Hedge Fund founder Thomas Sandell on Tuesday paid a whopping $ 105 million to settle claims of fraudulently evading New York City and state taxes for more than $ 450 million in his rates he earned, officials said.
The deal – from which a whistleblower will receive more than $ 22 million in reward – is the largest recovery in New York State history under the False Claims Act.
This state law was amended more than a decade ago to allow for deliberately evaded tax-related claims.
Sweden-born billionaire Sandell, who pleaded not guilty to misdemeanors, tried to evade his ten-million-dollar tax liability in the city and state for those fees earned in 2017 through officials of his firm, Sandell Asset Management Corp. dit.
The $ 105 million settlement covered both taxes and damages, according to state Attorney General Letitia James and the city’s corporation attorney James Johnson. The complainant’s reward represents 21% of this amount.
“The greed that allowed a man to try to avoid paying his fair share of taxes is amazing,” James said.
“Thomas Sandell and his company evicted New York taxpayers of tens of millions of dollars in a single year, which was a huge burden on our system and forced ordinary New Yorkers to bear that cost,” he said. James.
Chris Doyle, a lawyer who represented Sandell in the lawsuit for false claims, told CNBC, “Mr. Sandell and his companies don’t want to comment.”
Sandell closed its hedge fund in 2019 and transformed it into a family office.
In 2007, Sandell’s firm agreed to pay more than $ 8 million to resolve the Securities and Exchange Commission Asset Management’s claims for involvement in inappropriate trade-related short sales in a New Orleans-based holding company after the Hurricane Katrina in 2005
In the latest case in New York, officials said that due to a change in the 2008 rules related to the recognition of deferred commission income, Sandell had to recognize about $ 450 million of that income. in 2017 and pay taxes on that money to the state and the city.
“But to avoid that responsibility, Sandell left New York to live in London from August 2016 to 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’s operations were no longer in New York City, often with the help of a international accounting “.
As part of the scheme, officials said Sandell opened “a sales office” with three employees in Boca Raton, Florida, which he and his company claimed were SAMC’s only U.S. operation.
Although they had agreed to a finding from the Securities and Exchange Commission, the company’s main business headquarters remained New York City.
Even after several advisers, including an accounting firm that had been preparing its taxes for years, warned Sandell that “his tax position was problematic,” he stated, however, that he owed no taxes in New York. on the commission revenue it recognized in 2017, ”a press release read.
Randy Fox, the plaintiff’s attorney who sued Sandell under the False Claims Act alleging tax evasion, declined to identify the person or persons who created the limited liability corporation, Tooley LLC, which is the applicant designated in the application.
When asked what his client or clients would do with the $ 22,050,000 reward (a fraction of which Fox will get a contingency agreement), the lawyer said, “I don’t know.”
“At least buy a good bottle of champagne,” Fox added.
Fox was the founding head of the New York Attorney General’s Office of Taxpayer Protection.
He said Sandell’s alleged evasion was surprising because “he already had access to an incredible tax cut” that allowed him to invest the money for fees in an unqualified retirement plan, where he could earn returns for years before declaring for tax purposes.
Fox that 49 states allow whistleblowers to denounce under false claims acts that provide rewards for the flag of fraud to government entities.
But about half of those states limit the law to use it only to recover damages from fraud related to state Medicaid programs, he noted.
Fox said New York was the only state until recently that allowed false claim actions for any type of fraud. Some states do not prohibit the demand for false tax-related claims, but do not invite such actions, he said.
“The big question I have in my head is why all these states leave money on the table … when you think about the difference between the taxes paid and the taxes that are owed,” Fox said.
He said the estimated federal tax deficit actually owed versus taxes paid is $ 380 billion annually.
A less accurate estimate says New York State loses $ 10 billion a year in taxes that should have been paid, he said.
“Tax revenue pays for vital services to the city. When a deadly pandemic has gutted the economy and severely reduced our city’s budget, every dollar counts,” Johnson said.
“Hedge funds are required to pay taxes like everyone else and when they don’t, we will use our legal tools and strategies to hold them accountable. Period.”