A Fire Sale At QVC

These Bonds Are In Deep Distress

Protected By A 17-Century Legal Doctrine

John Lilburne had just been served with a gag order… literally.

John had been having a stressful day. So far, he’d been fined 500 pounds (no small sum in 1638!), flogged on his bare back with a three-pronged whip, and dragged by his hands from the rear of an ox cart.

Now, he found himself bent over and locked into the pillory in front of a gaping audience of tomato throwers – with a rag stuffed unceremoniously into his mouth to prevent him from addressing the crowd. (He’d done a lot of yelling that day, too.)

But there was one thing John Lilburne hadn’t done so far: incriminate himself.

Telling on yourself was the whole point of the Star Chamber – the secret tribunal where John had been accused of publishing seditious pamphlets…

Founded at the tail end of the medieval period in 1487, the autonomous Westminster, England “court” – with an awe-inspiring starry-blue ceiling, and without a jury – was a place for church and state to interrogate dissidents and squash independent thinking. (Even today, “star-chamber proceedings” is a byword for “kangaroo court.”)

Per parliamentary rules, the Star Chamber couldn’t dish out the death penalty, but almost anything else was fair game: beatings, imprisonment, and creative mutilation like ear-removal and nose-slitting.

Most infamously, the Chamber ran on the principle of ex officio: an oath that required you to answer every question asked – even if that meant giving evidence against yourself.

John Lilburne wasn’t having any of that. Known as Freeborn John, he was one of those pesky anti-establishment dissenters who believed that all men had certain natural “freeborn rights” (much like John Locke, whose writings on natural law would later pave the way for the Declaration of Independence). One of his rights, he maintained, was the right to remain silent in the face of incriminating questions.

“I am unwilling to answer any impertinent questions,” he told Star Chamber officials, “for fear that with my answer, I may do myself hurt. This is not the way to get to Liberty.” 

But it was certainly the way to get to the pillory. When the stocks produced no cooperation from John, the magistrate ordered him thrown into Fleet Prison – where, by candlelight, he penned a scathing exposé of the Star Chamber, The Work Of The Beast.

Published later that year and widely distributed, the pamphlet ultimately spurred Parliament to investigate the Star Chamber’s abuses of power and shut the court down in 1641. As for Freeborn John, he went on agitating for man’s God-given rights during the turbulent period of the English Civil War (1642-1651) and enjoyed a lengthy career of writing, arguing, and intermittent stays in prison before his death in 1657.

John’s insistence that you should not be required to incriminate yourself ultimately provided inspiration for the Fifth Amendment to the U.S. Constitution, and also for the Miranda rights read to arrested criminals, who are advised that they have the right to remain silent. (It is our hope that you never have the occasion to hear Miranda rights read to you.)

As for the Star Chamber itself, its legacy wasn’t wholly barbaric.

During the court’s 200-year reign of ear and nose removal, it also set some worthwhile legal precedents – a process that was, of course, far more efficient when everyone had to answer every question put to them.

Which brings us to the curious case of Farmer Pierce’s hidden-in-plain-sight sheep – and to a fraud ruling with direct bearing on our distressed-bond recommendation this month…

Dirty Deeds Done To Sheep

Forty years before the Star Chamber disbanded – with its arbitrary closed-door practices still in full swing – the Sheriff of Southampton showed up on one Farmer Pierce’s doorstep, acting as repo man.

Pierce, it seemed, owed a flock of sheep to a creditor, but he was in no hurry to have them collected. To that end, he’d enlisted the services of his friend Twyne as a sort of shell company.

He’d “gifted” the whole flock to Twyne via deed, and – even though the critters were still grazing right there in Pierce’s paddock, with his brand on their backs – he claimed they weren’t his. Nothin’ to see here – move along, if you please.

Unconvinced, the sheriff hauled both Twyne and Pierce before the Star Chamber. Sir Thomas Egerton, the prosecutor, made short work of the two fraudsters, who were forced to take the oath and quickly admitted to their deception. (Twyne was imprisoned, but there’s no record of what happened to Pierce – or to the sheep.)

In a landmark 1601 ruling, the Star Chamber found that the pair of miscreants were guilty of something called fraudulent conveyance, which is when a debtor transfers assets elsewhere to defraud creditors.

As part of the case, the court identified Six Badges of Fraud, including secrecy, suspicious friendship between the debtor and the transferee, and the fact that the debtor retained the full use of his property after the transfer. These Badges are the cornerstones of very similar fraudulent conveyance laws that still exist in modern courts today.

The legal doctrine of fraudulent conveyance is, in fact, what makes us confident that the bonds of the very distressed company we are recommending today will be repaid…

If this company were ever to file for bankruptcy, its bondholders would almost certainly bring suit against its parent under these fraud laws – which gives the company a strong incentive to repay its debt in full.