Rep. Dennis J. Kucinich has been holding congressional hearings as to whether New York City officials improperly inflated property values in order to secure more tax-exempt bonds for the construction of the new Yankee Stadium. If so, the city would have been centrally involved in making inaccurate, likely illegal, representations to the Internal Revenue Service and prospective bond purchasers in order to make “synthetic real property taxes” in the Yankee Stadium transaction appear artificially higher by a very substantial amount. The assessment for the land under Yankee Stadium leaped sixfold in a day, according to New York State Assemblyman Richard L. Brodsky, from $26.8 million to $204 million (on consecutive days in 2006). See our previous piece on this: Wednesday, October 1, 2008, Safety in the Numbers You Pull out of a Hat.
Overstatement of Real Estate Values Makes Yankee Stadium Bonds Taxable
If, as it very strongly appears, the city overstated the value of the property, it can reasonably be concluded that the bonds issued for Yankee Stadium should be declared taxable; in other words they would lose their federal, state and local tipple tax-exempt status. A lot has happened with respect to the Kucinich hearings since we last wrote. What interests us a lot right now is that the city is asserting attorney-client privilege to refuse to provide the Kucinich investigation with information about the suspiciously changing land values.
Questionable Assertion of Attorney-client Privilege Points to Problem
The assertion of attorney-client privilege seems highly questionable and has us wondering. That it is being grasped at seems to point to the fact that the city had inadequate grounds for the inflated statement of property values; (that they, yes, were pulled like a rabbit out of a hat, per picture above). New York City attorney Terri Sasanow said that rather than furnishing the actual documents about the land values supposedly supporting the bonds and their tax-exempt status, the city will asset privilege because it wants merely to provide a log of the documents. So are the bonds going to be declared taxable? (For reports of the assertion of privilege see: Atlantic Yards Report, Saturday, October 25, 2008, Testy Kucinich presses city officials on “gaming” Yankee Stadium assessment; big disagreement over “smoking gun,” the New York Times, Yankees Say They Would Have Left Bronx if Pushed, by Richard Sandomir, October 24, 2008 and most recently, New York Metro, City balks over Yankee Stadium documents, by Patrick Arden, Nov 6, 2008)
Attorney-client Privilege Unlikely
Congressman Kucinich is saying that the claim of attorney-client privilege doesn’t apply to Congress. Application of the special consideration of attorney-client privilege to Congress aside, we wonder whether it would apply at all in any situation?
Is the privilege is being applied in connection with a bond counsel opinion that the bonds were being properly issued with due authority under state law; or that they were actually tax- exempt? Or is the privilege being asserted because the city approached a lawyer other than bond counsel for a land valuation opinion? One would think a legal opinion on land valuation would be unusual and that it would only be sought because the city knew its approach to the overstated valuation of the property was highly questionable to begin with.
But who is to say that the city’s assertion of attorney-client privilege is in good faith at all?
Reasons Attorney-client Privilege Wouldn’t Apply
Attorney-client privilege doesn’t extend to facts. You can’t take facts that are not privileged and magically cloak them with privilege by communicating them to an attorney. It is also questionable whether this privilege of secrecy can apply at all to the public process of issuing bonds and taxing property. When it comes to bonds, almost the reverse is true; rather than being able to conceal negative information there is a special obligation to disclose it.
Bond transactions involve a multiplicity of parties, all of whom are supposed to be privy to the central risks of the transaction. In this case, the risk of land valuation would be such a risk. Attorney-client privilege does not apply when third parties other than lawyers have been privy to the information sought to be cloaked in privilege. It is unlikely that any information relied upon by co-participants in the transaction can be privileged. The transactions involve all sorts of non-lawyer certifications and representations, such as highly detailed issuer certificates. What is not specifically in actual certificates is nevertheless backed up with, and subject to, due-diligence communications and interactions beforehand. In theory, it is doubtful that anything that was “on the table” as part of the deal, anything that was accessible to other participants in the transaction should be subject to privilege. That includes parties like the rating agencies who are supposed to ask a lot of questions and should have been asking about the land and building valuations central to support of the transaction.
Who Can Assert the Privilege?
If the privilege is being asserted in connection with one of the bond counsel opinions, it raises the question of whether the city is a proper party to assert the privilege. (Certainly the Yankees are not.) Privilege can only be asserted by the client of the attorney. It may be a badly kept secret but, strictly speaking, the bond issuer (the city or nominee issuing authority) is not the client. Bond counsel is supposed to represent the “propriety” of the bond transaction. Accordingly, people who know their stuff would tell you this means that in an instance like this, bond counsel’s duty is to the bond holders who have so far been ill-served. The bond holders will be best served going forward if their privilege is not usurped to conceal facts adverse to them and on which they now need to act.
Assertion of Privilege Raises Liability Questions for Transaction Participants
There are interesting liability questions associated with the city’s assertion of privilege. Implicating an “attorney” (has the attorney or attorneys yet been identified?) in the setting of the likely fictitious property values exposes that attorney to a claim of malpractice. Asserting the privilege is also tantamount to broadcasting an assertion that a large number of other parties to the bond transaction, such as underwriters, underwriters’ counsel, and rating agencies did not share in information they certainly should have had. If those parties did not have the information they should have had at the time of bond issuance, does that betoken liability for them?
Stalling & Obfuscation Not in Good Faith?
Of course, it is quite likely that the city neither believes that attorney-client privilege applies, nor that they will prevail in the end when asserting it. Attorney-client privilege is a quick, reliable grab when you are stalling for time to prevent disclosure. It sounds plausible and, as you can see from the above, can take a little time to sort out. (I’m sure the PR people like it a lot better than pleading the Fifth Amendment’s privilege against self-incrimination.)
Is the city simply stalling for time and trying to stymie the congressional investigation? Yes, absolutely. Consider the following, as reported in the above-linked Atlantic Yards Report story: Representative Kucinich pointed out that the city had argued that his Congressional investigation should be halted simply because the city (and the Yankees) were not providing the documents they say they are, in fact, unwilling to provide. Kucinch (on October 25, 2008):
the Yankees and the city declined to testify at the Subcommittee’s hearing last month, “because they argued it was unfair to proceed before the Subcommittee could complete its investigation with the benefit of documents on the issue. No matter that the Yankees and City had withheld precisely these documents from the Subcommittee for two months.”Fascinating! And, of course, they are still withholding those documents. So the city’s premise is that they can use attorney-client privilege to completely halt an investigation by Congress. One clear indication that attorney-client privilege simply does not apply in this situation is that we have two independent non-attorney parties, the city and the Yankees, coordinating to jointly withhold shared information and documents. (Remember, information shared with a non-attorney third party is not privileged information.)
How Weak is City’s Defense Against Bonds Being Declared Taxable?
Stalling and obfuscating with a privilege that it can’t legitimately assert indicates that the city doesn’t have a good defense against the Yankee Stadium bonds being declared taxable. For more on what it would mean to have the bonds declared taxable, see our last piece Safety in the Numbers You Pull out of a Hat. (It would put the bond holders in jeopardy for back income taxes to the federal, state and city government with the ultimate liability probably coming around through litigation to the city.)
Seeking Atlantic Yards Favors from an Already Duped IRS
There is another reason the Bloomberg administration was stalling the congressional investigation, though that reason now seems to be past-tense. The Bloomberg administration was lobbying the IRS for loophole regulations principally to permit the issuance of the same kind of bonds that already issued for the Yankee and Mets Stadiums for the proposed Atlantic Yards Nets arena. (See: Tuesday, October 21, 2008, New Treasury Department regulations would grandfather in tax-free bonds for Atlantic Yards arena.) Loophole regulations were, in fact, issued October 21, 2008.
It is brazen to be lobbying the IRS for a loophole concerning the exact sort of transaction where one has already committed the abuse of furnishing factitious facts to the IRS. The brazenness was starkly obvious as the Bloomberg administration lobbied the IRS, because Congressman Kucinich publicly requested that the IRS refrain from issuing the regulations until the IRS could proceed fully informed with all the facts that will be forthcoming as a result of his investigation. The IRS issued the regulations ahead of time anyway. Really? The loophole regulations for Atlantic Yards have been referred to, perhaps inaccurately, as “grandfathering” in nature: It is not clear that they permit something that was previously properly permitted as would be necessary to appropriately consider the regulation as “grandfathering.” (Noticing New York strongly suggests that if it turns out that any elected officials were helping the Bloomberg administration lobby the IRS for the regulations, those officials should be rooted out for appropriately severe castigation.)
Are New IRS Regulations of Value for Atlantic Yards?
It is not clear that the new loophole regulations will serve, as intended, to facilitate issuance of tax-exempt R-TFIC-PILOT bonds (pronounced “Artifice- PILOT”) for the Atlantic Yard Arena. The amount of the bonds will be limited because the regulations won’t permit the setting of fictitiously high real estate taxes. Everyone, including all prospective bond purchasers, should now be extraordinarily wary about such scenarios. There are also technical problems which mean that the Atlantic Yards arena may not qualify for the regulation’s loophole. For a discussion of one technical problem see: Thursday, October 23, 2008, When AY GPP was "released" in July 2006, was that preliminary approval?
Question of Bloombergian Competence to Handle Financial Affairs
In covering the latest New York Metro story on this yesterday, No Land Grab commented:
Aside from the fact that the deal may have cheated the federal government of future tax revenue, note that the high land valuation benefits the Yankees and the low land valuation cheats the community.We have previously provided analysis concluding that Bloomberg is absolutely not the mayor we need to steer us through these financial times. (See: Thursday, October 23, 2008, Bloomberg Qualified Financial Crisis Leader? He Can Learn Says Schumer! and Saturday, October 25, 2008, More Discredit of Bloomberg as Qualified Financial Crisis Leader)
Is this why we need this Mayor more than ever to steer the City through these tough financial times?
The city went out on a limb to make these bonds tax-exempt with spuriously elevated real estate tax values. Given that the financial risk so casually undertaken may now put the city in the hole for millions, why was the risk undertaken? We offer two likely answers: first, the Bloomberg administration probably decided it just liked doing sports deals; the other answer is that the administration was attracted to the gimmicky Wall Street excitement of the deal. Each answer, particularly the second, is consistent with the point we made when we said that as a Wall Street crisis-insider, Bloomberg lacks perspective and is exactly the opposite of the kind of leader we need in a financial crisis.
More Wondering about Bloombergain Financial Competence
This just in: New York Times columnist Jim Dwyer is also questioning Michael R. Bloomberg’s competence to lead the city “during financial hard times.” (See: Today’s For Sports Teams, Mayors Play Ball at the City’s Expense.)
Mr. Dwyer catalogues various ways that the city under Bloomberg has been shortchanged in its dealings with the Yankees and the Mets while at the same time “Mr. Bloomberg says he has to close health clinics, shut libraries one day a week, not hire a new class of cops and raise property taxes.” Mr. Dwyer points out that this includes the piling on of an extraordinary additional $659 million or more in recently identified extra costs related to new Yankee and Mets stadiums. Dwyer observes that The Wall Street Journal reported recently that there “are signs that the air is going out of the sports industry bubble” while the originally purported (bubble) benefits of these stadium transactions were flimsy and likely hallucinated from the outset. Dwyer equates Bloomberg’s sports transaction mistakes with “the assumptions that drove Wall Street to sink trillions into financial instruments that no one actually understood but all the right people agreed were worth tons of money.” (We welcome Mr. Dwyer’s confirming insights. The inability of Michael-Financial-Whiz-Kid-Bloomberg to discern Wall Street blundering group think in advance was something we testified about at the City Council term limit hearings: Tuesday, October 21, 2008, Time to Report on the Best City Council Hearing Testimony)
Mr. Dwyer concludes:
The full reckoning on Mr. Bloomberg’s judgment about these major investments of public funds will most likely not come for a few years, long after he has run for a third term as mayor by arguing that he has been the wisest and steadiest of stewards — just the man for the city during hard financial times.Under The Rug of Privilege
These are not Mr. Bloomberg’s past mistakes. Mr. Bloomberg, unwilling to learn from his mistakes, is dogmatically committed to pursuing, exactly the same sort of misguided course with the proposed Atlantic Yards Nets arena that he pursued with Yankee Stadium. Mr. Bloomberg is already over-privileged but one way Mr. Bloomberg apparently hopes to hold to his errant course is by sweeping his administration’s calculated misdeeds under the rug of improperly asserted attorney-client privilege.