 29% of Americans without children, and 24% of Americans with children, would consider plastic surgery.

In Beverly Hills, observes an economist of my acquaintance, there are five plastic surgeons who specialize in bodily rejuvenation, and women of a certain age reveal which one they patronize by the telltale shape of their derriere. Middle-aged women now come in identifiable models, as in the old Twilight Zone episode, “Number 12 looks just like you.” Michael Jackson is just like the rest of us, only more so.

Some part of the American population, to be sure, still accepts the human life cycle; you are born, marry, have children, age, and die. Religion reconciles us to this inevitability. So much of American religion belongs in the self-help section, though, that it contributes to rather than cures the malady. Death seems a distant if disagreeable relation whose eventual visit can be postponed almost indefinitely, through exercise, anti-oxidants and cosmetic surgery.

That brings us back to the pope’s new encyclical, which responds to the world’s cry of economic misery. A good deal of it echoes then-Cardinal Joseph Ratzinger’s brilliant discussion of markets and morality in 1985, which I praised in Benedict XVI is magnificently right for Asia Times Online on December 9, 2008. But the most-publicized practical suggestions sound like the sort thing that Third World bureaucrats have wanted for decades, for example:
In the face of the unrelenting growth of global interdependence, there is a strongly felt need, even in the midst of a global recession, for a reform of the United Nations Organization, and likewise of economic institutions and international finance, so that the concept of the family of nations can acquire real teeth. One also senses the urgent need to find innovative ways of implementing the principle of the responsibility to protect and of giving poorer nations an effective voice in shared decision-making.
Giving “real teeth” to such a United Nations agency is a cure worse than the disease, for the poor nations generally are poor because they were badly governed to begin with. A duopoly of the two most successful large economies, the United States and China, might rescue the world economy – as Francesco Sisci and I argued last November 15 in U.S.’s road to recovery runs through Beijing – but not a committee of the poor and feckless.

That is a minor quibble with a pope who for decades has fought the world’s great rearguard action against so-called youth culture. Visiting Australia last year, he warned against treating his public celebration of mass as “a variant of modern youth culture, as a kind of ecclesiastical rock festival with the pope as the star.” The pope views rock concerts as an anti-cult, as he wrote in his 2000 book The Spirit of the Liturgy:
It is the expression of elemental passions, and at rock festivals it assumes a cultic character, a form of worship, in fact, in opposition to Christian worship. People are, so to speak, released from themselves by the experience of being part of a crowd and by the emotional shock of rhythm, noise, and special lighting effects. However, in the ecstasy of having all their defenses torn down, the participants sink, as it were, beneath the elemental force of the universe.
Everyone has a wish for the Holy Father – this encyclical seems to reflect the wishes of a great many people with conflicting views – but I cannot help wishing that he had used the occasion of a statement on economics to say more about how so-called youth culture has ruined the world economy.

My conservative friends all wish that the pope had mentioned the role of entrepreneurs (the terms does not appear once in the encyclical) in fostering prosperity. Part of the problem is that youth culture lured the entrepreneurs into quicksand. My first essays for Asia Times Online were motivated by the alarming failure of entrepreneurship during the Internet bubble.

I wrote here in 2000,
If Internet stocks were indeed fairly valued, we would have to conclude that the population of the world would have to spend the next century buying pornography, popular music and sundry items on line. Underlying the (then) generous valuations of technology stock was a futuristic vision of a world of mental insects drawn helplessly to the cyberspheric beacon, and plunging into the flames of a globalized youth culture. (See also Internet stocks and the failure of youth culture, Asia Times Online, August 31, 2001).
Something astonishing had happened, compared to which the tulip bulb craze and the South Sea bubble seem like models of sobriety. The eternal adolescence that Michael Jackson so ably represented in fantasy turned into the foundation for the great investing wave of the 1990s. The best minds America could train worked hundred-hour-weeks in pizza-box-strewn lofts to launch the next site for web-based greeting cards or virtual-reality sex. Stock analysts valued new issues in proportion to their “burn rate,” assuming that the more money they lost, the more they were worth. The sort of things the world really needed – hardier seeds, safer nuclear energy, more efficient electrical batteries – never turned up on the radar screen.

Equity markets collapsed and never came back. In nominal dollars, the technology-centered NASDAQ index stands at 1/3 of its February 2000 peak. Real returns to investment in youth culture followed the same trajectory as Michael Jackson’s nose. Undaunted, Americans stopped speculating in technology stocks and speculated instead in houses. The Peter Pan syndrome continued to afflict the American economy. Rather than save, as aging people should, they borrowed more to acquire bigger houses. The housing bubble prolonged America’s collective adolescence for a few more years, for it allowed Americans to spend money on toys rather than saving for the retirement that came rushing at the baby boomers like an oncoming express train.

Youth culture disoriented the entrepreneurs of America so thoroughly that conventional wisdom – including that of the Vatican and the Barack Obama administration – now ignores the entrepreneur as a source of economic growth.

Entrepreneurs will always be there. The supply-side economist Jude Wanniski like to say that an entrepreneur was a fellow wearing a propeller beanie and carrying a perpetual motion machine who was certain he would be the first trillionaire. Entrepreneurs are easy to find – stand still with a checkbook and they will swarm over you. But the American economy is missing something far more fundamental, that it cannot easily place, and it is a large part of what should be its younger generation. America’s perpetual adolescents failed to form families and raise children as their parents had, because they were too busy being children.

My study “Demographics and Depression” appears in the May 2009 issue of First Things. I observed that America’s population had risen from 200 million to 300 million since 1970, while the total number of two-parent families with children is the same today as it was in 1968, at 25 million. In 1973, the United States had 36 million large housing units, about in line with the number of two-parent families with children. By 2005, the number of large units stood at 72 million, while America had the same number of two-parent families with children. For all its growth, the number of traditional families with two parents and children has not changed since 1963. The American population is aging, and this has dramatic economic consequences.

America’s demographics look frighteningly similar to Japan’s at the beginning of its “lost decade” of 1990-2000. Japan’s population had just began to age dramatically. In 1990, the elderly dependency ratio stood at 17%, but it had risen to 25% by 2000. As the Japanese aged, their appetite for savings grew, and as their stock portfolios and home values crashed, they saved more and more. The more they saved, the worse the economy did. Interest rates of 0.25% or less and spectacular government deficits could not make a dent in the vast shift towards a propensity to save. The result was deflation: falling asset values and a strong yen.

We disagree that this Harry Dent-like diagnosis is a logical explanation for Japan’s lost decades. We side with the Austrians, that the Japanese policy makers’ misguided policies prevented the needed economic adjustments from happening – the “malinvestments” from the 1980s bubble were not liquidated but allowed to fester.

Below, Spengler says savings are deflationary. We disagree with that as well. In a properly functioning economy – admittedly an oxymoron today – the savings will be invested in capital goods. Why is spending on capital goods deflationary? And last but not least, what is so bad about deflation? It rewards savings and deferred gratification. One would think Spengler would be falling all over himself praising the idea.

Fast forward to America in 2010, with an elderly dependency ratio of 19%, right around where Japan was in 1990. By 2020, it will rise to 25%, almost as fast as Japan’s. Americans also have seen their stock prices and home values crater, and have suddenly shown an insatiable appetite for savings.

Savings are deflationary: We do not spend on current good but on future goods (securities). The government may attempt to substitute for household spending but it never quite works, no matter how many public works projects the government sponsors (again, Japan poured more cement than anyone else).

There is another deflationary dimension to aging. Old people are creditors, young people are debtors. Inflation is a transfer of wealth to debtors from creditors (debtors pay back debt in cheaper dollars). A country with a preponderance of old people will show strong political pressures against inflation. That is why the Japanese never objected to deflation. As an aging people, too many of them benefited. ...

Michael Jackson’s body lies a-moldering in the grave (in fact, it was a-moldering long before it reached the grave), but his adolescent soul goes marching on. The hangover from America’s obsession with perpetual youth will last for a decade or more. Judging from the rock-star adulation accorded to Obama, Americans have not yet learned their lesson, which is: after a certain age, no, you can’t.

SHORT TAKES

Liechtenstein Agrees with Germany to End Bank Secrecy on Tax Data

No “fishing trips” allowed (yet).

Liechtenstein initialed a deal with Germany to drop bank secrecy laws starting next year that until now have prevented cooperation in tax probes, one of the first concrete outcomes of promises that offshore tax havens across Europe made this year to open up their bank sectors.

[The] agreement in Berlin was triggered by pressure ahead of April’s meeting of Group of 20 nations, which had threatened to produce a blacklist of alleged tax havens for targeting with sanctions. Promises made by Lichtenstein and other offshore banking centers just ahead of the meeting caused G-20 leaders to back off, but the threat of sanctions remains if bilateral cooperation deals are not reached.

A Liechtenstein government spokesman said the German accord follows a model recommended by the OECD ... The pact does not allow German tax investigators to trawl Liechtenstein bank records searching for possible offenders, the spokesman said. That means banks in Liechtenstein will offer data on clients only in response to specific tax fraud investigations by foreign governments. ...

Liechtenstein and the U.S. signed a similar accord in December. Talks are under way for a tax-information agreement with the U.K., Liechtenstein said, adding it hopes to reach an accord with the European Union as a whole that would overlap, but not replace, its German pact.

An accord with the EU would allow Liechtenstein to cooperate with tax investigations in 27 countries, Liechtenstein said. Germany is surrounded by smaller jurisdictions such as Liechtenstein, Luxembourg, Austria and above all Switzerland that offer tighter bank secrecy laws that are attractive to German citizens looking for ways to hide income from tax authorities in Berlin.

New Zealand Tax Loophole Closes in Cook Islands Deal

Two countries will share tax information.

A landmark deal has closed the Cook Islands tax loophole that became infamous in the Winebox case. Prime Minister John Key and his Cook Islands counterpart Jim Marurai announced ... a deal to share tax information between the two countries an arrangement that will give New Zealand tax officials the power to pursue businesses and individuals who try to use the Cook Islands to dodge taxes back home.

Mr. Key said that it would prevent future cases such as the so-called Winebox case a tax scheme made famous by NZ First leader Winston Peters tabling a winebox full of documents purporting to show widespread tax evasion. But Mr. Key said the deal was also a response to a world trend, accelerated by the global financial crisis, toward more transparency.

Under the agreement, New Zealand tax officials will have the power to request tax records, business books and accounts, bank information, ownership information and other tax related information from the Cook Islands when they are inquiring into tax fraud.

New York Trustee Sues Offshore Hedge Fund, HSBC Bank in Madoff Case

The fund “knew or should have known that (Madoff’s business) was predicated on fraud” when it received double-digit returns during market downturns.

The complaint filed [July 14] in Manhattan bankruptcy court against the Herald Fund also names HSBC Bank as a defendant. It alleges the London-based bank withdrew the money from Bernard L. Madoff Investment Securities for the fund within three months before the firm’s liquidation began.

The fund “knew or should have known that (Madoff’s business) was predicated on fraud” when it received double-digit returns during market downturns, the complaint said. ...

In a statement, HSBC said it “continues to believe that it has good defenses to the claims and will vigorously defend itself against the actions that have been brought.” Madoff, 71, was sentenced late last month to 150 years in prison for orchestrating a multimbillion dollar Ponzi scheme that wiped out life savings and entire charities.

Thousands of investors with Madoff’s once-respected advisory firm believed their securities accounts were worth tens of billions of dollars. But investigators say the totals on the clients’ monthly account statements were fiction: In reality, Madoff never made investments, and instead used new investors’ money to pay returns to existing ones.

The search for Madoff’s assets “has unearthed a labyrinth of interrelated international funds, institutions and entities of almost unparalleled complexity and breadth.”

After Madoff’s arrest late year, trustee Irving Picard was appointed to try to recover funds. The search for Madoff’s assets “has unearthed a labyrinth of interrelated international funds, institutions and entities of almost unparalleled complexity and breadth,” Picard said in a report last week.

The report said the trustee has located assets and businesses “of interest” in 11 places: Great Britain, Ireland, France, Luxembourg, Switzerland, Spain, Gibraltar, Bermuda, the British Virgin Islands, the Cayman Islands, the Bahamas.

More than 15,400 claims against Madoff were filed by a July 2 deadline, the trustee said.

Royal Bank of Scotland to Close Dubai Offshore Office After Review

Just over a year since it opened.

RBS has been forced to close its Dubai offshore office just over a year since it opened following a “strategic review of its business,” it can be revealed.

RBS International will close its offshore banking office in August, a spokesman for the group confirmed on Tuesday. According to a statement given to Arabian Business, the closure follows a company-wide review of the group.

Climate Change Blamed for Caribbean Coral Deaths

Climate change has contributed to a flattening of the complex, multilayered architecture of Caribbean coral reefs, compromising their role as a nursery for fish stocks and a buffer against tropical storms, a study shows. The analysis of 500 surveys of 200 reefs, conducted between 1969 and 2008, showed the most complex types of reef had been virtually wiped out across the entire Caribbean.

Such reefs – typified by Table Corals measuring over one meter across and huge antler-shaped Staghorn Corals – act as a sanctuary for local fish stocks and a hunting ground for larger, commercially fished species.

Many have been replaced with the flattest types of rubble-strewn reef, which now cover about 3/4 of the Caribbean’s reef area, up from about 1/5 in the 1970s, said the study, published in the Royal Society Journal Biology Letters.

The biggest impact has occurred in the last decade, said the report by researchers from Britain’s University of East Anglia and Canada’s Simon Fraser University.

“Lack of ... refuges for species with commercial importance, such as lobsters and large fishes may compromise the long-term sustainability of fisheries and fishing communities,” the report said. Flatter reefs are also less effective in protecting coastal homes and villages from storm swells and tidal surges. ...

The degradation of Caribbean reefs is not entirely linked to climate change, with disease killing about 90% of Elkhorn and Staghorn Corals in the 1970s, but a second period of coral destruction is now under way.

New damage is typified by “coral bleaching,” which occurs when the tiny organisms that build coral reefs become stressed and abandon their colonies.

“We suggest that the last period of decline is partly due to climate change, but also due to several other human impacts such as over-fishing and coastal development,” Mr. Alvarez said. “In future, we will need to change our behavior and reduce the stress on the reefs.”