Lawyers Gone Bad

by Philip Slayton

  5. Re Rosenfeld, [2002] O.J. No. 3158. Rosenfeld’s appeal from this decision was dismissed—Re Rosenfeld, [2004] O.J. No. 2459. See also Iamgold Ltd. v. Rosenfeld, [1998] O.J. No. 4690, and Rinaldo v. Rosenfeld, [1999] O.J. No. 4665, both dealing with allegations of a fraudulent conveyance of property by Simon Rosenfeld to his wife in order to defeat and defraud creditors. The Iamgold case settled. Rinaldo’s action was dismissed. Rosenfeld has generally been very litigious; see, for example, Rosenfeld v. Iamgold International African Mining Gold Corp., [1997] O.J. No. 3770.

  6. See U.S. Securities and Exchange Commission, Litigation Release No. 16932, 14 March 2001.

  7. Adrian Humphreys, “Tripped up by $1, lawyer jailed for money laundering,” National Post, 31 March 2005, A4.

  8. David Baines, “Frustrated inspector looks elsewhere,” The Vancouver Sun, 21 May 2005, H5. Baines reported in December 2005 that Majcher’s lawyer had sent a letter to the RCMP stating that the force’s conduct toward Majcher “has been egregious, reckless and, in some cases, defamatory of him and has caused him undue emotional, professional and financial harm.” David Baines, “Two years later, not much to show,” The Vancouver Sun, 10 December 2005, H2.

  9. Betsy Powell, “Launderer lost a game with RCMP; Brokers applaud Dirty Money inventor: How-not-to-do-what-I-did was topic,” Toronto Star, 29 September 2005, A16.

  10. Betsy Powell, “A reputation built on connections; Family ties opened doors for Shoniker, Ex-crown accused of money laundering,” Toronto Star, 3 July 2004, A1.

  11. John Barber, “Let’s hope this ‘untouchable’ is put where he belongs,” The Globe and Mail, 23 August 2006, A8. In his article, Barber also wrote that Julian Fantino was “more or less excised from the body politic.” He was wrong. On October 12, 2006, Fantino was named commissioner of the Ontario Provincal Police, starting on October 30.

  12. Christie Blatchford, “High-powered friends duck for cover,” The Globe and Mail, 26 June 2004, A17.

  13. A version of this discussion first appeared in my “Law and Money” column, Canadian Lawyer, August 2005.

  14. In R. v. Campbell, the Supreme Court of Canada adopted what it described as the “functional” definition of solicitor-client privilege set out in Descôteaux v. Mierzwinski, [1982] 1 S.C.R. 860 at 872: “Where legal advice of any kind is sought from a professional legal adviser in his capacity as such, the communications relating to that purpose, made in confidence by the client, are at his instance permanently protected from disclosure by himself or by the legal adviser, except the protection be waived.”

  15. Federation of Law Societies of Canada v. Attorney General of Canada, [2002] O.J. No. 17.

  16. Put into force by amendments to the Rules of Professional Conduct and to by-laws 18 and 19.

  17. Stephen Schneider, Money Laundering in Canada: An Analysis of RCMP Cases, Nathanson Centre for the Study of Organized Crime and Corruption, York University, 2004, 67–73. Schneider is co-author with Margaret E. Beare of Money Laundering in Canada: Chasing Dirty and Dangerous Dollars (Toronto: University of Toronto Press, 2007). One of the most convincing accounts of money laundering is to be found in Shana Alexander, The Pizza Connection: Lawyers, Drugs and the Mafia (New York: Weidenfeld & Nicolson, 1988). See especially Chapter 4 in Alexander’s book.

  18. Steven Chase, “Scope of dirty money problem balloons,” The Globe and Mail, 4 October 2006, A4.

  19. Department of Finance, “Canada’s New Government Toughens Anti-Money Laundering and Anti-Terrorist Financing Regime,” 5 October 2006.

  Six: A Small Army

  1. David Cay Johnston, Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich—and Cheat Everybody Else (New York: Portfolio, 2003). See 263.

  2. Lynnley Browning, “Lawyers Face Scrutiny in Tax Inquiry,” The New York Times, 25 January 2006, C1.

  3. The Role of Professional Firms in the U.S. Tax Shelter Industry, report prepared by the Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs, U.S. Senate (Washington: U.S. Government Printing Office, 2005). See 96 and 99.

  4. See http://levin.senate.gov/newsroom/releasecfm?id=260030 (accessed 1 August 2006). See Tax Haven Abuses: The Enablers, The Tools and Secrecy, Minority and Majority Staff Report of the Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs, U.S. Senate (Washington: U.S. Government Printing Office, 2006).

  5. See David Cay Johnston, “Tax Cheats Called Out of Control,” The New York Times, 1 August 2006, C1. The role of lawyers in tax shelters is multifarious. A newspaper story begins, “A former senior partner at the law firm of Greenberg Traurig has formally resigned from the New York bar after admitting that he took $1.3 million in kickbacks for steering wealthy clients … to questionable tax shelters.” Lynnley Browning, “Lawyer Tied to Kickbacks Quits the Bar,” The New York Times, 16 November 2006, C3.

  6. “… the opulence of a professional waiting room that soothes the visitor’s anxiety about how much it is all going to cost with the subliminal assurance that nobody who makes this much money can be peddling unsound advice.” Paul Seabright, The Company of Strangers: A Natural History of Economic Life (Princeton: Princeton University Press, 2004), 85.

  7. Davis & Company declined to discuss the Strother affair with me, giving the reason that “the matter is still before the courts.” Strother also declined to be interviewed, giving the same reason. I interviewed Harry Knutson and David Merrick, of Monarch Entertainment Corporation, in Vancouver on November 22, 2005. Views and quotations attributed to Knutson are from that interview. I have several times written about the Strother affair in Canadian Lawyer, and some of the language and ideas in this chapter are drawn from those columns.

  8. In 3464920 Canada Inc. v. Strother, Davis & Company, et al., 2002 BCSC 1179, Justice Lowry gave a full explanation of how TAPSF worked:

  [4] What was referred to as tax-assisted production services financing was a concept that served to enhance the advantages of producing American-made films in Canada by providing for investors a 15 year (and after 1994 a 10 year) tax deferral. The concept was not a government-sponsored, legislated tax incentive to attract American film business. It was developed by Stephen Cheikes, an American attorney who practised law in the Los Angeles motion picture industry for some years before coming to Canada in 1987.

  [5] Utilizing a limited partnership in a complex structure to facilitate the flow of funds between investors, lending institutions, the studio involved, and other necessary on-and-off-shore entities, investors would notionally produce a film for a studio in return for a fee, paid over time, which was contingent on the success of the film. The application of Generally Accepted Accounting Principles (GAAP) yielded a loss to the partnership because of a mismatch between the expenses it incurred in producing the film and the part of the fee it received at the outset of the life of the investment. The loss was flowed out to the investors to be deducted from their unrelated income which was thereby sheltered.

  [6] The concept was based on the advantage to be taken of the court-sanctioned view that the right to receive income at some future date is not a capital asset. As a result, expenditures made for that purpose do not become nondeductible capital expenditures: Asamera Oil (Indonesia) Limited v. The Queen (1973), 73 D.T.C. 5274 (F.C.T.D.). They could be used as income tax deductions without offending the provisions of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 including, in particular, those provisions which prevent technical reliance on a part of the statute in a manner at odds with its overall purpose: s. 245, the General Anti-Avoidance Requirements (GAAR).

  [7] An investment in the production services of a film held a limited prospect of profit. For the investor, the principal attraction of the concept was the sheltering of income achieved by deducting losses from income on which tax would otherwise have to be paid. Tax would eventually have to be paid on the balance of the fee revenue when it was received, but that would n
ot be for many years and the investor enjoyed the use of the money in the interim. Hence, a production services investment provided what could be a valuable tax deferral.

  [8] The American studio, which paid no tax in Canada, shared in the tax benefit achieved by the deferral through effectively selling to the Canadian investors the expenses of making the film for a price that then served to reduce its cost of production. The promoter of the tax shelter would incur the expenses of securing a film to be produced, assembling and marketing the investment transaction which most often would be done by a public offering, and attending to the administration required over the life of the investment. The promoter derived its profit as a middleman from the difference between what the investors actually paid as part of their investment for the production expenses and the price the studio received.

  9. Patricia Best and Ann Shortell, “Stopping the puck,” The Kingston Whig-Standard, 4 January 1986, 1.

  10. See Katherine Gay, “Feds take aim at ‘abusive’ tax shelters,” The Financial Post, 12 September 1995, 17. In that article, Gay observes that “tax shelter brokers are a never-say-die breed, able to slip through hairline cracks in tax rules and revered by clients for doing so.” Perhaps the best recent explanation of what constitutes an “abusive” tax shelter is found in The Role of Professional Firms in the U.S. Tax Shelter Industry, report prepared by the Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs, U.S. Senate, (Washington: U.S. Government Printing Office, 2005). Its introduction explains:

  In its broadest sense, the term ‘‘tax shelter’’ is a device used to reduce or eliminate the tax liability of the tax shelter user. This may encompass legitimate or illegitimate endeavors. While there is no one standard to determine the line between legitimate ‘‘tax planning’’ and ‘‘abusive tax shelters,’’ the latter can be characterized as transactions in which a significant purpose is the avoidance or evasion of Federal, state or local tax in a manner not intended by the law.

  The abusive tax shelters investigated by the Subcommittee were complex transactions used by corporations or individuals to obtain substantial tax benefits in a manner never intended by the Federal tax code. While some of these transactions may have complied with the literal language of specific tax provisions, they produced results that were unwarranted, unintended, or inconsistent with the overall structure or underlying policy of the Internal Revenue Code. These transactions had no economic substance or business purpose other than to reduce taxes. Abusive tax shelters can be custom-designed for a single user or prepared as a generic tax product sold to multiple clients. The Subcommittee investigation focused on generic abusive tax shelters sold to multiple clients as opposed to a custom-tailored tax strategy sold to a single client.

  11. The B.C. Court of Appeal’s first decision in the case is 3464920 Canada Inc. v. Strother, 2005 BCCA 35.

  12. In his Strother trial judgment, Justice Lowry explained the basis of the new ruling Sentinel Hill relied on:

  [26] The exceptions to the Rules were first published at the end of July 1997 in what appears to have been a final draft of the amendments to the Act. Although clearly none of the exceptions were intended to foster the resurrection of the tax shelters, the exception given by s. 18.1(15)(b)—the one upon which Sentinel Hill had sought the advance tax ruling (the “15(b) exception”)—proved to accomplish exactly that. As enacted, it effectively provided that the Matchable Expenditures Rules would not apply where more than 80% of a right to receive remuneration was realized before the end of the year in which an expenditure was made. Its purpose appears to have been to accommodate service providers where a relatively small part of their income is contingent on events and is earned over time, but it actually served to facilitate the tax-sheltered financing of American motion picture and television films being made in Canada until 2001.

  [27] Prior to the Matchable Expenditures Rules, a tax-assisted production services investment was predicated on the investors’ contingent fee being paid by a studio in two parts. The first part, equalling 50% of the expenditures, was paid early in the life of the investment while the remainder, amounting to the balance of the expenditures, and perhaps more, if any investment profit was to be realized, was deferred to the end. The investors’ loss deduction lay in the 50% of the expenditures not recovered when the first part of the fee was paid.

  [28] Once the Rules came into force, tax-sheltered financing had to be undertaken on a different basis. To fall within the 15(b) exception, the investment had to be predicated upon the investors receiving a non-contingent or fixed fee of 80.1% in the year in which the expenditure was made (commensurate with the production of the film), and a further fee at the end of the investment. This meant that, instead of 50%, only 19.9% of the expenditures could be deducted, and two-and-a-half times as much film production was required to achieve the same amount of deduction. In addition, the scope for investment was reduced because the government’s tax credit program effectively removed Canadian labour expenses from the amount of production available. Hence only non-Canadian labour expenses (NCLE) were available to be purchased from the studios because it was always more advantageous for a studio to take the tax credit benefit where Canadian labour was employed.

  13. There are some similarities between the Strother story and the fabled tale of U.S. tax shelter lawyer Paul Daugerdas. See Paul Braverman, “Helter Shelter,” The American Lawyer, 5 December 2003, 65. Daugerdas and Diversified Group Inc. (DGI), a company that made and sold tax shelters, entered into a business arrangement. Daugerdas, then with the Chicago law firm of Altheimer & Gray, worked with DGI to develop and sell a shelter called COBRA. Daugerdas wrote opinion letters for the buyers. Profits were split fifty-fifty. Braverman writes, “In 2000 DGI sued Daugerdas, claiming that he was using DGI’s idea but not giving DGI its cut. Daugerdas, who had since moved to Jenkens & Gilchrist, responded that no agreement prohibited him from using the shelter, adding that it was based on a nonproprietary strategy that anyone familiar with the tax code could figure out.” The case settled after a payment by Jenkens & Gilchrist’s insurance carrier. Braverman describes Daugerdas as a products lawyer: “The ‘products’ lawyer creates something, then goes looking for someone to buy it.”

  14. 3464920 Canada Inc. v. Strother, 2005 BCCA 385.

  15. Davis claims that the correct figure for fees paid by Monarch is $50,000.

  16. Here is how the Supreme Court framed the issues in giving leave to appeal:

  Commercial law—Barristers and solicitors—Duty of loyalty—Remedies—Accounting remedy—Court of Appeal concluding that lawyer breached duty of loyalty to client and ordering that he account for and disgorge all profits received—Court of Appeal also ordering law firm to disgorge profits it earned in form of legal fees as a result of acting for second client in conflict with its duty to its original client—Circumstances in which solicitors and other professional fiduciaries are entitled to act for commercial competitors—Limits of duty of loyalty owed by a professional fiduciary—When disgorgement of profits through an accounting is justified as a remedy for breach of fiduciary duty—Whether no profit rule requires an order for disgorgement to one client, of profits or fees earned for services rendered to the other client—Whether disgorgement remedy can be ordered against a partnership on the basis of vicarious liability in the absence of any loss suffered as a result of a partner’s wrongful act.

  17. In the Supreme Court of Canada, S.C.C. File No. 30838, Factum of Robert C. Strother et al., 31 March 2006, paragraph 7.

  18. For the full arguments, see Strother factum, paragraphs 66–142.

  19. In the Supreme Court of Canada, S.C.C. File No. 30838, Factum of Davis & Company, 3 April 2006, paragraph 5.

  20. In the Supreme Court of Canada, S.C.C. File No. 30838, Factum of 3464920 Canada Inc., formerly known as Monarch Entertainment Corporation, 30 March 2006.

  21. In the Supreme Court of Canada, S.C.C. File No. 30838, Motion for Leave to
Intervene of Canadian Bar Association, 2 May 2006. The CBA was initially represented by the law firm of Heenan Blaikie. Monarch objected, noting that Heenan Blaikie had acted for Strother and Darc in various capacities. Heenan Blaikie withdrew from its representation of the CBA.

  22. Darc rejects all the arguments of Knutson and Monarch. See In the Supreme Court of Canada, S.C.C. File No. 30838, Factum of J. Paul Darc et al., 25 May 2006.

  23. David Baines, “Courts have differing views on partnerships, loopholes,” The Vancouver Sun, 17 December 2005, D4.

  24. It was recorded by the cable channel CPAC and was broadcast a few days later.

  Seven: Sleeping with a Client

  1. The lawyer is always a man. To the author’s knowledge, no female lawyer in Canada has ever been formally accused of having an improper sexual relationship with a client. I first wrote about this subject in a Canadian Lawyer cover story—“What’s Love Got to Do with It?” November–December 2004.

  2. Law Society of Upper Canada v. Ramsey, [1992] L.S.D.D. No. 47.

  3. Nova Scotia Barristers’ Society v. Rose, [1996] L.S.D.D. No. 108.

  4. Law Society of Alberta v. Adams, [1997] L.S.D.D. No. 157.

  5. Law Society of Alberta v. Adams, [1998] L.S.D.D. No. 139.

  6. Adams v. Law Society of Alberta, [2000] A.J. No. 1031. Said the court:

  Professional bodies are those to whom the government has seen fit to grant monopoly status. With this monopolistic right comes certain responsibilities and obligations. Chief amongst them is self-regulation. Self-regulation is based on the legitimate expectation of both the government and public that those members of a profession who are found guilty of conduct deserving of sanction will be regulated—and disciplined—on an administrative law basis by the profession’s statutorily prescribed regulatory bodies.… A professional misconduct hearing involves not only the individual and all the factors that relate to that individual, both favourably and unfavourably, but also the effect of the individual’s misconduct on both the individual client and generally on the profession in question. This public dimension is of critical significance to the mandate of professional disciplinary bodies. (paragraph 6)