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Forbes: Where Did the Money Go?

Where Did the Money Go?

Seth Lubove, 12.26.05

You win a big judgement, but the defendant has tucked his assets into an offshore account. Collecting will be a challenge.

With Cook Islands law designed to attract business from people who want to protect their assets from judgments, it would have been next to impossible for Ms. X to collect her money in a legal action there. So she sued the Cook Islands bank that held the Jones trust in the U.S., winning a $3 million default judgment. But this judgment was no more enforceable than the earlier one. Reason: This bank had no discernible assets in the U.S. to attach. Needless to say, offshore banks in asset havens usually do not maintain correspondent balances in New York City. They do business with a daisy chain of other offshore banks.

In the end Ms. X settled with Jones for an undisclosed amount. Then she went after some peripheral players. A suit against the financial consultant she blames for helping arrange the offshore scheme, Robert Lambert of San Clemente, Calif., got her a $60,000 settlement. Another suit, against Miami asset-protection promoters Patricia Donlevy-Rosen and Howard Rosen, was settled for $47,500.

Yes, there are legitimate domestic asset-protection schemes (see box, p. 60) to fend off ruinous legal awards against doctors hit by medical malpractice claims, executives by shareholder suits, spouses by divorce. But from the point of view of the plaintiffs, asset-protection trusts frustrate the public policy of accountability enshrined in common law. According to a Government Accountability Office study last January, only 7%, or $40 million, of the $568 million owed in restitution in five unnamed criminal cases–much of it tucked offshore–has been paid.

Impenetrable as offshore trusts may be, their owners still are subject to (local law). Thus the owners can’t (without committing felonies) use trusts to avoid U.S. taxes…… U.S. citizens must declare income from anywhere in the world. These facts, and the possibility that the defendant could get a contempt-of-court citation for failing to disgorge funds from offshore accounts, give plaintiffs some leverage. Here are tips for people trying to collect from wealthy, secretive deadbeats:

Follow the paper trail.
In the Jones rape civil case the plaintiff’s attorney got a court-ordered edict to examine Jones’ financial paperwork. (A lawyer) tracked Jones’ assets by sorting through his checks and finding a title transfer to the trust for his home.

Get a court order. Judges have become especially dubious of offshore trusts in recent years, even if they were formed so far in advance of a legal judgment that no connection is possible. Example: Denyse and Michael Anderson case.

Prove fraudulent transfer. This term refers not to the crime of fraud but to the civil offense of transferring assets in order to defeat creditors’ legitimate claims. If an offshore transfer occurred shortly before your lawsuit, then you have a better chance of persuading a judge to order the defendant to undo the transfer.

Use bankruptcy law. If a defendant who owes money on a judgment winds up, either voluntarily or involuntarily, in bankruptcy court, he has to declare all his assets, including offshore ones. Lying about the existence of assets is a felony. Admitting to the offshore accounts but arguing that they are somehow locked up beyond the reach of the debtor might or might not convince the bankruptcy judge. Derivatives trader Stephan Jay Lawrence shifted $7 million to Mauritius to avoid paying a judgment owed to Bear Stearns over a margin call, then declared bankruptcy. Brushing aside Lawrence’s argument that he no longer had access to his funds, a judge in 1999 jailed him until he could cough up the money. Jones declared bankruptcy in July 2002 to escape Ms. X’s claim, but the judge dismissed it as a “bad faith filing.”

He charges $25,000 and up to arrange offshore trusts.

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