Hedge fund founder Thomas Sandell on Tuesday paid a whopping $ 105 million to settle claims that he fraudulently evaded New York state and city taxes by more than $ 450 million in fees he won, said authorities.
The deal – from which a whistleblower will receive more than $ 22 million in reward – is the biggest recovery in New York state history under the False Claims Act.
This state law was amended more than a decade ago to allow for claims related to purposely withheld taxes.
Swedish billionaire Sandell, who admitted no wrongdoing, tried to evade tens of millions of dollars in taxes owed to the city and the state for these fees earned in 2017 through his company, Sandell Asset Management Corp. said.
The $ 105 million deal covered taxes and damages, according to state attorney general Letitia James and the city’s legal counsel, James Johnson. The whistleblower’s reward represents 21 percent of that amount.
“The greed that allowed a man to try to avoid paying his fair share of taxes is surprising,” said James.
“Thomas Sandell and his company deceived New York taxpayers by tens of millions of dollars in a single year – placing a huge burden on our system and forcing ordinary New Yorkers to bear that cost,” said James.
Chris Doyle, a lawyer who represented Sandell in the False Claims case, told CNBC: “Mr. Sandell and his companies are declining to comment.”
Sandell closed its hedge fund in 2019 and turned it into a family office.
In 2007, Sandell’s firm agreed to pay more than $ 8 million to settle the Securities and Exchange Commission Asset Management’s claims of involvement in improper short sales related to trading in a New Orleans-based holding company following Hurricane Katrina in 2005 .
In the latter case in New York, officials said that due to a change in the 2008 rules related to the recognition of deferred fee revenue, Sandell was required to recognize about $ 450 million in such revenue in 2017 and pay taxes on it. money to the state and the city.
“But to avoid this responsibility, Sandell left New York to live in London from August 2016 until mid-2019,” officials said in a press release.
“And while SAMC continued to operate in New York City, Sandell and SAMC took steps to make it appear that SAMC operations were no longer in New York City, often with the help of an international accounting firm.”
As part of the scheme, officials said Sandell opened “a front office” with three employees in Boca Raton, Florida, who he and his company say are SAMC’s only American operation.
This was despite the fact that they agreed with the Securities and Exchange Commission finding that the company’s main place of business was still New York City.
Even after several consultants, including an accounting firm that prepared his taxes for years, warned Sandell that “his tax position was problematic”, he “nevertheless claimed that he owed New York taxes on the fee income he recognized in 2017 “, press release said.
Randy Fox, the whistleblower’s attorney who sued Sandell under the False Claims Act alleging tax evasion, declined to identify the individual or individuals who created the limited liability company, Tooley LLC, who is the named plaintiff in the lawsuit.
Asked what his client (s) would do with the $ 22,050,000 reward – a fraction of which Fox will receive in a contingency fee agreement – the lawyer said, “I don’t know.”
“At least buy a nice bottle of champagne,” added Fox.
Fox was the founding chief of the New York attorney general’s office of taxpayer protection.
He said Sandell’s alleged evasion was blatant because he “already had access to an incredible tax break” that allowed him to invest the money earmarked as fees in an unqualified retirement plan, where he could pay returns for years before the fees had to be declared for tax purposes.
Fox says 49 states allow whistleblowers to prosecute lawsuits under false allegations that provide rewards for allegations of fraud at government agencies.
But about half of those states limit the law to use only to recover damages for fraud related to state Medicaid programs, he noted.
Fox said New York was the only state until recently that allowed for false claim actions for any type of fraud. Some states do not prohibit false tax-related lawsuits, but they do not propose such actions, he said.
“The big question in my mind is why all these states are leaving money on the table … when you think about the difference between taxes paid and taxes owed,” said Fox.
He said the estimated federal tax deficit actually due to the taxes paid is $ 380 billion annually.
A less accurate estimate says New York State is losing $ 10 billion a year in taxes that should have been paid, he said.
“Tax revenue pays for vital city services. When a deadly pandemic eviscerated the economy and severely overburdened our city budget, every dollar counts,” said Johnson.
“Hedge funds are obliged to pay taxes like everyone else, and when they don’t, we will use our legal tools and strategies to hold them accountable. Period.”