Friday, January 22, 2010

NYT: Basking In Islands of Legalisms


The Cook Islands have a smaller population — about 20,000 — than one apartment complex in Manhattan, and an economy with little to offer except tourism and pearl exports. The country contracts out its national defense to New Zealand, which is four hours away by plane.

But sand and sun are not the attractions for some Americans who have sent their money to the Cook Islands.

Under Cook Islands law, foreign court orders are generally disregarded, which is helpful for someone trying to keep assets away from creditors.

In fact, getting an American court order can make it harder to get money out of the Cook Islands. If someone who stashed funds in a Cook Islands trust asks for the money back because a court ordered him to do so, Cook Islands law says that person is acting under duress, and the local trustee can refuse to return the money.

Over the years, a number of less-than-upstanding Americans have found the islands attractive for that reason, among them former corporate raiders, penny stock promoters and telemarketers who defrauded customers.

The latest to use that tactic is the wife of Jamie L. Solow, a former broker in Florida who evidently has a silver tongue and certainly has a lot of angry former customers. In one year, he earned more than $3 million in commissions selling a form of collateralized debt obligations known as “inverse floaters” to individual investors who claim he never warned them of the risks.

The investments proved to be disastrous, and the Securities and Exchange Commission persuaded a jury in West Palm Beach, Fla., that he had committed securities fraud.

Now a federal judge has ordered Mr. Solow to go to prison on Monday for civil contempt for failing to come up with a large part of the $6 million he was ordered to pay in disgorgement, interest and penalties.

Mr. Solow claimed he had virtually no assets, since his wife owned everything in the family and had put most of it in a Cook Islands trust. A couple of months after the jury verdict, but before the final judgment was issued, she put an undisclosed amount of cash and jewelry in a safe deposit box in a Swiss bank in Zurich.

Mr. Solow did sell all the assets he acknowledged owning — an old pickup truck and some office furniture — and sent $2,639 to the court. The family Rolls Royce was also sold, for $205,000, but the Solows say it was actually owned by Mrs. Solow, even though her husband had put up the money to buy it and signed the sale documents.

This week, Mr. Solow asked that his incarceration be delayed, on the grounds that he and his wife were now willing to ask the Cook Islands trustee to return the money. They have not actually made that request, and in the past, Cook Islands trustees have refused to honor such requests. In ordering Mr. Solow to prison, Judge Donald M. Middlebrooks, of the United States District Court for the Southern District of Florida, said his inability to pay was self-created, and thus no excuse.

Nor was the judge impressed by Mr. Solow’s contention that the S.E.C. itself was to blame for his inability to pay, since it had won an order barring him from the securities industry, and thus prevented him from working.

“Mr. Solow’s ‘chosen profession’ consisted of committing fraud against his investors,” the judge wrote. “That being the case, an opportunity to do different work, outside his ‘chosen field,’ may better serve his ability to satisfy the disgorgement order.”

In setting up the trust, Mr. Solow’s wife, Gina, followed a blueprint laid out in a 2005 article in an accounting publication, written by Howard D. Rosen, a lawyer in Florida whom she hired a few days after the jury verdict in early 2008.

The Solows own a waterfront home in Hillsboro Beach, Fla., which they view as their permanent residence even though they have not lived in it for several years because of hurricane damage. “It has been condemned due to the roof falling in,” Mr. Solow’s attorney, Carl F. Schoeppl, said Thursday, adding that he did not know how much repairs would cost.

The house was already encumbered by $2.4 million in mortgages, but a Cook Islands bank lent $5.2 million more secured by the house. The money from that was immediately placed in a Cook Islands trust to benefit only Mrs. Solow.

The judge noted that the mortgage could not have been taken out without Mr. Solow’s consent.

The house is now listed for sale for $6.1 million, far less than the combined mortgages, but the bank in the Cook Islands was taking no real risk. The proceeds from the mortgage were deposited in the Cook Islands, and the interest earned is used to pay the interest on the mortgage.

Mrs. Solow also took out a $1.2 million mortgage on the Fort Lauderdale condominium she owns, and in which the couple live.

Mr. Rosen, the lawyer who set up the trust, said in the article that it was a challenge to protect real estate from American courts, since the property obviously could not be moved overseas.

“The only effective method available to protect an immovable asset,” he wrote, “is to make the asset unattractive to a creditor by removing its value — make the asset not worth going after. (Think about it: Would you spend your time and money to sue someone if all they had was a piece of real property worth $1 million encumbered by a $950,000 mortgage?) This technique is implemented by pledging the asset as collateral for a loan and by then protecting the loan proceeds with the client’s other liquid assets in the offshore trust.”

In a telephone interview, Mr. Rosen, who had testified in the case on behalf of Mr. Solow, told me that Judge Middlebrooks “simply does not understand the laws of the United States” and voiced confidence that an appeals court would overturn the ruling.

In an e-mail message, he compared the use of an offshore trust to a company’s decision to incorporate in Delaware rather than some other state. “Establishing a trust in the Cook Islands or other suitable asset protection jurisdiction in order to gain a protective advantage is no different,” he wrote. “It is a choice-of-law matter.”

Of course, Delaware law does not say companies can ignore judgments issued by judges in other states.

Even if Judge Middlebrooks’s order is upheld on appeal, the S.E.C. could be in for a long battle to get the money. More than a decade ago, the Federal Trade Commission persuaded a federal court to jail a married couple, Michael and Denyse Anderson, for civil contempt after they violated a court order to return funds to the United States that had been put into a Cook Islands trust. The commission said the two were involved in a telemarketing Ponzi scheme.

After several months, Mr. and Mrs. Anderson agreed to direct the trustee to release the money, and were released from jail. But the trustee refused, citing the United States court order as a form of duress, and the Cook Island courts upheld that decision.

Eventually, the F.T.C. was able to recover most of the money, which went to a fund to repay victims of the fraud, because the trustee agreed to settle. That happened after the commission threatened to file contempt charges against ANZ, the Australian bank in which the Cook Islands bank had deposited the money. ANZ, which has offices in the United States, evidently persuaded the trustee to agree to a settlement.

Promoters of Cook Island trusts learned from that case, and now make sure to use banks that have no American operations. It seems likely that a request from Mrs. Solow now would be similarly refused by the trustee.

It is worth noting that nearly all of the asset-moving activities in this case came after the S.E.C. notified Mr. Solow that it intended to file suit, and many of them came after the jury rendered its verdict. Perhaps it could have been avoided if there had been an asset protection freeze in place.

The S.E.C. says it has been seeking more such freezes. Mary L. Schapiro, the commission’s chairwoman, said last week that the commission “sought 82 asset freezes to preserve assets for the benefit of investors” in fiscal year 2009, “an increase of 78 percent compared to 46” in the previous year.

But it did not seek such an order in the Solow case, and probably would have had a difficult time getting one. It most often does so in insider trading cases, where it is preserving the apparently ill-gotten gains from being sent abroad, and in cases where it can persuade a judge that there is reason to fear the defendant would move assets and that it is highly likely the S.E.C. will win the case.

The S.E.C. has now filed a follow-up case against Mrs. Solow, who was not a defendant in the original case, and is seeking to garnish any bank accounts she has. But the money is long gone.

Copyright 2010 The New York Times Company. all rights reserved.

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