Hedge fund and manager pay New York $105 million to settle tax evasion case initiated by whistleblower

The New York State Attorney General Letitia James and New York City Corporation Counsel John E. Johnson have settled a state tax evasion case for $105 million against Thomas Sandell of Sandell Asset Management Corporation (SAMC), a hedge fund. It is alleged that Sandell, through his firm, recognized over $450 million in management and performance fees in 2017, but instead of paying the state and city proper taxes he evaded tens of millions of dollars in taxes. The New York authorities were alerted to the potential of fraud in October 2018 by a whistleblower lawsuit brought under New York’s False Claims Act (FCA). This settlement adds to the more than $460 million in tax-related false claim settlements the state has collected to date. This recovery should alert businesses to the continued trend of states pursuing tax claims under their respective FCAs even though the federal FCA does not include tax claims.

“The greed that allowed one man to try to avoid paying his fair share of taxes is astonishing,” said Attorney General James. “Thomas Sandell and his company bilked New York taxpayers out of tens of millions of dollars in a single year — placing a tremendous burden on our system and forcing ordinary New Yorkers to bear that cost. My office remains committed to ensuring that those who knowingly commit tax fraud — and those who facilitate their misconduct — pay a steep price for doing so.”

As the result of a 2008 change in deferred fee income recognition rules, Sandell was required to recognize approximately $450 million in deferred fee income in 2017 and to pay taxes on that income in New York state and New York City. But, to avoid this liability, Sandell left New York to live in London from August 2016 until mid-2019, and, even though SAMC continued operating in New York City, Sandell and SAMC took steps to make it appear as though SAMC’s operations were no longer in New York City, often with the assistance of an international accounting firm (Accounting Firm A).

As part of this deception, Sandell opened a shell office with three back-office employees in Boca Raton, Florida, which Sandell and SAMC held out to New York’s tax authorities as SAMC’s sole U.S. operation — even after agreeing to a finding by the U.S. Securities and Exchange Commission (SEC) that SAMC’s principal place of business continued to be in New York City. To further conceal SAMC’s New York presence, Sandell also funneled SAMC’s payroll and property expenses through a third-party entity — which he owned — even though SAMC had incurred, remained responsible for, and, in fact, continued paying those expenses.

Despite being put on notice that his tax position was problematic by multiple advisors, including his long-time tax preparer (Accounting Firm B), Sandell nonetheless claimed that he owed no New York taxes on the fee income he recognized in 2017. Accounting Firm B made clear to Sandell that he could not claim to owe nothing in New York taxes on his deferred-fee income — particularly in light of the SEC’s conclusion that SAMC’s principal place of business continued to be in New York City. In response, Sandell replaced Accounting Firm B with Accounting Firm A without conducting any further diligence into Accounting Firm A’s tax position and wrongfully claimed no New York tax was due on returns filed for the 2017 year, depriving the state and city of tens of millions of dollars in tax revenues.

Sandell has already transmitted the full $105 million agreed upon in back taxes and damages.

Sandell and SAMC neither admit nor deny the allegations made by the Office of the Attorney General (OAG) and by the New York City Department of Law.

The investigation leading to today’s agreement began with a whistleblower lawsuit filed in October 2018 under the New York False Claims Act. The investigation found that Sandell performed the investment services that generated the deferred fees at issue exclusively in New York City and that his deferred fees were therefore taxable in New York state and New York City.

The OAG expresses its appreciation to the whistleblower, without whose information the misconduct might not have been discovered, and to the whistleblower’s attorneys. Under the New York False Claims Act, whistleblowers are entitled to receive a percentage of settlement proceeds for bringing this misconduct to light.

The OAG also thanks the New York state Department of Taxation and Finance and the New York City Department of Finance for their invaluable assistance in this matter.

This matter was handled for the OAG by Senior Trial Counsel David N. Ellenhorn and Assistant Attorney General Joshua B. Dugan of the Taxpayer Protection Bureau, with assistance from Senior Legal Support Analyst Bianca M. LaVeglia. The Taxpayer Protection Bureau is led by Bureau Chief Thomas Teige Carroll and Deputy Bureau Chief Scott Spiegelman, and is a part of the Division for Economic Justice, led by Chief Deputy Attorney General Chris D’Angelo and First Deputy Attorney General Jennifer Levy.

New York passed its Fraud and Enforcement Recovery Act (Act) in 2010. The Act lifted the tax bar for FCA claims and allowed whistleblowers to file qui tam lawsuits regarding tax fraud for a portion of the recovery. Since then, New York has been a leader in this space. Last year, New York AG Letitia James wrote to then-California AG Xavier Becerra in support of legislation to amend California’s FCA to include tax issues. And recently when D.C. amended its FCA, council members said New York’s law inspired the change. Michigan has also considered similar amendments.

Proponents for including tax fraud in state FCAs stress that it is a powerful mechanism for enforcing tax laws and generating revenues. As previously indicated, these benefits are even more appealing given the way the pandemic has stretched state and local resources. This point was not lost on New York authorities. As Corporation Counsel Johnson put it: “Tax revenues pay for vital city services. When a deadly pandemic has eviscerated the economy and severely strained our city’s budget, every dollar counts.” Given the tight budgets of many cities and states, individuals and businesses should carefully monitor their state’s upcoming legislation, as states may consider expanding their FCAs to tax fraud claims by either adding an analog to the federal FCA or expanding liability under an existing state false claims law.

 

JEFFREY NEWMAN REPRESENTS WHISTLEBLOWERS NATIONWIDE INCLUDING WHISTLEBLOWERS WITH INFORMATION ABOUT STATE TAX EVASION. HE CAN BE REACHED AT jnewman@newmanshapiro.com 978-880-4758