Report: new Fairness Doctrine would face high legal hurdle

February 12, 2009

By Matthew Lasar (Ars Technica)[1]

Talk of reviving the Fairness Doctrine raises hackles on both sides of the aisle for different reasons. Any attempt to revive it would face an uphill battle in the courts, a Congressional research report says.

Is Congress going to introduce a bill calling for the restoration of the Fairness Doctrine? Dark predictions continue to emanate from various experts auguring an attempt to revive it. But according to the Library of Congress' Thomas guide on Congressional action, the only active Fairness Doctrine-related bills in the House and Senate would bar the FCC from ever bringing the policy back again.

Some lawmaker out there is obviously interested in the Doctrine, though, because the Congressional Research Service has recently published an analysis (PDF) of the regulation's history and prospects, one that recently showed up on Wikileaks. What does it conclude? Its main findings can't be encouraging to pro-Fairness Doctrine schemers lurking around the corridors of Capitol Hill.

"Any attempt to reinstate the Fairness Doctrine likely would be met with a constitutional challenge," the study warns. "Whether a newly instituted Fairness Doctrine would survive constitutional scrutiny remains an open question." One thing is for sure—wherever you stand on this controversial question, this report is one of the best summaries of the issue available on the Web.

Let's be reasonable

To recap: the FCC enforced the Fairness Doctrine from 1949 until abandoning it in 1987. It required broadcasters to devote a "reasonable portion" of airtime to "controversial issues of public importance" and to offer access to "the expression of contrasting viewpoints held by responsible elements with respect to the controversial issues presented."

This mission, despite its theoretical virtues, put the government in charge of regulating the political content of license holders. Broadcasters hated it. The Reagan administration's FCC bumped the policy off. Congress tried to reinstate the Doctrine twice, but Reagan and the first Bush vetoed their bills.

As the CRS report notes, in February of 2005, a small gaggle of House Democrats took a stab at trying to bring something like the Fairness Doctrine back. Their proposed law got nowhere. Over the next two years they didn't try again, despite restoring slim majorities in Congress.

But Republicans had a ball with the controversy, repeatedly submitting bills banning the FCC from reviving the Doctrine. These didn't get anywhere either. In an effort to calm everybody down, then FCC Chair Kevin Martin publicly promised not to enforce the policy. Neither of the agency's Democrats objected to this. But the GOP was on a roll. It finally got a rider attached to an appropriations bill preventing Martin or his successors from bringing back Fairness, at least until the budget for fiscal year 2009 is passed or March 6 arrives, whichever comes sooner. That is where we stand now, with, as noted, several bills pending to extend the ban indefinitely.

The CRS reports' main question can be inflammatorily summarized as follows: if Congressional Democrats were moronic enough to sidetrack themselves in this crisis moment by actually attempting to reintroduce the Fairness Doctrine, and if by some miracle they managed to get such a bill past Republicans, who, despite all their protestations, would probably love to see the Democrats try, would the law survive a legal challenge that reached the United States Supreme Court?

Here's how the report sees the issue:

Does Red Lion still matter?

As Fairness Doctrine history fanatics know, in 1969 the Supreme Court declared the policy constitutional. In the Red Lion case—a dispute between a radio station and a journalist who demanded his right to respond to an attack—the Supremes ruled that the FCC had statutory authority to implement the doctrine. It also ruled that because of the "scarcity" of broadcast frequencies, the First Amendment right of listeners to hear many viewpoints over the public airwaves outweighed the rights of the license holders themselves.

But by the mid-1980s, the Commission was ready to dump the doctrine. In short, the FCC argued that, with the onset of cable and other technologies, the scarcity concept no longer held the same weight it had two decades earlier. The agency also noted broadcasters who told the Commission that they avoided tackling certain issues for fear of Fairness Doctrine lawsuits.

When an appeals court ruled that Congress had never specifically codified the Fairness Doctrine per se, the FCC made its move—in 1987 it declined to enforce the policy in response to a complaint. "The principal function of the First Amendment has been to protect the free marketplace of ideas by precluding government intrusion," the Commission declared.

If Congress restored the Fairness Doctrine, a court challenge would doubtless focus on First Amendment questions, the CRS study says. "The Fairness Doctrine is a content-based restriction on speech because it requires a government agent, the FCC, to examine the speech of private actors and to make subjective judgments regarding the fairness of the speech," it explains. And in Miami Herald Publishing v. Tornillo (1974), the Supreme Court nuked a Florida law that applied the Fairness Doctrine to newspapers.

"It seems, therefore, that if the Supreme Court were to apply strict scrutiny to the Fairness Doctrine the doctrine would be struck down," the CRS survey concludes. But nota bene that we're talking about "strict scrutiny" here. The question is whether the Big Nine (or at least five of them) would go for a less strict standing—still finding merit in the scarcity concept. In fact, the high court has repeatedly reaffirmed the ideas that broadcast licenses are scarce or unique—the second most famously in its 1978 Pacifica v. FCC indecency decision.

Tailor me narrow

So it's possible that the Supremes could opt for "intermediate scrutiny," the CRS analysis says, based on the following logic:

unlike other regulations on broadcaster speech that have been struck down, the Fairness Doctrine requires that speech be answered with more speech. This aspect of the doctrine has been cited approvingly by the Supreme Court. The Fairness Doctrine does not single out any one point of view as objectionable or off-limits. Instead, it requires that all significant points of view on issues of public importance receive broadcast time. This is a tenet at the core of the First Amendment, and it could be argued that the doctrine achieved its goal of raising the level of debate on the broadcast airwaves, despite the FCC’s findings in the 1980s.

Were the Supreme Court to follow this logic and uphold the Fairness Doctrine yet again, it would probably require the policy to be "narrowly tailored"—that is, enforced on a case-by-case basis, CRS predicts. But other, less flexible systems might also be approved. None of this, however, would apply to satellite and cable providers, who do not hold licenses to the public airwaves and therefore, like newspapers, enjoy strict First Amendment protection.

This is all conjecture, of course. The real legal debate would be launched by some member of the House or Senate submitting a bill calling upon the FCC to start enforcing the Fairness Doctrine again. Is that going to happen? Hopefully not. But one must always be mindful of Einstein's famous distinction between genius and stupidity. "Genius," he noted, "has its limits."

Thanks to Ars Technica and Matthew Lasar for covering this topic. Copyright remains with the aforementioned.

Thousands of Congressional Reports Now Available Online

February 10, 2009

By Brian Krebs (WashingtonPost.com) [1]

Open government groups scored a small but potentially decisive victory this week in a long-running battle to win publication of thousands of secret reports that Congress uses to fashion new laws.

Each year, with the help of more than $100 million in funding from Congress, the Congressional Research Service (CRS) produces thousands of reports on legislative policy issues ranging from farm subsidies to weapons sales. While the reports are neither copyrighted nor classified, their release has been solely at the discretion of lawmakers.

But on Monday, Wikileaks.org, an online clearinghouse for leaked documents, published thousands of previously unreleased CRS reports. At the same time, the group says it is on track to receive a steady stream of new reports, which it plans to feed to open government groups and directly to consumers via its Web site.

Wikileaks spokesman Daniel Schmitt said the documents were obtained through the congressional intranet several weeks ago, and that the group plans to continue publishing the reports as long as their confidential source keeps providing them.

"These documents belong in the public domain because they represent an essential part of policymaking and they are produced with taxpayer dollars," Schmitt said. The Wikileaks Web site was temporarily unavailable for several hours on Monday as nearly five million visitors tried to download the massive 2 GB archive. Schmitt called the public response unprecedented, noting that the documents attracted more visitors than during Wikileak's last headline grabbing stunt: The publication of e-mails and images seized by a hacker who broke into the Yahoo! e-mail account of then-Republican vice presidential candidate Sarah Palin.

CRS spokesperson Janine D'Addario said funding legislation from Congress specifically restricts CRS from making the reports directly available to the public.

"One of the concerns is that publication directly to the public has the potential to impair communications between members of Congress and their constituents," D'Addario said. "Because we work for Congress, we don't want to be placed in a situation where we're speaking directly to those constitutens."

Steven Aftergood, who maintains a blog about government secrecy related to intelligence and national security policy for the Federation of American Scientists, said the CRS has long maintained that its analysts work for members of Congress and should not be interacting with the general public.

"It's sort of a turf-based desire to keep CRS at the disposal of members of Congress, which is completely bogus," Aftergood said. "The CRS in what it does is very similar to the General Accountability Office. Both are congressional offices that work at the direction of Congress, and yet GAO manages to publish new reports on its site every day without any detrimental effect."

Aftergood said the reports range in quality from the banal to some of the best analysis available.

"While 90 percent of the reports are probably mediocre, at their best they are very good," Aftergood said. "One I published on our Web site today about technologies for detecting nuclear weapons is literally the best treatment of the subject I've seen."

Ari Schwartz, vice president of the Center for Democracy & Technology, said while the CRS reports are even-handed to a fault, CRS has nonetheless sought to distance itself from potentially divisive policy battles.

Often used by lobbyists and industry analysts as indicators of what's next on Capitol Hill, the CRS reports also can be politically explosive. Reports questioning the constitutionality of the Bush administration's warrantless wiretapping program have been seized upon by media outlets and lawmakers alike.

"In one sense, they're afraid of becoming a political agency, because the more public these reports get, the more politicized they may become," Schwartz said.

CDT maintains OpenCRS.com, to date the largest repository of CRS reports. Schwartz said the 6,780 reports released by Wikileaks should help to fill in most of the gaps in its archive of missing CRS reports going back several years.

Schwartz said Wikileaks has agreed to feed OpenCRS.com's document collection with all newly released CRS reports it receives.

In years past, several lawmakers have tried unsuccessfully to garner support for making the CRS reports directly available to citizens online. One such proponent, Sen. Joseph Lieberman (D-Conn.), praised the action by Wikileaks, saying he hopes to work with the Senate Rules Committee "to create a comprehensive and officially-sanctions system for releasing CRS reports to the public."

"I have long argued that CRS reports should be made more widely available to the public, in part because they are produced at public expense and because broad dissemination supports the goal of greater government transparency," Lieberman said. "Wikileaks's recent action demonstrates the futility of any effort to limit distribution of those reports."

The secrecy of the reports has created a bootleg market for the documents. Gallery Watch, owned by the Capitol Hill newspaper Roll Call, has sold the CRS reports for years. Gallery Watch declined to comment for this story.

Gallery Watch receives its feed of CRS reports from Walt Seager, 70, a former trade magazine journalist based in Damascus, Md., who for 25 years has mined the Hill for them.

For his part, Seager is unconcerned about the mass publication of CRS documents and said he welcomes the challenge.

"I don't think it will be a complete archive, and I don't think they'll have the timeliness and value-added material that we can bring," Seager said. "Life is pretty boring without some competition."

First appeared in WashingtonPost.com. Thanks to Brian Krebs and WashingtonPost.com for covering this issue. Copyright remains with Washington Post.

Parts for 'dirty bomb' found in slain US man's home

February 10, 2009
Agency says radioactive materials recovered in home of man allegedly slain by his wife.

By Walter Griffin (Bangor Daily News)[1]

BELFAST, Maine — James G. Cummings, who police say was shot to death by his wife two months ago, allegedly had a cache of radioactive materials in his home suitable for building a “dirty bomb.”

According to an FBI field intelligence report from the Washington Regional Threat and Analysis Center posted online by WikiLeaks, an organization that posts leaked documents, an investigation into the case revealed that radioactive materials were removed from Cummings’ home after his shooting death on Dec. 9.

The report posted on the WikiLeaks Web site states that “On 9 December 2008, radiological dispersal device components and literature, and radioactive materials, were discovered at the Maine residence of an identified deceased [person] James Cummings.”

Click here to view the full report. The section referring to Cummings can be read [on page 11].

It says that four 1-gallon containers of 35 percent hydrogen peroxide, uranium, thorium, lithium metal, thermite, aluminum powder, beryllium, boron, black iron oxide and magnesium ribbon were found in the home.

Also found was literature on how to build “dirty bombs” and information about cesium-137, strontium-90 and cobalt-60, radioactive materials. The FBI report also stated there was evidence linking James Cummings to white supremacist groups. This would seem to confirm observations by local tradesmen who worked at the Cummings home that he was an ardent admirer of Adolf Hitler and had a collection of Nazi memorabilia around the house, including a prominently displayed flag with swastika. Cummings claimed to have pieces of Hitler’s personal silverware and place settings, painter Mike Robbins said a few days after the shooting.

An application for membership in the National Socialist Movement filled out by Cummings also was found in the residence, according to the report. Cummings’ wife, Amber B. Cummings, 31, told investigators that her husband spoke of “dirty bombs,” according to the report, and mixed chemicals in her kitchen sink. She allegedly told police that Cummings subjected her to years of mental, physical and sexual abuse. She also said that Cummings was “very upset” when Barack Obama was elected president.

A “dirty bomb” is a type of “radiological dispersal device” that combines a conventional explosive such as dynamite with radioactive material, according to the U.S. Nuclear Regulatory Commission’s Web site. “Most RDDs would not release enough radiation to kill people or cause severe illness,” the NRC says, adding that “a dirty bomb is in no way similar to a nuclear weapon” because its effects occur in a very limited area compared to a nuclear explosion.

The report noted that “uranium, thorium, cesium-137, stontium-90 and cobalt-60 are radioactive isotopes and 35 percent hydrogen peroxide is a necessary precursor for the manufacture of peroxide-based explosives. Lithium metal, thermite and aluminum are materials used to sensitize and amplify the effects of explosives.”

The report stated that the uranium component was bought online from a U.S. company that was identified in the investigation, but not in the report.

John Donnelley, an agent at the FBI’s Boston office, declined Tuesday to comment on the report. Donnelley said some FBI reports are provided to law enforcement agencies and sometimes get released to media outlets.

“I wouldn’t be prepared to speak on that,” Donnelley said. “I have no comment.”

The Washington Regional Threat and Analysis Center is an intelligence gathering office affiliated with Washington, D.C., law enforcement. Telephone and e-mail messages left with the center Tuesday were not returned.

State police have identified Amber Cummings as the person who shot James Cummings. The couple’s 9-year-old daughter was present the morning of the shooting in what police have described as a domestic violence homicide.

Amber Cummings, who is staying in the Belfast area, has not been charged in the case, although the Waldo County grand jury currently meeting in Belfast could take up the matter during its session this week. While state police have acknowledged that the 29-year-old Cummings was killed by a gunshot, the results of the autopsy have been impounded, as have the search warrants executed at Cummings’ High Street home following the shooting. Authorities spent days searching the home, according to neighbors.

Lt. Gary Wright, who heads up the Maine State Police Criminal Investigation Division team working the case, declined to comment on any aspects of the case when contacted Tuesday.

“We’re not going to comment on anything,” Wright said Tuesday evening. “It’s an open homicide investigation and we’re not going to comment. That’s our standard policy.”

Stephen McCausland, spokesman for the Maine Department of Public Safety, also had no comment on the report. “This is an active, open homicide investigation,” he said Tuesday evening, “and as a result, it’s inappropriate to get into confirming or denying aspects of that.”

Maine Deputy Attorney General William Stokes also declined to comment on the report Tuesday.

David Farmer, spokesman for Gov. John Baldacci, said Tuesday that it was inappropriate for the governor to comment on an open investigation. When asked about the copy of the field report sent to him by the Bangor Daily News, he said, “At this point, I have been unable to confirm the authenticity of the documents you sent to us.”

A spokesman for U.S. Sen. Susan Collins’ staff said there was no one able to comment on the report Tuesday night.

Telephone messages left with the U.S. Department of Homeland Security were not returned Tuesday evening. Robbins, who worked on the house for a month last summer, described Cummings as an angry person who was verbally abusive to his wife. He said Cummings apparently was independently wealthy and did not work. Robbins said Cummings talked incessantly about his love of guns and his fascination for Hitler. He said Cummings repeatedly berated his wife about home-schooling their daughter. He said Cummings had a controlling personality and wanted to know his wife and child’s every move.

Cummings grew up in California and lived in Texas before moving to Maine in August 2007. Although Robbins said Cummings told him he made his money in Texas real estate, it appears that the actual source of his wealth was a trust fund established by his father, a prominent landowner in the Northern California city of Fort Bragg. An Internet search of the James B. Cummings Trust indicated that it has an annual income of $10 million.

The FBI field intelligence report was apparently first reported on by unattributable.com, an online magazine which covers and blogs on current events.

BDN writer Dawn Gagnon in Bangor contributed to this report.

Thanks to BDN and the authors for covering this document. Copyright remains with the aforementioned.

GOP's Stimulus Talking Points Contradict Congressional Research Service

February 10, 2009

By Jonathan Stein (MotherJones) [1]

Are House Republicans reading the reports from the non-partisan Congressional Research Service? Because if the language they used today at a series of Capitol Hill press conferences on the stimulus is any indication, they are not doing their homework.

Congressman Mike Pence of Indiana, the third-ranking Republican in the House of Representatives, kicked the day off with a morning press availability. Reacting to the town hall event President Barack Obama held in his state on Monday to sell the stimulus to ordinary Americans, Pence called the bill a "monstrous wish list of tired liberal spending priorities." Sitting in a well-apportioned conference room on Capitol Hill, he insisted that a "so-called stimulus bill" loaded with spending would never get the support of the conservative House GOP caucus. "We're going to dig in, almost irrespective of the polls." He then noted that support for the bill is dropping in the polls.

The one thing that Pence pointed to as a panacea, both for the nation's economic problems and for the bill's lack of bipartisan support, was tax cuts. "The fastest way to jumpstart an economy in a recession," he said, is to give tax relief to families and small businesses. He noted that he too had held a town hall in Indiana, and the biggest rounds of applause always came for tax cuts.

A few hours later, the number two Republican in the House, Congressman Eric Cantor of Virginia, held his own press availability. "Poll after poll" show that Americans want tax cuts, he said. He claimed that a plan put forward by House Republicans that is heavy on tax cuts will cost half as much as the current stimulus and create twice as many jobs.

The problem is that few people who study economics see things the same way as the Republican leadership. Liberal economists such as Paul Krugman, James Galbraith, and Dean Baker, have been clamoring since the beginning of the stimulus debate that massive infrastructure investment is a far better stimulant than tax cuts. But the conclusion is not an ideological one. Mark Zandi, the universally respected chief economist for Moody's Economy.com, released data (represented in several handy charts floating around the web) that showed food stamps, unemployment benefits, and infrastructure spending are all better at stimulating the economy than tax cuts.

And now, an unimpeachable non-partisan source has been revealed as coming to the same conclusion. Early this week, thousands of reports from the Congressional Research Service, which exists to provide unbiased answers and info to curious lawmakers, were leaked on the website wikileaks.org. One such report from January 23 of this year called "Economic Stimulus: Issues and Policies" [pdf] makes it clear that the GOP's talking points place ideology over good economics. "Economists generally agree that spending proposals are somewhat more stimulative than tax cuts since part of a tax cut may be saved by the recipients," says the report. "The primary way to achieve the most bang for the buck is by choosing policies that result in spending, not saving. Direct government spending on goods and services would therefore lead to the most bang for the buck since none of it would be saved."

The CRS report also says that if tax cuts must be used they should be slanted toward low-income Americans, never Republicans' favorite constituency. "The effectiveness of tax cuts also depends on their nature... tax cuts received by lower income individuals are more likely to be spent."

Particularly useless are corporate tax cuts, which are one of the cornerstones of the GOP's stimulus alternatives. One such alternative pushed by Senator Jim DeMint was a package of tax cuts that included cutting the corporate income tax by roughly one-third. CRS is not excited about the prospect:

Most evidence does not suggest that business tax cuts would provide significant short-term stimulus. Investment incentives are attractive, if they work, because increasing investment does not trade off short term stimulus benefits for a reduction in capital formation, as do provisions stimulating consumption. Nevertheless, most evidence does not suggest these provisions work very well to induce short-term spending. This lack of effectiveness may occur because of planning lags or because stimulus is generally provided during economic slowdowns when excess capacity may already exist. Of business tax provisions, investment subsidies are more effective than rate cuts, but there is little evidence to support much stimulus effect.

One wonders what the congressional Republicans' sin is. Have they simply not read the economic research, including some from within the Congress itself, that suggests their ideas are not good for the nation? Or are they aware of the truth but choose to ignore it, because their united opposition makes life difficult for the new president and their embrace of tax cuts at all costs will always be popular with voters? They must hope that as they push debunked economic proposals, voters don't come to the conclusion that their party is either incompetent or disingenuous.

Wikileaks posts 6,780 Congressional reports -- fun, but no smoking gun

February 9, 2009

By Paul Boutin (The Industry Standard) [1]

The anonymous collective behind Wikileaks, a collaborative site with no ties to Wikipedia other than using the same software, have obtained and published 6,780 reports prepared between 1990 and mid-January by the Congressional Research Service, a branch of Congress that does public policy research for U.S. senators and representatives. CRS report topics range fromChina's nuclear capability to issues on horse slaughtering. Congress funds the CRS with about $100 million annually. Legally, these reports are public domain material. But as a branch of Congress, the CRS is exempt from the Freedom of Information Act.

Ever since the World Wide Web caught on, Capitol Hill insiders from Al Gore to John McCain have argued for putting CRS reports online, so constituents can see what information their representatives are using to make policy decisions. But many Congresspeople don't want their reports publicized. "Every time a member [of Congress] requests a particular document, the public may infer that he's staking out a particular policy position," a spokesman for former Alaska Senator Ted Stevens once told the Washington Post.

Senator Stevens may think the Internet is a series of tubes, but he's factually correct that CRS reports shouldn't be presumed to represent any one member of Congress's position on a topic. These are reports prepared for Congresspeople, not by them. Wikileaks' copies of the documents don't say who requested each report. Nor can we know for sure which members of Congress read each report. If they did, we don't whether or not they believed it to be the authoritative truth. And it would be wrong to presume that a CRS report is the only input a lawmaker received on an important issue.

For example, a pre-9/11 report on biological weapons stated up front that the "growing concern" over bio-warfare scenarios had been fueled by "novels and movies which attract public interest and a strong press interest," and that many experts considered these worries "out proportion to the actual threat." Yet Congress allowed President Bush to order a military invasion of Iraq based in large part on the threat of biological weapons that have never been found.

Social media pundit David Weinberger has identifed the greatest value of publicizing CRS reports: "Had [the reports] been made public at the time [of presentation to Congress], not only would we citizens have been educated, we could have enhanced, disputed, and corrected oversights and biases."

More recently, the January 2009 report on the FCC's defunct Fairness Doctrine explains the difference between that doctrine and the FCC's equal-time rule for political candidates. It lists the arguments for and against federal regulations requiring broadcasters to cover "issues of public importance," and spells out the roadblocks to any attempt to reinstate a the doctrine. But it also notes that the FCC's internal findings on the topic have never been reviewed by a court, so it's uncertain whether or not new regulations would survive a court challenge.

Little of this is probably new to activists pushing for a revised Fairness Doctrine. What matters is that they can now see the report prepared for the Congresspeople they need to lobby.

These 6,780 documents are a great start. Now, can we get this month's reports?

First appeared in The Standard. Thanks to Paul Boutin and The Standard for covering this issue. Copyright remains with The Standard.

J.Baer confirms trading incident, shares off lows

February 6, 2009

By Jason Rhodes and Lisa Jucca (Forbes / Reuters)[1]

• Bank had 5 million SFR loss from "trading incident"
• Anonymous letter says employees hid "millions" in losses
• Shares tumble as much as 40 percent, later pare losses
• Regulator says still assessing situation
• Firm says GAM not for sale; FY net profit 852 million Sfr

ZURICH, Feb 6 (Reuters) - Swiss bank Julius Baer said on Friday it had suffered a "minor trading incident" last year, playing down investor concerns over an anonymous letter which said employees hid losses.

Shares in the bank fell as much as 40 percent as copies of the letter circulated among traders on Friday, but the stock later recovered much of that ground as the bank estimated the resulting loss at just 5 million Swiss francs ($4.2 million).

Hans de Gier, who was appointed chief executive of the private bank after the suicide of Alex Widmer in December, told a news conference on the day of the full-year results that Julius Baer took proper action after a letter was sent to the authorities relating to an incident.

"There was a minor trading incident in October but it was absolutely irrelevant," de Gier said.

Julius Baer later confirmed that a former employee of its markets division failed to follow instructions in respect to certain bond positions, causing an unrealised loss of 5 million francs which it disclosed in its annual report on Friday.

"This issue is really not of relevance for the group given our large business volumes," a spokesman said in an internal memo to staff sent to Reuters, adding that auditors and the Swiss regulator had signed off on its 2008 annual report.

Julius Baer said it was in contact with the Swiss bourse about a possible investigation into market manipulation about what it called the "anonymous defamatory letter".

"It looks as if the situation is not material, but they didn't handle the communication very professionally," said Rainer Skierka, an analyst at Bank Sarasin. "The results look relatively good in the circumstances."

The letter, purportedly from several unnamed directors in Julius Baer private banking, said junior employees in the market division had parked loss-making securities on the bank's own account to avoid booking "several millions in losses".

The letter also said a junior trader had been fired over the incident and questioned whether this action was sufficient.

After De Gier's comments, the shares recouped some of their losses, and after the later statement from the bank they recovered further to stand 9.7 percent lower at 30.00 Swiss francs at 1552 GMT, compared with a 4 percent rise in the DJ Stoxx European banking sector index.

REGULATOR INVESTIGATING

A spokesman for the Swiss financial regulator confirmed it had received the letter. He said Julius Baer had responded and taken measures since then, but added that the case was not yet closed and the regulator was still assessing the situation.

De Gier did not say who the letter was from. The bank said it had reported the matter to the police.

Last year, the bank denied claims by a former employee that its Cayman Islands branch was used to help clients avoid taxes.

Those allegations had been in the public domain since 2005 but caused a storm last year when they were republished on Wikileaks.org, prompting a U.S. judge to shut down the site before a free-speech backlash prompted him to lift the order.

The news of the October trading incident came as Julius Baer reported full-year net profit fell 25 percent to 852 million Swiss francs and weak equity markets led to a 32 percent fall in assets under management. Analysts polled by Reuters had expected net profit to fall to 863 million francs.

Switzerland's third-largest bank again ruled out the sale of its battered hedge fund arm GAM even after it said the unit had significant outflows in 2008 and forecast redemptions to continue into 2009.

Julius Baer has been denying speculation since last spring that it was looking to sell poor-performing GAM.

MADOFF SPARKS Q4 REDEMPTIONS

The bank said that the fourth quarter was particularly hard for GAM as investors lost confidence in hedge funds in December with news of the alleged fraud involving U.S. businessman Bernard Madoff, even though GAM was not involved.

Davis Solo, who heads the asset management business at Julius Baer, told an analyst conference that roughly half of the asset decline at GAM was due to redemption and added he expected redemptions to continue into the first quarter.

The group said on Friday that AuM fell to 275 billion francs because of falling prices in most asset classes, particularly in the second half of the year, and due to the effects of the strong Swiss franc.

Inflows were strong with net new money of 22 billion Swiss francs at Bank Julius Baer and private banking contributing a record 17 billion Swiss francs.

"The strength in private banking does not come as a surprise, but is burdened by large outflows in asset management," Kepler analysts said in a note to clients.

Baer left its dividend unchanged at 0.50 Swiss francs per share and said it would continue its share buyback programme of up to 2 billion francs between 2008 and 2010. It said it still intended to float U.S. asset management unit Artio.

First appeared with Reuters. Thanks to Reuters and Forbes for covering this issue. Copyright remains with Reuters / Forbes. Additional reporting by Rupert Pretterklieber and Emma Thomasson; Editing by Andrew Callus and David Cowell.

How One Fund's Profits Ended Up in the Caymans

February 5, 2009

By Lucy Komisar (Inter Press Service/The Komisar Scoop)[1]

President Barack Obama said he would crack down on firms that use offshore centres to evade taxes. He could begin with a New York subsidiary of one of the world’s largest private banks, which used a Cayman Islands company to shift its profits.

Why would a New York fund manager run operations through an office in the Caymans? “This type of structure is for optimising taxes,” explained Max Obrist, a Cayman Islands official of the global Julius Baer Group (Zurich).

He told IPS that “generating” the income where a company was actually based, “you would pay much more taxes”. Obrist was describing a company shifting claimed earnings to tax havens to evade home taxes. He allegedly helped Julius Baer Investment Management (JBIM) New York do just that.

Obrist is a director of Baer Select Management (BSM), a Cayman Islands company. According to a

whistleblower who used to work with him in the Caymans, BSM is a fake firm created by Julius Baer

to sign agreements with JBIM and other subsidiaries so they could evade taxes.

The whistleblower, Rudolf Elmer, 53, a German, was chief operating officer of Julius Baer Bank & Trust Company (JBBT), Caymans, at 212,000 dollars a year and served on the BSM board from 1999 to November 2002. JBIM paid fees to BSM to “manage” its investments. Elmer told IPS that JBIM moved to BSM profits it should have reported to the U.S. Internal Revenue Service.

JBIM is now called Artio Global Investors. It manages 72 billion dollars in assets. It has some 900 institutional clients,including corporations, pension funds, endowments and foundations and major financial institutions as well as more than 700,000 mutual fund shareholders.

Its chief executive and chief investment officer Richard Pell and head of international equity Rudolph-Riad Younes were paid 120 million dollars during the first nine months of 2007, leaving the company with income of 48.6 million dollars.

Artio is a subsidiary of Julius Baer Group, Switzerland’s largest private banking group with over 300 billion dollars in assets invested on behalf of institutions and very wealthy individuals. Julius Baer’s reported profits in 2007 were more than 1.1 billion dollars. It has 30 offices in world financial centres, from New York and London to Dubai and Tokyo. BSM is a Julius Baer subsidiary.

Elmer said, “There was a strategic plan adopted in 1996 to utilise Baer Select Management, JBIM New

York and JBIM London to benefit from the offshore system.” He said that JBIM assigned management

functions to BSM in order to award it a performance fee. He provided backup documentation to IPS,

including financial spreadsheets.

He said that Obrist in the name of BSM ratified a few decisions, but really worked for JBBT. He said that control was exercised and decisions taken by JBIM New York or Julius Baer Investment Funds Services Ltd, Zürich, which were part of Bank Julius Baer & Co, Zürich.

According to Elmer, JBIM made a proposal to Julius Baer Investment Management, Zürich, to launch a fund, and Zürich approved. JBIM did the paperwork and other organisational tasks with the help of JB Zürich and Caymans lawyers.

The offering memorandum said that Baer Select Management was appointed investment manager, Elmer said, and BSM appointed JBIM investment advisor.

JBIM was generally listed as a fund “advisor”, though some public documents said that JBIM managed funds. Elizabeth Nesvold, founder of the New York investment-banking boutique Silver Lane Advisors LLC, noted that though investment managers make most of their money from performance fees, most of the JBIM’s revenue was claimed from advisory fees.

A call to the Grand Caymans phone number for BSM was picked up by a receptionist for Julius Baer Bank

and Trust Co Ltd (JBBT). “Is this the number for Baer Select Management?” she was asked. “Yes,” she

replied, and passed the call to Max Obrist. He identified himself as BSM’s director. He had a few other

jobs. The Jan. 13, 2000 minutes of the JBBT management committee said, “Direct Money Market dealing

has started. Max Obrist has assumed responsibility for this activity.”

He was also listed as a director of Directorate Inc., British Virgin Islands, the corporate director of some Julius Baer funds.

Describing BSM’s tasks, Obrist explained, “We have to follow stocks, monitor their investment policies, we monitor the risk reports we receive from the investment advisor and check if there are performance fee calculations involved if they are executed properly, all monitoring duties. We are in contact with the external auditors and the regulatory authorities and Cayman Islands monitoring authority.”

He said BSM’s fee was “a percentage of profits, and it depends on what type of duties we have to do here from Cayman.”

Why was BSM needed? He replied, “That’s an interesting question. I don’t always know when they start

something. They decided on a much higher level. I wasn’t involved. We were told: ‘You act as investment

manager for these new funds’.” But he didn’t manage, he “monitored”.

Fees paid to BSM resulted in lower company profits and taxes for JBIM. Fund managers generally take profits of 1 or 2 percent of assets plus 10 to 20 percent of investment gains. As the funds had high values, that involved substantial amounts. According to Elmer, BSM, acting through a board whose members worked for JBBT, transferred profits via several offshore companies to Julius Baer Holding Ltd, Zürich.

Obrist denied that BSM is a shell company. He said, “We are physically here in the Cayman Islands, not just a post office box like some companies trying to save taxes without doing anything physically.”

He insisted, “BSM is to give service from an offshore place and at the same time we can within Julius

Baer optimise taxes, yes. But we are physically here. We do our job as investment manager. If Baer

Select would be here just as a post office box company and generate the millions in Cayman as income

instead of in the U.S. or the U.K. or Switzerland, then that would not be a very smart thing.”

Obrist said BSM stopped working for JBIM New York four or five years ago after it closed some hedge funds. However, JBIM/Artio would still be potentially liable for unpaid taxes, as the U.S. has no statute of limitations for tax fraud.

Artio CEO Richard Pell did not reply to numerous phone messages and emails describing this story and requesting an interview. Martin Somogyi, spokesperson for Julius Baer, Zurich, emailed that the company always adhered to applicable regulations and was regularly audited, but that it would not agree to an interview. (Its global auditor is KPMG.)

Julius Baer Americas Inc. (now Artio Global Investors) which owns JBIM/Artio, in February 2008 filed with the SEC that it would go public with an initial public offering (IPO) to sell up to 1 billion dollars of common stock on the New York Stock Exchange. The offering would be handled by Goldman, Sachs and Merrill Lynch. The IPO has been postponed.

First appeared in The Komisar Scoop. Thanks to Lucy Komisar for covering these documents. Copyright remains with The Komisar Scoop / Inter Press Service.