US V Harry Stonehill – America’s Jarndyce V Jarndyce

1962. It was the only year in which JFK was president for the whole entire year. World events impinged on my family as my big brother onboard an aircraft carrier chasing Soviet submarines when not recovering Mercury astronauts had his four year enlistment extended to five. Somehow bright fourth grader that I was, I missed the story of the dramatic raid by the Philippines National Bureau of Investigation on March 3, 1962. According to reporter Amando Doronila who covered the raid, 200 agents seized 35 truckloads of documents from 27 offices and corporations controlled by American expatriate Harry Stonehill.

The Battle Continues

The raid would have a profound effect on Philippine politics, because included among the mountain of documents was a book in which Stonehill had recorded bribes that he paid to many prominent politicians including then Senator Ferdinand Marcos. There are a lot of amazing things about this story including a little sidebar about Stan Lee of Marvel fame, who was a friend of Harry Stonehill and passed up a chance to be a wheeler dealer in the Philippines to continue his comic book career. The really amazing thing is that the implications of the March 3, 1962 NBI raid are still being litigated in the United States.

I have a little spreadsheet, which is likely incomplete, of nineteen opinions that are at least tangentially related to the raid. The most recent is dated February 10, 2022 – Pauline Dale Stonehill v US Department of Justice Tax Division. The opinion is not the end of the case as various motions by both sides are either granted or denied. Early on the opinion explains what this action and four other currently live actions (against the IRS, FBI, CIA and DOJ Criminal Division) are about:

In 1962, Henry Stonehill’s business enterprises in the Philippines were raided by the Philippine National Bureau of Investigation (“NBI”), purportedly at the direction of the U.S. Government. The evidence seized in those raids, which was provided by the NBI to the United States, was used to pursue both civil and criminal tax cases against Mr. Stonehill and eventually resulted in a $17.6 million tax judgment against Mr. Stonehill and his business associate.

The three Freedom of Information Act (“FOIA”) requests at issue in this case are the most recent chapter in what is now over a half-century’s worth of litigation as Mr. Stonehill, and Ms. Stonehill on behalf of his estate, have sought to uncover the full extent of U.S. government involvement and conduct in those raids and the subsequent litigation.

Power To Tax – Power To Destroy

The most passionate defense of Harry Stonehill that I have been able to find is that of his son Sam Stonehill. Sam contacted me when I wrote about a 2011 opinion which seemed to and possibly did bring the matter to a close. I recently reached back out to Sam, but have not heard from him. Sam is the child of Harry’s third wife. Pauline who is carrying on the case is wife number four. Harry died in 2002. Sam was born in the late seventies when Harry was around sixty. He devotes a good piece of this ten minute autobiography to Harry’s story.

In Sam’s narrative Harry was a brilliant entrepreneur. By teaching farmers in the Philippines how to grow to tobacco he threatened US tobacco exports. US officials were pressuring Harry to use his tremendous influence for US interests. He refused and they used their influence to have the Philippines government force him out of the country and then prevented him from ever getting any business going anywhere in the world for the rest of his life.

It seems to be undisputed that Harry managed to get a lot of his wealth out of the Philippines. It ended up being under the cloud of an income tax jeopardy assessment for the years 1958 – 1961. The tax deficiency was $7,869,364.55 with a 50% penalty tacked on. Since in those days the top marginal rate which kicked in for incomes over $200,000 was 91%, the assessment is beyond confiscatory. That doesn’t make it wrong, but you can see how it would look that way.

Litigation lowered the tab considerably brining the tax deficiency under $3 million by the time the district court ruled on it in 1976, but the interest clock had been ticking all that time making the total tab then nearly $9 million.

Harry’s Other Advocate

One person critical to keeping the litigation going is Robert Heggestad, who besides being an attorney has some fame as an art and antique collector. Perhaps not to the degree of son Sam, but Mr. Heggestad seems like he is pretty wild about Harry. He wrote me:

I have represented Harry Stonehill and his Estate for almost 30 years. As you can imagine, I am intimately aware of every aspect of this case. Based on my involvement, I believe a gross miscarriage of justice occurred during the original Stonehill proceedings.

As you know, to prove fraud on the court requires clear and convincing evidence that the government’s misconduct substantially undermined the judicial process by preventing the court from analyzing the case.  In 2011, the Ninth Circuit found:

• the FBI Special Agent in charge of the Stonehill investigation, Robert Hawley “lied in his deposition about his knowledge of the raid;” Hawley committed perjury during the suppression hearings;
• the statements of John McCarthy, the attorney who represented the Government in the Stonehill investigation and litigation for more than two decades, “were not forthright. They concealed rather than revealed the true state of affairs known to the government;”
• the Philippine National Bureau of Investigation (“NBI”) agents who conducted the illegal raids on Stonehill’s businesses likely “worked for the CIA, especially in connection with wiretapping activities…,” and
• Stonehill’s lawyer William Saunders, who initially represented Stonehill after the raids, was an informant who cooperated with the government.

­­The Ninth Circuit concluded that “the government’s misrepresentations or false statements made by government witnesses or attorneys were on largely tangential issues and did not substantially undermine the judicial process by preventing the district court or this court from analyzing the case.”  It also concluded that just because Stonehill’s lawyer was a government informer, it didn’t necessarily mean that he informed on Stonehill at the time he was representing him.

Mr. Heggestad indicated that he cannot comment further at this point in the litigation.

The Philippine Supreme Court ruled that the raid was illegal under their version of the Fourth Amendment. As any regular watcher of Law And Order will tell you that makes the material that NBI turned over to the US IRS “fruit of the poisoned tree” . But the raid was not the work of the US government – or so they say. Over the years, there have been more bits and pieces of evidence that there was US involvement.

Burden Of Proof

I am really disappointed that I can’t get my legal brain trust engaged on this story. The problem is I don’t get Mr. Heggestad’s end game. The evidence they are seeking would overturn a 1967 ruling on a motion to suppress the evidence from the raid. When it comes to a tax deficiency though, the burden of proof is on the taxpayer. Mr. Heggestad wrote me that the “presumption of correctness” is not an obstacle to where he is headed, but I am unable to discern where that is.

The Al Capone Syndrome

One of the items that appears as an exhibit to complaints in the case is a memo from Robert Chandler the IRS representative in Manila to the director of international operations. The memo is dated January 10, 1962, almost two months before the raid. It goes into some detail on what a bad guy Embassy officials think Stonehill is:

….it appears that Stonehill’s individual influence may be sufficient to undermine the entire American effort and perhaps destroy democracy here at a cost to the United States which will be immeasurable and much beyond the hundreds of millions in aid programs and loans.

It goes on at some length but near the end we have

….several elements in the Embassy are already thoroughly familiar with the informant’s information and many them are aware that the best, if not the only, attack which can be made on Stonehill is through the IRS.

Chandler goes on to indicate that voluntary compliance in the Far East is very unsatisfactory and that a publicized case would be helpful in creating an effective enforcement image. There is something wrong with having tax enforcement being a tool that is used for other ends, which is pretty clearly what was going on in Stonehill’s case. It is neither the first nor last time that it has happened, of course, the Al Capone story remaining the most famous.

Acknowledgement

I would like to thank Manuel L. Quezon III for help with the background on this story.

Literary Reference

You and I both know that Jarndyce v Jarndyce is the fictional case that goes on for over a hundred years that is the background for Bleak House by Charles Dickens, but you have to consider the other readers.