-->Attorney-Client Privilege Under Siege / The Daily Reckoning
Ouzilly, France
Tuesday, 5 August 2003
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*** Heat. Hot heat. Infernal heat.
*** Stocks up. Gold up. Bonds up.
*** 'Job growth going forward'? But where is the job growth
going backward? And more lame balderdash from people who
should know better...
Heat.
Europe is suffering through an inferno of heat. And here in
rural France, people think of nothing else; they talk of
nothing else. Who can keep his mind on stocks and bonds
when it is 100 degrees outside, and no air conditioning
inside? (Still we manage a little rumination, keep
reading... )
"Another old person died in the village last night," said
our gardener, yesterday morning. Damien keeps track of the
dead better than we do; he works part-time for the commune
and digs its graves.
"It was the heat that got her. And now Madame Lardeau is
very sick. She's 97 years old; they say she's stopped
eating. But I hope she can hold out until the heat wave is
over. If I have to dig any more graves in this heat they'll
need one for me too!"
Gardeners in France - maybe the world over - are a colorful
breed. They spend too much time alone with plants; talking
to geraniums drives a man mad.
Our former gardener was a pleasure to have around. But then
he reconciled with his wife and seemed to come to his
senses. After that, we could never seem to synchronize our
drinking. He was sober when we were drunk and drunk when we
were sober; it just didn't seem to work.
Damien has a wild look in his eye. And he, too, talks to
vegetables. But he does his work well and saves his
drinking for the village bar, where drunks are not only
welcome, but needed. There used to 9 bars in town. That was
before television... and before work lured the young people
to the big cities. Now, there is only one bar left in a
town full of sober, gray heads....and, in this heat, the
old people drop like bonds.
"Did you hear?" asked Damien this morning."Madame Lardeau
died last night. If this heat keeps up, there won't be
anyone left.
"I'm going to wait until tomorrow morning, early, to dig
the grave... before it gets too hot."
And with that little, heh heh, warm-up... we turn you over
to our man in the city of dreams:
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Eric Fry, in mercifully 20-degrees-cooler Manhattan...
- Investors may be busy buying stocks, but they're TALKING
about bonds. The bond market's scandalous behavior is the
talk of the town... What has become of the well-mannered
bond market we used to know? No self-respecting financial
market should ever drop flat on its back in the presence of
polite company.
-"Why is the bond market behaving so badly?" the alarmed
lumpeninvestoriat is wondering."And will its bad behavior
influence other financial markets like - gulp - the stock
market?"
- Yesterday, the Dow Jones Industrial Average gained 32
points to 9,186, after sliding as much as 105 points
earlier in the session. The Nasdaq slipped nearly two
points to 1,714. Meanwhile, the bond market selloff abated
somewhat, as Treasury issues rallied for a second straight
session. The 10-year Treasury note gained 24/32, dropping
its yield to 4.29%, from 4.47% last Thursday. But the bond
market's two-day rally doesn't change the fact that yields
have been soaring for weeks.
- Yesterday, the Wall Street Journal finally picked up on
the obvious notion that rising rates might be harmful to
finance companies. Splashed across the front page of its
"Money and Investing" section, three separate stories
chronicled the woes of rapidly rising interest rates. The
Journal, as usual, is late to the party. But at least it
finally showed up. The Daily Reckoning has been rollicking
at the bond bear party for weeks already...
- We would never risk arousing the ire of the financial
market gods by saying,"We told you so." But it's true that
we've been highlighting the bond market's feeble
underpinnings for some time now. On May 21st, less than
three weeks before the bond market peaked, we remarked,
"The New York office of the Daily Reckoning steadfastly
believes - wrongly, so far - that the U.S. bond market is
one of the most compelling 'sells' in the world of global
finance. It's conceivable, of course, that the 10-year
yield will plummet below 3% before marching higher.
Nevertheless, your New York editor would take the bet (in
small quantities) that one year from now, the 10-year
Treasury yield will be higher than it is today."
- One month later - and only 10 days after the bond
market's peak - we quoted the work of Donald Straszheim of
Straszhein Global Advisors when he wrote,"We think bonds
have peaked. Investors would be wise to not get too greedy
at these levels - the lowest yields in 40-50 years... The
bond market during 2002-03 has begun to look like Nasdaq,
June 1999 to March 2000 - a blow-off. Too far, too fast.
Too good to last.
-"When memories and their lessons fade," Straszheim
continued,"investors pay the price. The last double in the
Nasdaq took just nine months (2524 on June 18, 1999, to the
peak of 5,048 on March 10, 2000). The bond market move has
been equally outsized... The 5-year Treasury yield is not
2.21%. From 6.35% in June 2000 and 4.34% in June 2002. What
a move!... Looks like a top [in price] in bonds to us."
- Nice call, Donald! Bond prices have been plummeting ever
since.
"Twenty-one years, eight months, two weeks, two days. Thus
marks what many are saying could be the end of a remarkable
two-decade run in the U.S. bond market," the Wall Street
Journal relates."To get a sense of the scale of the
decline, consider that the drop is greater than any three-
month loss for bonds dating to 1927... Put another way: The
Dow Jones Industrial Average would have to drop nearly
1,400 points from its current level - by Halloween - to
match it."
- Has the bond market's spectacular collapse converted your
New York editor into a value-sensing bond bull? Ummm... no.
Perhaps he is 120 basis points less bearish than he was
when the 10-yield was yielding 3.09%. But he is certainly
not bullish.
- The bond selloff looks like the real deal: the beginning
of the end of America's spectacular two-decade bull market
in bonds. It is also, therefore, the beginning of the end
of America's epic mortgage refinance boom... and that could
be a bit of a problem for the U.S. economy, or at least the
87% of the economy that relies upon consumer spending.
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Back in Ouzilly...
***"Things really are getting better for investors," says
an email message just received from Lou Dobbs.
How does he know?
"I just interviewed Bill Donaldson, the new SEC
Commissioner, and I also had the pleasure of talking in-
depth with the new Treasury Secretary John Snow... what they
told me, both on the air and off, gave me a great deal of
confidence that they are serious about cleaning up the
climate of fraud that has tainted Wall Street over the past
several years, and about generating real economic and job
growth going forward."
Well, that does it for us, doesn't it, dear reader? If the
SEC commissioner and the Treasury Secretary say things are
getting better, well... end of conversation.
Why didn't we think of that? Why spend all this time trying
to understand the winds and tides when we could just ask
the weatherman?
Besides, in this case, these guys don't just watch the
weather - they make it! Like Greek gods, they can hurl
thunderbolts wherever they want... or so they say. And if
they're serious about 'cleaning up the climate of fraud'
and about 'generating real economic and job growth going
forward,' what more do we need to know?
Well... well... I guess we might be a little curious about
why they weren't serious about it last year. Why didn't
they generate a little job growth going backwards, if you
know what we mean? Alan Greenspan recently told Congress
that he was sure that things were looking up for the 2nd
half. Of course, his words were almost exactly the same as
those he used the year before... and the year before that.
And just to make sure the economy lived up to his
forecasts, he knocked interest rates down 13 times in a
row.
But where's the job growth? We don't see any... going
forward, backwards, or sideways.
"One in 10 tech jobs may move overseas," says the Chicago
Tribune. More than half a million tech jobs have already
been lost. Businesses need profits before they're willing
to hire. The popular press reports that profits were up 13%
in the first quarter. But a more accurate figure, from the
national accounts, is only 2%. Nobody is going to do much
hiring based on those feeble results.
Business profits as a percentage of GDP have been falling
since the Dollar Standard system was put into place in the
early '70s. It is a deep structural problem, not a cyclical
one. Americans spend... but the profits end up in the hands
of people overseas, the people who make things. This is not
a problem that is going to be solved by making short-term
financing cheaper... nor by cleaning up a climate of fraud,
whatever that may mean. It is a problem that will
eventually be rectified, just as all big debts are settled:
in pain and suffering. The dollar will fall, savings will
increase, the stock market and bond markets will collapse,
and Americans will have less money to spend. These are all
things that are in the future, and they are things that
Snow, Greenspan, Donaldson and the rest will never admit -
even when they are in the midst of them.
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The Daily Reckoning PRESENTS: Watch out - figuring out your
taxes just got even more complicated...
ATTORNEY-CLIENT PRIVILEGE UNDER SIEGE
by Robert E. Bauman, JD
On June 19, 2003, a U.S. District Court judge in Chicago
ordered one of the largest U.S. law firms to disclose to
the Internal Revenue Service the names of about 700 clients
who received tax shelter advice from attorneys at the firm.
The IRS has in recent years greatly increased its use of
such 'John Doe' summonses. Beginning in 2000, it employed
them when seeking information on thousands of holders of
offshore bank account credit cards from American Express,
VISA and MasterCard. But the IRS has reportedly never used
this highhanded tactic against a law firm.
The law firm, Jenkens & Gilchrist - one of the nation's
largest - has refused to comply with the unprecedented
court order, saying it will fight it all the way to the
U.S. Supreme Court."Americans have a right to consult with
an attorney in confidence, and only the clients themselves
can waive that right," a spokesman for the firm said,
adding that it expected the courts to uphold its position.
The IRS position, of course, is that it is seeking evidence
about tax shelters which its alleges are illegal.
In The United States, Canada, the United Kingdom and other
common law nations, attorney-client privilege describes a
well-established, traditional right. It encompasses the
ethical duty of an attorney or solicitor not to divulge to
others confidential communications with a client. It also
includes the client's right to refuse to disclose, and to
prevent others from disclosing, such confidential
communications with his or her attorney.
This important rule evolved as a means to encourage clients
to make full disclosure to an attorney when seeking legal
advice, without fear that the legal advisor would inform
others. To do less might well hamper preparation of the
client's case, or prevent the attorney from giving the
correct advice.
In the Chicago case, acting as prior judge and jury, the
IRS simply branded certain types of tax-avoidance shelter
plans (called COBRA) as illegal. It alleged the law firm
was offering advice about these supposedly 'illegal' plans.
That speculation, said the IRS, supposedly gives it the
right to see COBRA client files. IRS officials said the
transactions, which allegedly took place between 1998 and
2003, generated phony paper losses of about US$4 million
each, or about US$2.4 billion in all.
If the IRS is successful in its demands against Jenkens &
Gilchrist, there will remain almost no confidentiality for
tax attorneys and their clients. A simple statement from
the IRS that it believes a certain tax shelter or other
plan to be 'abusive' will open the files of any client who
may have discussed the plan with a lawyer, let alone
adopted the plan as his own personal or business tax
strategy.
This radical new course of judicial activism is the easy
way out for the IRS. In the past, the agency had to proceed
against each taxpayer individually, proving that his or her
tax plan was somehow illegal or had been used in an abusive
way. Now, if the IRS position is upheld, the agency can
simply speculate that certain groups of people are engaging
in alleged illegal tax avoidance schemes and grab their
lawyers' files.
In one sense, no one should be surprised that the IRS,
backed by the U.S. Department of Justice, is playing this
sort of legal hardball. Only a few years ago, the FBI
raided the law offices of several criminal defense
attorneys in south Florida that represented accused drug
kingpins. Grabbing files and computers, the attorneys
themselves eventually were indicted and some convicted of
'conspiring' with their clients, a far cry from simply
'representing' them.
Anti-money-laundering laws and more recently, anti-
terrorism laws, have also been used to force attorneys to
report 'suspicious activities' of clients, with mixed
results. It has always been a requirement that attorneys
report a client's pending or planned future criminal acts,
if the lawyer is aware of them. An attorney cannot
knowingly assist a client in committing fraud or a criminal
act. Indeed, attorneys today are wary of positioning
themselves so as to be accused of any criminal conduct by a
client whom may sell out the lawyer in negotiations with
prosecutors. 'Know your client' is a modern attorney's
watchword and guide.
But when a tax attorney discusses a tax avoidance plan with
a client, and the client later adopts the approach based on
that competent legal advice, that cannot, in my view,
justify waiving attorney-client privilege. This does not
constitute criminal conduct, but rather the normal practice
of law.
These recent events mean you must take great care when
hiring a tax or any other attorney. Don't discuss
confidential matters until you conclude a representation
agreement in writing. This serves as the benchmark when
privilege attaches and begins to run.
In some cases, it is best to have your domestic tax
attorney hire an offshore trust attorney to handle matters
in a foreign tax haven or other nation. This dual
arrangement can add another protective layer of attorney-
client privilege.
In the United States, an attorney has no duty to report
that a client may have in the past been engaged in illegal
conduct. However, in the United Kingdom, Switzerland and
some other nations, an attorney must report suspicion of
money laundering. In the United Kingdom, this includes
reporting of suspected illegal tax evasion. Canadian
attorney-client privilege is now under revision, with the
government demanding to know all. This means you must find
out about the status of attorney-client privilege in any
offshore nation where you may decide to employ an attorney.
It's your privilege. Protect it - and yourself.
Regards,
Robert E. Bauman
for the Daily Reckoning
Editor's note: Robert E. Bauman, JD is a former member of
the U.S. House of Representatives from Maryland and the
author of several books on offshore financial topics. Mr.
Bauman serves as legal counsel to The Sovereign Society, an
international group of citizens concerned with government
encroachment on financial freedom.
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