Just Out: New York Attorney General Subpoenas Bain Documents

By Donna Ladd September 1, 2012

In its Sunday edition, http://www.nytimes.com/2012/09/02/business/inquiry-on-tax-strategy-adds-to-scrutiny-of-finance-firms.html?pagewanted=1&_r=1&hp">The New York Times is reporting that New York Attorney General Eric Schneiderman is investigating several private equity firms, including Bain Capital for possibly abusing a tax strategy "in order to slice hundreds of millions of dollars from their tax bills."

The attorney general, Eric T. Schneiderman, has in recent weeks subpoenaed more than a dozen firms seeking documents that would reveal whether they converted certain management fees collected from their investors into fund investments, which are taxed at a far lower rate than ordinary income.

Among the firms to receive subpoenas are Kohlberg Kravis Roberts & Company, TPG Capital, Sun Capital Partners, Apollo Global Management, Silver Lake Partners and Bain Capital, which was founded by Mitt Romney, the Republican nominee for president. Representatives for the firms declined to comment on the inquiry.

Mr. Schneiderman’s investigation will intensify scrutiny of an industry already bruised by the campaign season, as President Obama and the Democrats have sought to depict Mr. Romney through his long career in private equity as a businessman who dismantled companies and laid off workers while amassing a personal fortune estimated at $250 million.

The subpoenas, by a Democrat, went out before a huge document leak recently that raised questions about Bain Capital's practices:

The tax strategy — which is viewed as perfectly legal by some tax experts, aggressive by others and potentially illegal by some — came to light last month when hundreds of pages of Bain’s internal financial documents were made available online. The financial statements show that at least $1 billion in accumulated fees that otherwise would have been taxed as ordinary income for Bain executives had been converted into investments producing capital gains, which are subject to a federal tax of 15 percent, versus a top rate of 35 percent for ordinary income. That means the Bain partners saved more than $200 million in federal income taxes and more than $20 million in Medicare taxes.

The subpoenas, which executives said were issued in July, predated the leak of the Bain documents by several weeks and do not appear to be connected with them. Mr. Schneiderman, who is also co-chairman of a mortgage fraud task force appointed by Mr. Obama, has made cracking down on large-scale tax evasion a priority of his first term.

As a retired partner, Mr. Romney continues to receive profits from Bain Capital and has had investments in some of the funds that documents show used the tax strategy.

Be sure to read the entire article for a succinct explanation about the fees/interest practices of many financial firms. This ends the piece:

The leaked documents show that Bain has in recent years waived management fees in at least eight private equity and other funds, including one formed as early as January 2002. The documents stated that Bain executives had the right to decide either annually or each quarter whether to waive some or all of their management fees; they also had the ability to convert the waived fees into investments in particular companies held by the funds.

Victor Fleischer, a law professor and finance expert at the University of Colorado who has been critical of the tax rules for private equity firms, said he believed Bain had waived management fees into investments with so little risk that the arrangement would not qualify for the capital gains rate if challenged by the I.R.S. “There is a tension between economic risk and tax risk that is supposed to be inversely proportional,” Mr. Fleischer said. “The way Bain set it up there’s not much risk at all, so it’s hard to see how this income should receive capital gains treatment.”

donnaladd 11 years, 7 months ago

Also, don't mis this http://www.rollingstone.com/politics/...">important story by Matt Taibbi, one of the best indepth journalists/writers working today: "Greed and Debt: The True Story of Mitt Romney and Bain Capital." It begins:

The great criticism of Mitt Romney, from both sides of the aisle, has always been that he doesn't stand for anything. He's a flip-flopper, they say, a lightweight, a cardboard opportunist who'll say anything to get elected.

The critics couldn't be more wrong. Mitt Romney is no tissue-paper man. He's closer to being a revolutionary, a backward-world version of Che or Trotsky, with tweezed nostrils instead of a beard, a half-Windsor instead of a leather jerkin. His legendary flip-flops aren't the lies of a bumbling opportunist – they're the confident prevarications of a man untroubled by misleading the nonbeliever in pursuit of a single, all-consuming goal. Romney has a vision, and he's trying for something big: We've just been too slow to sort out what it is, just as we've been slow to grasp the roots of the radical economic changes that have swept the country in the last generation.

The incredible untold story of the 2012 election so far is that Romney's run has been a shimmering pearl of perfect political hypocrisy, which he's somehow managed to keep hidden, even with thousands of cameras following his every move.

donnaladd 11 years, 7 months ago

In case you missed the hundreds of pages of leaked Bain documents, http://gawker.com/5936394">click here to view.

donnaladd 11 years, 7 months ago

BTW, Taibbi answered http://www.rollingstone.com/politics/...">questions about his Bain/Romney story on his blog. It included this statement:

[W]hat people need to understand about private equity firms like Bain is that they are not in the business of turning around companies and creating jobs. The unions and pension funds that invested in those deals did not do so to rescue companies. If you invest in a Bain or a Carlyle or a KKR takeover deal, you’re not betting on the future success of whatever company they took over. You're betting on the ability of those firms to make money on the deal, which may – or, just as importantly, may not – involve turning the target company around.

And while we're on the topic of shutting down businesses and plants while "running it like a business," here's is an http://www.nytimes.com/2008/11/19/opi...">op-ed Romney wrote against the auto bailout--which worked. The title: "Let Detroit Go Bankrupt"

(And don't forget: Even Bush didn't want that to happen, and gets initial credit for the auto bailout.)

brjohn9 11 years, 7 months ago

This issue is far bigger than the current election. The fraud the AG is investigating is widespread and even celebrated among the financial class. It is not a secret. Somehow, they have turned this scam into an ideology.

Reagan insisted on taxing investment income at the same rate as wage income because finance folks will always find a way to the lower rate. Now, so-called investment income is taxed at only 15 percent, far below taxes on wages. Conservatives love to talk about perverse incentives, but they are mostly silent about this obviously perverse incentive to shift income into "investments" to evade taxes.

If you are a conservative, as Ryan and Romney claim to be, and you propose that investment income should be taxed at essentially half the rate as wage income, then you are a hypocrite. Hopefully, Reagan will return as a zombie and eat your brains.

Turtleread 11 years, 7 months ago

Ala the WorldCom case and other cases to hot to handle, I thank God that New York has an Attorney General or District Attorney-Generals who are courageous enough to confront the corruption that appears in the corporations and the plutocrats who cry about others not paying their fair share while they are shoving millions and billions of untaxed gains out the back door. Kudos to them and New York.

Turtleread 10 years, 3 months ago

Hey Ms. Ladd, how about some follow-up on this story? What happened? Did they get their clocks cleaned?

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