The Betrayal of the American Dream

by Donald L. Barlett

  In 2006 Birkenfeld resigned from UBS, but continued to provide offshore banking services to U.S. clients through a Swiss corporation with offices in Miami. He also continued to work with Mario Staggl, who owned and operated New Haven Trust in Liechtenstein. Over the years, according to U.S. court documents, Staggl “devised, marketed and implemented tax evasion schemes” through the use of “Liechtenstein nominee entities, Liechtenstein banks, and Danish shell companies.” On behalf of their tax-averse clients, Staggl and Birkenfeld routed money through phony companies and assorted tax haven countries to conceal income: standard fare in foreign tax havens.

  But in 2007 Birkenfeld became concerned about what he was doing and approached the IRS seeking whistleblower status. If the IRS agreed, Birkenfeld would receive, in exchange for inside information on international tax fraud and the roles played by UBS and Swiss bankers generally, a percentage of the tax revenue ultimately recovered. For the IRS, this was a golden opportunity to do what had never been done before: unveil the inner workings of the legendary secret Swiss banking system, which featured untraceable cell phones, fake trusts, encrypted computers for bankers to use when they traveled around the United States signing up new clients, and the tactic of personally carrying checks back to Switzerland so as not to trigger a suspicious activity report by the Treasury Department.

  It was all very cloak and dagger. On one occasion Birkenfeld had used a client’s money to buy diamonds, stuffed them in a toothpaste tube, and brought the contraband into the United States, with Homeland Security and the IRS none the wiser. Bankers would meet clients at prestigious public events like the NASDAQ tennis tournament and Art Basel Miami Beach, where more than 250 leading galleries from around the world showcase the works of 2,000 artists of the twentieth and twenty-first centuries. In 2004 alone, 32 Swiss bankers came to the United States and met with clients about 3,800 times. No matter the event, all of those meetings had the same unifying feature: rich Americans with money to conceal from the IRS.

  Birkenfeld also provided inside information to the Securities and Exchange Commission and the Permanent Subcommittee on Investigations of the Senate Committee on Homeland Security and Governmental Affairs.

  In large part because of Birkenfeld’s information about his former employer, UBS agreed to pay $780 million to the U.S. Treasury to settle claims that it had helped cheat the United States out of tax revenue. Igor Olenicoff, the California and Florida real estate developer, paid $52 million in back taxes, fines, and penalties. He added another layer of intrigue to the tax evasion scheme by saying that one of the sham companies was actually an entity that Russia’s president at the time, Boris Yeltsin, had set up to make foreign investments.

  As for Birkenfeld, the very same Justice Department that said in court documents that he had provided “substantial assistance” that was “timely, significant, useful, truthful, complete, and reliable” sent him to the slammer. Indicted for conspiring to help people hide money from the tax collector, Birkenfeld pleaded guilty and was sent to prison for forty months. Why the Justice Department chose to jail an informant who helped the United States recoup billions of dollars in concealed taxes and helped disclose the existence of more than 20,000 secret American offshore accounts holding nearly $20 billion is uncertain. What is clear is that the Justice Department sent an unmistakable message to future whistleblowers: turn in a list of tax cheats and it’s quite likely that you—not the tax law violators—will go to prison.

  To date, few have. In fact, most of the cheats were given amnesty if they agreed to pay up. But the vast majority of Americans who held the secret UBS accounts have never been identified. UBS itself and several of its executives all just paid fines. As for Mario Staggl, he simply disappeared into the mists of foreign tax havens, never to be seen by U.S. authorities, who declared him a fugitive. Birkenfeld’s boss, who presided over the global tax fraud scam, fared even better. Martin Liechti pleaded the Fifth Amendment when he was called to testify before Congress. After being detained for a few months, he was allowed to return to Switzerland. He was never charged with a crime.

  The Justice Department’s handling of Birkenfeld stirred indignation among tax professionals, the news media, and the whistleblower community. It’s generally understood that whistleblowers in any field often enter the courthouse with less than clean hands. But it’s also generally understood that the good they can accomplish far outweighs their personal transgressions. Tax Notes, a highly respected weekly publication on federal taxation, proclaimed Birkenfeld its “2009 Tax Person of the Year” for successfully disclosing “what goes on in the wealth protection units of the world’s major banks.” The Atlantic called the prosecution one of “the five worst law-related moves by the Obama White House and Justice Department.” And Time asserted that “almost no one in the U.S. government would deny that Birkenfeld was absolutely essential to its landmark tax-evasion case against Swiss banking giant UBS.”

  The sentence was handed down on August 21, 2009, in the U.S. District Court in Fort Lauderdale, Florida. Six days later, President Obama, on vacation with his family at Martha’s Vineyard, set off to play several hours of golf with friends. Among his golfing partners was Robert Wolf, the head of UBS’s American operations, an early financial supporter of Obama and one of his major bundlers of campaign contributions. Wolf continues to fill that role, in addition to stopping by the White House for occasional dinners and other gatherings.

  CHAPTER 6

  THE END OF RETIREMENT

  Of all the statistics that show how the rules are changing for middle-class Americans, here is one of the most alarming: since 1985, corporations have killed 84,350 pension plans—each of which promised secure retirement benefits to dozens or hundreds or even thousands of men and women.

  Corporations offer many explanations and excuses for why they are cutting down a vital safety net for Americans, but it all comes down to money. The money saved by not funding employee pensions now goes for executive salaries, dividends, or some pet project of a company’s CEO. Congress went along and even compounded the betrayal by pretending that the change was in employees’ best interest.

  What this means is that fewer and fewer Americans will have enough money to take care of themselves in their later years. As with taxes and trade, Congress has been pivotal in granting favors to the most powerful corporations. Lawmakers have written pension rules that encourage businesses to underfund their retirement plans or switch to plans less favorable to employees. These rules deny workers the right to sue to enforce retirement promises. Lawmakers have also written bankruptcy regulations to allow corporations to scrap the health insurance coverage they promised to employees who retired early—including workers who were forced into early retirement. Congress has enacted legislation that adds to the cost of retirement. One by one, policies that once afforded at least the possibility of a secure retirement to many seniors have been undermined or destroyed, while at the same time Congress has allowed corporations to repudiate lifetime-benefit agreements.

  Pensions were once an integral part of the American dream, a pledge by corporations to their employees: for your decades of work, you can count on retirement benefits. In return for lower earnings in the present, you were promised compensation in the future when you retired. Not everyone had a pension, but from the 1950s to the 1980s, the number of workers who did rose steadily—until 1985. Since then, more and more companies have walked away from pensions, reneging on their promise to their employees and leaving millions at risk.

  Before today’s workers reach retirement age, decisions by Congress favoring moneyed interests will drive millions of older Americans—most of them women—into poverty, push millions more to the brink, and turn the golden years into a time of need for everyone but the affluent.

  For all of this you can thank the rule makers of Wall Street and Washington who have colluded to rewrite the rules on retirement in ways that will harm millions of middle-class Americans for decades. Here is what they ha
ve done:

  • In addition to the 84,350 pension plans killed by corporations since 1985, companies have frozen thousands of other plans, meaning that new employees are barred from participating or benefit levels are frozen, or both. Freezing a pension plan is often the first step toward eliminating it.

  • The congressionally touted replacements for pensions—401 (k) plans—have insufficient holdings to provide a serious retirement benefit. This even though millions will be depending on them.

  • As companies have killed or curtailed pensions for employees, executive pensions have soared, largely because they are based on executives’ compensation—which has ballooned in recent decades.

  • At some companies the only employees who have pensions are the corporation’s executives.

  • The 401 (k) plans promoted by corporations and Congress that have replaced pensions as the main retirement plan for many employees are uninsured, and they are less secure and cost more to administer than traditional pensions, but they have provided a windfall of fees for Wall Street.

  • Workers’ pensions are insured by the federal Pension Benefit Guaranty Corporation (PBGC), but the agency faces mounting deficits, raising the question of whether it will be able to fully honor all pensions that may be defaulted by private companies in the future.

  The result of these changes is that America has devolved into a land of two separate and decidedly unequal retirement systems—one for the have-mores and another for the have-lesses, whose numbers are exploding. Those who have less aren’t just the poor, whose later years have always been a struggle; now they include large numbers of the middle class—men and women, individuals and families, who once eagerly awaited retirement, but now fear what those years will bring. People like Kathy Coleman of Ave Maria, Florida.

  Like millions of others who once looked forward to that time, retirement isn’t on Kathy’s radar. She didn’t expect this. Kathy grew up in St. Clair Shores, Michigan, the daughter of a tool and die engineer. She graduated from Wayne State University in Detroit with majors in art and interior design. She married, had two sons, and started a career in interior design. After her sons were grown and she was single again, she moved to Florida and went to work as the cultural and social events director at the exclusive Polo Club of Boca Raton. She arranged concerts, coordinated speakers and excursions for members, prepared the annual budget and monthly reports, and helped create the club’s annual calendar of events.

  In 2005, intrigued by a new town that Domino’s pizza founder Tom Monaghan was building near Naples on the west coast of Florida, she relocated, taking a job as conference director for Legatus, an organization of wealthy Catholic businessmen that Monaghan had founded. She wrote marketing copy and articles for the Legatus website and helped coordinate the group’s conferences, including an annual pilgrimage to Rome for an audience with the pope. She bought a new home in the community of Ave Maria, near the university of the same name, which Monaghan had also founded. On a quiet street, the house had three bedrooms and a pool and made an attractive place for her sons and their families to visit. It would also be a good place to retire.

  Two years and eight months later, Kathy and some of her coworkers lost their jobs at Legatus. It was a blow that caught them by surprise. One distraught employee later committed suicide. Kathy brushed up her résumé and began looking for work, assuming that with her years of experience in a wide range of jobs, it would be only a matter of time before she found one. But there was nothing. To make her mortgage payment and meet other expenses, she withdrew savings and started tapping into her 401(k). At a time when she would have liked to have been putting money away for retirement—she was in her sixties—she had to dip into her nest egg just to keep a roof over her head. At one point she worked at three part-time jobs and took an online course to become a real estate broker. She also organized a career counseling class at a local church to provide practical tips and moral support for others like herself.

  With her financial situation growing increasingly dire, she ultimately took a job behind the deli counter of a grocery store. The woman who had helped arrange visits to the pope was now slicing ham and cheese. She learned how to close the store for the night—how to take apart and clean the slicers, tidy up cabinets and coolers, and disassemble the metal over floor drains so they could be mopped. “I hadn’t worked in anything like this since I was in my teens,” she said. Eventually she qualified for the company’s health plan, and in her first year she got a raise—a fifteen-cent-an-hour increase that put her up to $10.40 an hour.

  If things had worked out differently, Kathy, sixty-three, might be thinking of retirement. Instead, simply holding on to her house is her most important priority. She renegotiated the mortgage and lowered the monthly payment with a forty-year mortgage. Unlike earlier generations of Americans who often left their debt-free homes to their children as an asset, Kathy will never be able to do that. Instead of saving in her later years and retiring the mortgage, she will be making payments to her bank as long as she lives if she stays in her house. Even after renegotiating her mortgage, money is still tight because her earnings are only one-third of what they once were. Having pulled money out of her 401 (k), and being in no position to replenish it from her modest earnings, Kathy is just trying to get by while she continues to look for a job in which she can use her talents and experience. In the meantime, she’s focused on the present: “I’m not living in the future anymore.”

  A few miles west of Kathy, in the wealthy seaside town of Naples, retirement looks very different to Bruce Sherman.

  Sherman was a money manager who headed Private Capital Management, a Naples-based investment firm that caters to wealthy individuals. He made a lot of money over the years for his clients and himself, but his last big deal had lasting repercussions.

  He was the money manager who in 2006 brought down Knight-Ridder, the nation’s second-largest newspaper chain, which included the Philadelphia Inquirer, the Miami Herald, and the San Jose Mercury News. After gaining control of 19 percent of Knight-Ridder’s stock, Sherman in 2005 demanded changes in the company’s management, and when the response of company leaders didn’t satisfy him, he decided to sell off all the shares he controlled.

  But Sherman controlled such a large bloc of stock that if he dumped it into the market, its value would plummet. To preserve Private Capital Management’s investment, Knight-Ridder had to be sold outright, through auction or otherwise. So Sherman decided “to bully the company into putting itself up for sale,” according to the American Journalism Review.

  To the surprise of its employees and the journalism world, Knight-Ridder caved and sold the company for $6.5 billion. The buyer was a smaller chain, McClatchy Newspapers, which in turn sold off a number of former Knight-Ridder papers to help offset the purchase price. The sale set off a chain reaction as investors fled the field, dumping their holdings in other newspaper stocks.

  Every newspaper in the former Knight-Ridder chain has suffered greatly since Sherman’s brief foray into the newspaper business. The troubles affecting former Knight-Ridder properties are part of an industry-wide trend that has hit all newspapers in the Internet era. But Sherman’s acquisition of a large bloc of the company’s stock on behalf of his clients served to drive up the company’s stock price in excess of its value and was a contributing factor to the papers’ later weaknesses in dealing with debt. Every former Knight-Ridder paper has gone through layoff after layoff, killed pensions, frozen benefits, mandated unpaid furloughs, or taken other harsh measures to try to remain viable. To be sure, newspapers had financial problems before Sherman, and they still do, but the run-up in the debt of Knight-Ridder papers that he provoked has saddled them with huge liabilities that have compounded their problems.

  None of that concerns Sherman. He retired from Private Capital in 2009. This gave him more time to play golf and spend time with his grandchildren, he told a local reporter. It has also given him time for charitable events. One of his inte
rests is the annual Naples Winter Wine Festival, which raises money for a local foundation to support programs for underprivileged and at-risk children. One of the highlights of the Naples social season, the festival often imports famous wine experts and notable chefs to entertain the wealthy attendees. Sherman and his third wife, Cynthia, were cochairs of the 2011 festival.

  When not on the golf course or at a charitable event, Sherman can be found in his 12,050-square-foot penthouse at the Regent, a luxury high-rise condominium overlooking the blue waters of the Gulf of Mexico. He and Cynthia purchased the place for $9.5 million in 2003. Though it had been built only the year before, they called in a decorator who had worked with Steven Spielberg to spruce it up, according to local press accounts. The Regent has about everything one could want in a gated community: guest suites, an auto-spray car wash, a beachfront pool, and massage and exercise rooms. In his spacious penthouse, Sherman told a local reporter that he’d set aside one room for a special purpose: an office to manage his investments.

  TURNING BACK THE CLOCK

  For many Americans, the changes that would affect their retirement years arrived by stealth. The number of Americans covered by guaranteed pensions had risen steadily from 1950 to 1980: 10.3 million in 1950; 23 million in 1960; 35 million in 1970. By 1980, a total of 28 percent of the private workforce was covered by a defined benefit pension plan. This was the gold standard for retirement because a pension plan guaranteed retirees a fixed income for life.

  But then Wall Street and corporate America decided that enough was enough: deeming pensions too costly for corporations and their stockholders, they began to kill pensions and shift employees into cheaper plans that paid employees less money.