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Archive for the ‘Wasting Money in the Recession’ Category

This is a case I reported on earlier in my blog.  I cannot fathom how this story has not been covered by 60 Minutes or made the front page of any major daily.  I’m just as surprised that it has not surfaced in any major daily in California during the budget crisis.  Why?  Because this could cost the State over half a billion dollars.  In fact, a verdict has been delivered against California by a Nevada jury and is awaiting appeal- in the State of Nevada.

The events are covered in detail in any of the following sources:

Forbes, Oyez: US Supreme Court Media

To summarize, the California FTB sued Gilbert Hyatt, an inventor of a microprocessor chip, for tax fraud.  The FTB claimed that Mr. Hyatt did not file a return for the income derived from his invention.  Mr. Hyatt claimed he was already a Nevada resident at the time he invented the chip; California claimed otherwise.  Whether that case has merit is still to be decided and could lead to a recovery of around $50M for the FTB, including penalties and interest, which account for over 80% of the total.

 The real issue, however, is the FTB’s misconduct in pursuing Mr. Hyatt in Nevada.  According to Bill Leonard, a member of the California State Board of Equalization, as published in his newsletter:

Tax agents rummaged through his trash without warrants, visited business partners and doctors, and shared his Social Security Number and other personal information with the media. This is outrageous behavior and I call on the FTB to rein in their agents. What really galled me is the FTB testified in open court that this level of harassment was only a typical audit. If true, then the stormtroopers are alive and well at the FTB.

 Mr. Hyatt sued the FTB for torts and other misconduct.  The FTB claimed it was immune from being sued under the doctrine of comity- defined by the Nevada Supreme Court as “an accommodation policy, under which the courts of one state voluntarily give effect to the laws and judicial decisions of another state out of deference and respect, to promote harmonious interstate relations.”

The Nevada Supreme Court sided with Hyatt.  The FTB appealed to the United States Supreme Court who ruled 9-0 against the agency, stating in its unanimous opinion:

“The State of Nevada is undoubtedly “competent to legislate” with respect to the subject matter of the alleged intentional torts here, which, it is claimed, have injured one of its citizens within its borders.”

“The Nevada Supreme Court sensitively applied principles of comity with a healthy regard for California’s sovereign status, relying on the contours of Nevada’s own sovereign immunity from suit as a benchmark for its analysis.”

Now the stage was set for Mr. Hyatt’s suit for damages.  He won his case in Nevada District Court in August 2008 and was awarded almost $400 million. 

The FTB requested a whole new trial.  The request was rejected. Judge Walsh of the District Court in Las Vegas said, “FTB essentially relies on previously unsuccessful arguments.”

What’s more, Judge Walsh ruled that the FTB must post a bond equal to 10% of the settlement, or around $39 million, if it wants to appeal.

I asked Assemblyman’s Feuer’s office to follow up on this case in February; it was referred to Judy Chu of the Board of Equalization.  I have not heard back.

There are two key questions that the taxpayers of California need answered:  were any employees of the FTB disciplined?  Will California continue to pour money in this case by appealing in what could be called a hostile environment?  Don’t forget- Nevada convicted OJ Simpson on criminal charges; California failed.

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I’m surprised this story did not receive the same degree of publicity as AIG’s bonus payments: http://finance.yahoo.com/news/Fannie-Freddie-worker-bonuses-apf-14845980.html .
 

 

First a word about retention bonuses.  There are times when they are necessary, for example, if there are individuals with knowledge about unique transactions or processes that are critical to business combinations or other special situations.  However, to offer such incentives to 7,600 employees, as is being done at FNMA and FHLMC, defies any measure of common sense.  Does anyone really think that all of these thousands of employees possess information that is essential to propping up the two mortgage giants?  Does someone fear that these employees will jump to other companies?  If that is a real possibility, then please tell us where those other jobs are.  The unemployment rate must be grossly overstated.
 
If these employees do leave there will be many former Wall Street and financial industry workers ready to take their place, either as temporary contractors or regular employees.  What’s more, they will be as productive, if not more.  I have been there.  In 1991-1992, as a contractor, I was part of a small team that accounted for the final liquidation of what was the largest banking failure in the history of the United States through that time- Gibraltar Savings.  All of the key staff and most of the regular employees of Gibraltar Savings had been gone for a long time before we came on the scene.  The Resolution Trust Corporation was desperate to account for the remaining assets of the institution but had failed to do so for the prior two years despite their best efforts.  Within one year, we accomplished what the RTC could not. We did it without access to the knowledge that had slipped out the doors of the institution.
 
As outrageous as these mass bonuses are, even more egregious is this rationale offered by the federal regulator overseeing Fannie and Freddie: “The companies’ federal regulator, James Lockhart of the Federal Housing Finance Agency, defended the bonuses in a March 27 letter to (Senator) Grassley, noting that the collapse of the company’s stock prices “destroyed years of savings for many” workers. The companies’ stocks now trade below $1, down from more than $60 in fall 2007.”

Well, who hasn’t seen their retirement accounts clobbered?  Are we going to receive bonuses to offset some of our losses?  Where do we sign up?

I urge you to write to Senators Feinstein and Boxer, as well as your Representative in the House, to express your outrage at this injustice. Attach the article and feel free to include any of my points.

Paul Hatfield, CPA

Treasurer, NC Valley Village 

 

 

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