Back in 1851, America was described as a sparrow-hawk amongst pigeons. Current goings-on in Auckland and at the Attorney General's office of New York state will have the same mortifying effect.

As revealed in today's The Daily Telegraph, campaigning Attorney General Eliot Spitzer is running an investigation into the Royal New Zealand Yacht Squadron as current trustee of the America's Cup. At issue is the question of whether George Schulyer's Deed of Gift (and there were three written between 1857 and 1887) which passed over the Cup named after the yacht America in trust, by definition requires the Cup holder to be bound by the rules regulating trusts.

This include the presentation of accounts and a distribution of monies raised to not just the defender but to all bone-fide challengers who might be ranked as beneficiaries of the trust.

Who stimulated the Attorney General's interest is unknown, but there are several attempts to have this revealed under the USA's Freedom of Information Act. Spitzer is a well known campaigning Attorney General and has caught to the post-Enron, post Arthur Anderson zeitgiest of corporate governance.

One of Spitzer's recent speeches was the 'Crisis in Accountability'- so you get the flavour.

The Swiss Alinghi team have been circulating a document amongst the challengers for some time setting out a legal analysis of trusts which argues that the spoils of holding the Cup reside not merely with the defender but the entire AC community.

For Team New Zealand, struggling still to reach its funding budget and going into battle with either of the massive billionaire teams of Ernest Bertarelli's Alinghi or Larry Ellison's Oracle BMW, the inquiry could not have come at a worse time.

It takes only nano-second for the defender's suspicion to be raised that the inquiry is a deliberate ploy to derail Team New Zealand in vital run-up to the XXX1st Match.

No one is directly charging the Royal New Zealand Yacht Squadron, and therefore Team New Zealand, with misappropriation of funds. Instead, as has happened with the Cup in the past, accepted practice may appear to be out of step with the fine print of the law.

Remember, everyone believed that 12-metres were the only legitimate Cup class until the Deed of Gift was dusted off and the provision to sail boats up to a 90ft waterline was found to be still valid. Hence the Big Boat v catamaran debacle of 1988.

This new interest in Cup revenue stems from the fact that the event now makes money. Up until 1983, running the Cup was a liability. One thing Royal Perth YC did when it was the trustee to 1987 was establish the Delaware based corporation America's Cup Properties Inc to register and protect the Cup trademarks.

As each challenger is licensed to use these marks, Team New Zealand argue that the challengers are already beneficiaries. But the proposition in the Alinghi analysis is that all monies raised for the Cup, which in the current cycle would include deals with event sponsors Air New Zealand, Fuji Xerox and Louis Vuitton, could be liable for sharing around. One estimate puts this at US$5 million.

TNZ don't hide their concern that an attack on these funds is a thinly veiled bid to scupper the defence by predatory challengers; a charge denied.

Behind the scenes on Halsey Street there are moves to warrant TNZ that there will no attempt suck funds away from the defender, or to enforce what may yet prove to have been a fiduciary duty to recover income from previous trustees. This would include trying to assess how much money the old TNZ of 2000 generated and likewise the three San Diego YC defences of 1988, 1992 and 1995.

In an issue where consensus seems absent and suspicion prevalent, Team New Zealand is working with the New York YC as the longest standing trustee and YC Punta Ala, as the current Challenger of Record, to seem legal opinion and come up with some options. They envisage then going to the Royal Perth YC and San Diego YC believing that the Attorney General would find a unified front of the Cup's trustees persuasive.

If it's found that the Cup is not operated as a trust - which seems unlikely- the problem goes away. If Schuyler's 1887 Deed is void then the Cup is returned to his heirs. If the Cup has to be operated like a trust, then it could be the end of it as we know it. What winner would want it if the money raised to defend had to distributed to the very challengers trying it take it away?

It is a far from an academic debate.

Tim Jeffery, 23 December 2002