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In the summer of 2001, the National Association of Home Builders sought advice from the D.C. office of Powell Goldstein on how to cut the tax bill on its increasingly profitable research center. No one expected what followed. Powell Goldstein’s plan resulted in deep divisions within the builders association, accusations of possible tax fraud, the firing of the research center’s popular president and three vice presidents, and a $9 million employment suit in D.C.’s federal court. Now, a federal judge has delivered another blow to the firm: Powell Goldstein lawyers have been ordered to divulge any documents related to the tax plan and the firing � and could be called as witnesses in the employment case. “It is rare for lawyers to fail to protect the [attorney-client] privilege and waive it,” says Stephen Gillers, a New York University Law School legal ethics expert, referring to the judge’s conclusion that the firm’s failure to aggressively recover one set of documents from the plaintiff in this case effectively constituted a waiver of attorney-client privilege and opened the door for the plaintiff to obtain even more material. “It is even more rare to do it with a mass of documents.” The Sept. 30 ruling by Judge John Bates of the U.S. District Court for the District of Columbia stems from the case of Liza Bowles, the former president of the research center who filed the employment suit against the home builders association and its officers. Debra Katz of D.C.’s Bernabei & Katz, who represents Bowles, says there are thousands of pages of documents Powell Goldstein had claimed were protected from discovery, including internal e-mails and memos drafted by the firm’s legal team. “Now that the court has ruled that there is no privilege, it’s a new terrain,” says Katz, who is working on the case with Bernabei & Katz’s Alan Kabat and with Daniel Edelman of D.C.’s Yablonski, Both & Edelman. Powell Goldstein partner Allen Rugg, who is handling the employment dispute, declines to discuss the case in detail, but in an e-mail to Legal Times says, “NAHB strongly disagrees with the plaintiff’s claims.” Rugg also notes that the NAHB will “honor the court’s decision.” In its motion for summary judgment, the NAHB argues that the tax plan was completely legitimate and that it was Bowles who violated her employment contract by setting up a new business while on the research center’s payroll. Calls to NAHB President Bobby Rayburn were referred to the association’s public relations office. NAHB spokeswoman Donna Reichle says it is office policy not to comment on litigation. All of the other individuals named in this article were also contacted for comment. They either declined comment or did not return telephone calls. PROFITS GROW The NAHB is a politically powerful organization that has represented state and local construction associations since 1942. For the past 40 years, the NAHB has had a research company, the NAHB Research Center, based in Upper Marlboro, Md., that tests building supplies, studies the buying trends of purchasers of building materials, and sets rules on the type of products NAHB members should use on construction jobs. According to court papers, the association’s research arm was becoming more and more profitable toward the end of the 1990s by selling its services to the government. Bowles, who joined the center in 1983 and became its president in 1992, was credited by NAHB leaders with much of the research center’s success. In January 2002, Bowles and the board governing the center entered into a five-year contract � with Bowles receiving $225,000 a year plus bonuses to continue presiding over the center. But as the center’s profitability increased, so did its tax liabilities. Between 1998 and 2002, the center paid about $2 million in taxes, according to court papers. By 2001, NAHB leaders were looking for ways to minimize or eliminate the center’s tax liability. They turned to outside counsel Powell Goldstein. Powell Goldstein lawyers Peter Segal, Michael Sanders, Mark Traphagen, and Susan Cobb eventually recommended that the center pay a royalty fee to the NAHB for use of its name and logo. An October 2001 memo by Powell Goldstein, which offered a series of tax recommendations, stated: “[I]n the area of royalty income, the [Internal Revenue Service] has lost all of its cases, and thus they are no longer pursuing royalty income aggressively. We would recommend that we review NAHB’s current royalty agreements to make sure any [taxable income] exposure can be minimize[d].” Trademark consulting company InteCap Inc. was brought in to study the issue. It recommended the center should pay anywhere from 4 percent to 6 percent of its annual gross revenue in royalties to the home builders association. Upon the advice of Powell Goldstein, the NAHB and the center’s board ultimately agreed that the annual fee should be 5 percent. From the beginning, Bowles questioned the legitimacy of the tax shelter. The research center hired Thomas Howard, a partner at the D.C. office of Ballard Spahr Andrews & Ingersoll and the research center’s corporate secretary, for an opinion on the Powell Goldstein plan. Accounting firm Deloitte & Touche was brought in to give its own advice on the value of the trademark. Howard wrote a letter to Powell Goldstein’s Sanders in January 2002 recommending that the parties seek advice from the Internal Revenue Service before going ahead with the royalty proposal. On Jan. 28, 2002, Sanders responded that such a review would take a long time and “would open the parties to possible IRS scrutiny, including an audit, which both parties should seek to avoid.” In July 2002, Ballard Spahr drafted a memorandum stating that there were serious questions as to who actually owned the center’s trademark. The memo pointed out that the center had used its name for 30 years without interference from the NAHB. In addition, the trademark on file with the U.S. Patent and Trademark Office was registered in 1991 by the center � not the NAHB. “The real issue is how we think the IRS would treat the license and royalty payment for the use of the acronym,” Howard wrote in a July 5, 2002, e-mail to Bowles. “While this is purely speculation on my part, I believe that the IRS would take the most straightforward, simplistic and obvious analysis, which is that the [research center] has used its name for 30-plus years without objection or control by NAHB and that the registration is evidence of the [research center's] ownership.” Meanwhile, Deloitte & Touche concluded the value of the trademark was in the range of .8 to 1.8 percent of the research center’s profits � far less than what InteCap had proposed. In an interview, Bowles says that, based on Howard’s advice, she would not support the plan. “If you’re going to sign something that’s going to be used for tax purposes that says things you know not to be true, to me that’s illegal,” Bowles says. FEARING LIABILITY The tax shelter issue came to a head at a Sept. 9, 2002, meeting of the research center’s board of directors. At that meeting, several board members expressed their fear that the plan, if found to be fraudulent, could land them in jail, according to a transcript included in court records. Many demanded assurances that they would be indemnified from any liability. Powell Goldstein’s Segal and Traphagen participated via telephone. “[I]f I were representing the IRS, I would say there is something phony here: ‘What the hell is going on?’ ‘Why are these people doing this?’ ” said board member Lawrence Goldrich, a developer from Virginia Beach, Va. “ Then I would certainly want to audit their books and find out why.” The NAHB’s Rayburn, then-treasurer of the association, urged the board to vote in favor of the proposal, stating there was nothing improper about the plan. “Regardless of what has been said as to what this issue is all about, it is purely about tax,” Rayburn said. “Why in the world would you pay $2 million in taxes when you can create a way to make that not happen?” The license agreement was approved with 11 board members voting in favor of it. Eight voted against it. J. Roger Glunt, chair of the research center’s board of directors, noted at the board meeting that Bowles and the three vice presidents objected to the proposal and had asked to be terminated. “All three of the vice presidents indicated to me that they were uncomfortable with signing the agreement, uncomfortable being part of this license agreement, that they felt it was unethical, and they had a philosophical difference,” Glunt told the board, according to the transcript. The board voted to fire the four and give them severance payments. Bowles was to be paid a full year’s salary of $225,000 under the terms of her employment contract. Two days later, the research center’s board held an emergency meeting at which point it voted to reinstate Bowles and the others and to stop payment on their severance checks, according to court papers. The NAHB had learned that the four had set up a company named Newport Partners just days before being fired. In court papers, the NAHB claims that Newport Partners was set up to compete with the research center for business and that Bowles and the other executives violated noncompete clauses in their employment agreements. The defendants note that shortly after the firings, Newport Partners bid on the same government contract the research center had applied for. According to documents filed in the court case, Bowles and the three vice presidents � David Dacquisto, Larry Zarker, and Mark Nowack � signed Articles of Organization on Sept. 5, 2002. On its Web site, Newport Partners describes itself as a small women-owned business based in Davidsonville, Md., that provides technical and market research support to clients looking to introduce innovative technology into the marketplace. Bowles says the eight-employee company run out of her home grossed about $800,000 last year with about 75 percent of its work coming from government contracts. Bowles says the company was set up as a safety net, once it became clear to her that the plan would be approved. Bowles adds that the company papers were not filed with the state of Maryland until Sept. 11 � two days after she was fired. The employees never returned to work at the research center and instead took legal action. Bowles initially hired Stanley Brown of Hogan & Hartson, who wrote a letter to the center’s outside counsel demanding Bowles receive her severance package. In that Sept. 23, 2002, letter, Brown noted that Bowles “has certain documents in connection with her employment as President of the Research Center.” Katz says the case was referred to her by Brown once it was clear the matter would likely wind up in court. Bowles filed suit against the home builders association in November 2002, claiming tortious interference with contract and civil conspiracy. She is seeking $9 million in damages. The three ex-vice presidents are currently in arbitration in Maryland due to the terms of their employment contracts. Bowles sued the association to avoid mandatory arbitration. Over the next year, Powell Goldstein lawyers wrote several letters to Brown � and later Katz, as well as other attorneys working for Bowles � requesting that the materials Bowles had in her possession be returned. It wasn’t until February that Powell Goldstein’s Rugg filed a motion asking Judge Bates to order Bowles to return the documents. In his opinion, Bates found that the NAHB and Powell Goldstein waited too long to seek the return of internal documents from Bowles. “NAHB failed to take any discernible steps to protect the confidentiality of the documents at the outset, and then failed for more than a year to take any legal measures to preserve its privileges in the documents once it discovered that they were in the open,” wrote Bates. He then extended the waiver of attorney-client privilege to all other documents relating “to the same subject matter.” The two parties are now set to wrangle over what documents are to be turned over by the NAHB and Powell Goldstein. Katz says she will ask Bates to reopen discovery in light of his opinion. A hearing on the matter has yet to be scheduled.

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