North Carolina Wealth Law Counselor : North Carolina Estate Planning Lawyers & Attorneys for Asset Protection & Trust Administration in Greensboro, Raleigh & Winston-Salem NC

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In SEC v. Solow, the Securities and Exchange Commission ("SEC") charged Jamie Solow, a stock broker, with a fraudulent trading scheme involving inverse floating rate collateralized mortgage obligations. The case was tried to a jury , which returned a verdict in the SEC's favor on all seven counts. The final judgment found Mr. Solow liable for $2,646,485.99, plus prejudgment interest of $778,302.91, plus a civil penalty of $2,646,485.99.

During the four months between the date the trial ended and the date the final judgment was entered, Mrs. Solow retained a firm that specialized in Cook Islands trusts. Pursuant to the plan they created, the Solows, among other things, stripped approximately 6.5 million dollars in equity from two Florida properties, one of which they owned as tenants-by-the-entirety, and the other of which was owned by a corporation of which Mrs. Solow was the sole shareholder.

Following the entry of the final judgment Mr. Solow made three payments totaling $2,639.24 to the Court so the SEC sought to hold him in contempt. In response Mr. Solow argued:

1. The properties from which the equity was stripped were exempt from creditors' claims because the properties were held as tenants-by-the-entirety with his wife and, therefore, could never be reached by his creditors (a good argument)
2. He had no ability to make the trustee of the Cook Islands trust pay the judgment (a bad argument)
3. As a result of the Court's order he could no longer be a stock broker and, therefore, could not earn money to pay the judgment (an ugly argument)

After reviewing other securities fraud cases in which the defendant sought to shelter assets in an offshore trust, notably In re Lawrence and SEC v. Bilzerian, the Court noted, " where assets are held in an offshore trust, the 'burden of proving impossibility as a defense to a contempt charge will be especially high.'" 

The Court went on to point out that because disgorgement is an equitable remedy, a federal district court is not bound by state exemption laws. Instead it "has broad discretion in fashioning the equitable remedy of a disgorgement order...and will not be guided by state law where its effect is to make a liable party judgment proof." The Court noted that Mr.Solow created the impossibility by transferring the assets to the Cook Islands trust and, therefore, the defense of impossibility was unavailable. As a result the Court ordered Mr. Solow to be jailed until he satisfied the disgorgement order.

If offshore trusts are so great, what went wrong?

1. Hiding ill-gotten gains is never a goal of asset protection.  The  majority of "bad" asset protection cases are those in which the defendant is attempting to secret ill-gotten gains or avoid paying a federal tax liability.
2. The best asset protection plans, implemented for lawful reasons, are those implemented well before there are any claims on the horizon.
3. It is often said, "It is okay to be a pig, but all hogs get slaughtered." It is worth consideration whether if, had the Solows done nothing, the court would have forced the sale of their home.

Whether and when to use an offshore trust depends on the particular client's unique facts and circumstances.  As with all other planning techniques, the best plans are implemented well prior to the existence of any threatened or actual claims. Finally, legitimate asset protection planning never involves sheltering ill-gotten gains.