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Like their archetypes in Greek mythology, attorneys Michael Mendelson and Wayne Lesser have pursued their golden fleece for nearly 10 years. Their journey began in 1992, when the two complained that San Francisco City Attorney Louise Renne’s office failed to investigate an alleged secret real estate transfer involving IBM Corp. that cost municipal coffers a windfall in property taxes. They beat into a headwind for the next decade trying to convince city officials to take action against IBM. Along the way, the two say they spent 4,000 hours and expended $10,000 on the case, and accused the city of trying to hand IBM a $24 million gift while Renne owned stock in the company. According to financial records, Renne held stock worth at least $10,000 at the time of the negotiations. Not only, they say, has the city failed to collect all taxes owed, but it has flip-flopped on pursuing $24 million in civil fraud penalties that Lesser and Mendelson say should be a slam dunk. “This is like Jason and the Argonauts’ quest for the Golden Fleece,” Mendelson says. “But it’s also a golden fleecing of the taxpayer by IBM, which was ably assisted by the city attorney.” But Mendelson and Lesser admit they aren’t just good-government guys. They’re after attorneys’ fees of about $14 million — 25 percent of the $56 million in back property taxes, interest and penalties they say the city is owed — for tipping off Renne to the alleged IBM property tax dodge on 1 Market Plaza, which the computer maker’s pension fund owned from 1986 to 1994. IBM’s lawyers deny that the transaction was illegal or improper and say there shouldn’t be any fraud penalty. Deputy City Attorney Owen Clements says the city doesn’t need, or want, Mendelson and Lesser’s help. He says city officials were on top of the matter before the two attorneys started making noise. He also denies his office supports a give-back to IBM. But he’s most adamant that, whatever the outcome of the case, the two lawyers have no fee due them. “There’s no such thing as tax bounty money,” Clements said in an interview. And he says that what Mendelson and Lesser call a “give-back” is nothing more than the standard give-and-take that occurs in all settlement talks. He argues that the city negotiated with IBM for a higher reassessment of 1 Market Plaza and convinced the computer firm to acknowledge ownership of the property during the disputed period. “In light of those two concessions from [IBM], this office recommended that [the Board of Supervisors] approve a stipulation that would have given back the fraud penalty as part of the overall settlement of the matter,” Clements said. But in March 2000, the supervisors balked at the deal, and threw the sticky issue to the Assessment Appeals Board, where the matter remains pending. Board chairman Ronald Chun said he hopes to have a decision by August. Renne, meanwhile, at first said there was no conflict of interest, then in a later interview said she had recused herself from her office’s handling of the case. WHO’S THE OWNER? At issue is whether IBM concealed from city tax officials its pension fund’s purchase of 1 Market Plaza from the Equitable Life Assurance Society in 1986. The dispute began as a minor matter. One of Lesser’s clients, Joseph Abouab, the owner of a deli with leased space in 1 Market Plaza, came to him with a letter in 1991 saying his lease had expired and he had to move. When Lesser looked into the matter, he says, “I couldn’t find out who owned the building.” After some digging, he concluded it was IBM. Although the ostensible owner was Equitable, Lesser and Mendelson say their research shows that in 1986 Equitable transferred 81 percent ownership to a “separate account” maintained by Equitable. In 1992, after the two brought a private attorney general suit in superior court, IBM sought legal advice from the San Francisco law firm then known as Bennett & Yee. The first option that attorney William Bennett outlined was for IBM to inform the assessor of the change of ownership, let a reassessment occur and then challenge the resulting property tax increase. A second option in his letter of Sept. 14, 1992, proposed that IBM do nothing. “Do not advise the assessor of this purchase and do not file with the assessor the change of ownership statement that is legally required when a transfer of property occurs,” he wrote. “Equitable continues as holder of record title. Do not in any way represent that IBM has any interest in the property or control over its management.” “I recommend following Option No. 2,” Bennett wrote IBM, a suggestion it apparently followed. Mendelson says Bennett’s letter was one of the smoking guns they needed. But he says they soon found more. The two attorneys discovered a Form 5500 that IBM filed with the IRS in 1991 showing its pension fund owned 100 percent of 1 Market Plaza. They also found Equitable had continued to file San Francisco’s Form 571L, which property owners must submit to the city each year. It tells the assessor who owns a piece of property. For the years 1987-91 Equitable said it owned 1 Market Plaza. A box on the form asks: “Did another person or entity acquire ‘control’ through acquisition of stock or otherwise of this corporation or entity?” The “no” box is checked for all five years. “It is undisputed that [IBM] did not report the 1986 transaction to the assessor and that Equitable … continued to submit Form 571Ls showing no change of ownership or control of the property,” Clements has written in legal papers. CHANGING DIRECTIONS Mendelson and Lesser’s case eventually became moot in 1995 when IBM agreed with the city attorney’s office to a reassessment of 1 Market Plaza. San Francisco Superior Court Judge Stuart Pollak said he would consider awarding Mendelson and Lesser fees if the city collected revenue it would not otherwise have realized. But several years later — after a side trip to federal court and proceedings before the assessment board — IBM and the city attorney cut a new deal. But this one did not include the civil fraud penalty. That was somewhat surprising. In November 1994, Patrick Mahoney, then Renne’s chief trial attorney and now a San Francisco superior court judge, had told television station KRON that “there was fraud in connection with this transaction.” “In this case, the transaction was structured in a complicated manner,” Mahoney had told KRON. “But the essence of it was a transfer of ownership interest to IBM without reporting that fact to the assessor.” Mahoney and Clements say they backed off the fraud penalty because they weren’t sure they could prevail in a court fight. “In my mind, it was always going to be difficult to prove,” the judge said recently during an interview in chambers. Under provisions of Proposition 13, any change of property ownership of more than 50 percent triggers a tax reassessment. The dispute is now being weighed by the assessment board. RENNE’S STAKE IN IBM During the time the city attorney’s office was negotiating with IBM over the change of ownership issue, City Attorney Renne reported in her Statement of Economic Interest that she owned between $10,000 and $100,000 of IBM stock. She sold her holdings in July 1998. She later purchased a smaller amount of IBM stock in 1999, which she sold on March 22, 2000, according to documents on file at the city’s Ethics Commission. That sale occurred a week after the proposed settlement crafted by her office was sent to the Board of Supervisors. Then a month later she again purchased IBM stock worth between $10,000 and $100,000. Mendelson and Lesser contend that Renne never publicly recused herself from the case, never filed a declaration with the court acknowledging her holdings or built a “firewall” between her and her staff that was working on the 1 Market Plaza matter. “This is an open and obvious conflict,” Mendelson says. When asked about her IBM holdings, Renne gave different explanations during two interviews. She initially said she didn’t see a conflict because her investment was in IBM, the company, and not the computer firm’s pension fund. Renne added that she didn’t think the corporation controlled the retirement fund. The next day, after acknowledging she and Mahoney had a telephone conversation the previous night about the IBM case, Renne said she had walled herself off from the matter when Mahoney first notified her of the potential conflict. “I have recused myself from being involved in this case,” she said, adding that she has been “scrupulous” about potential conflicts of interest. “I double-check everything,” she said. But Renne said there is nothing to document that recusal other than her and Mahoney’s recollections going back 10 years. She called Mendelson, whom she hired as a litigator in the late 1980s, a “former disgruntled employee.” She declined to elaborate. Mendelson said he quit after two years, because he had become “bored” with the work. IBM: NO OWNERSHIP CHANGE Meanwhile, IBM and Equitable argue that there never was a change of ownership in 1986. Robert Fischer Jr., whose firm of Fulbright & Jaworski represents both companies, said in court papers that Equitable set up a “separate account transaction” that maintained Equitable as the legal owner. “The evidence also conclusively shows that even if [IBM's] conclusion on the change of ownership issue is incorrect, that conclusion was reasonably made and not indicative of fraud,” Fischer said in his brief. He urged the assessment board to “find there was no change of ownership and award the taxpayer a refund of the overpayment of taxes and the fraud penalties assessed, with interest.” Deputy City Attorney Clements disputes Fischer’s claims. “It’s pretty clear to us, and I think it was pretty clear at the [assessment board] hearings … that IBM was calling the shots out there.” Even if the city doesn’t appreciate Lesser and Mendelson’s work on the matter, they say they’re due a pay day. “I want to get paid as much as the law allows,” Lesser said. “What has been our involvement in this matter,” Lesser said, “is not so much that we discovered, investigated, perfected, filed and prosecuted all aspects of these proceedings for the last decade, but that during that time, as lawyers and citizens [we] acted as and have been the guardians of the guardians — city attorney and assessor.” Mendelson is less charitable. He says Renne “basically rolled over to IBM and said, ‘Here’s $24 million.’ “ “We brought the case to her,” he said. “We figured it out, but her office, rather than picking it up and running with it, instead took the easy way out by settling the case and giving the money back without doing a fair and full investigation. They took a dive.”

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