Harbert Management to Pay $40 Million to Settle New York Tax Whistleblower Tax Case

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https://www.corporatecrimereporter.com/news/200/hedge-fund-pay-40-million-settle-largest-new-york-whistleblower-tax-case/

Harbert Management to Pay $40 Million to Settle New York Tax Whistleblower Tax Case

By Editor Filed in News April 18th, 2017 @ 11:57 am


Alabama based Harbert Management and top executives at the firm will pay $40 million to settle a New York tax whistleblower case.
Harbert Management was the fund sponsor for Harbinger Capital Partners, a $26 billion hedge fund based in New York City.

The settlement resolves whistleblower allegations that members of Harbinger’s investment manager failed to pay millions in New York State tax on performance income for several years. The case alleges that the defendants evaded New York State and City taxes by shifting income derived from Harbinger from New York to Alabama to avoid New York’s higher tax rates.
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The whistleblower, whose identity remains protected, will receive $8.8 million – or 22 percent of the settlement.
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The settlement is the largest tax-related recovery by the Attorney General’s office, resulting from an action filed under the New York False Claims Act.
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In 2001, Harbert Management Corporation, an investment management company based in Birmingham, Alabama, sponsored and organized the Harbinger Capital Partners Master Fund I Limited hedge fund, hiring Philip Falcone as its primary investment decision-maker. Harbinger Capital Partners Offshore Manager LLC served as the investment manager for the Harbinger Fund from 2002 through 2009. Philip Falcone and the other members of the investment team operated in New York City.

As investment manager, Offshore Manager earned performance fee income in an amount equal to 20 percent of the Harbinger Fund’s net profits. Offshore Manager’s members, which included several senior executives at Harbert Management Corporation, were required to pay New York State income tax on this performance fee income earned by Falcone’s trading activity in New York.
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In early 2005, during the preparation of tax returns for the 2004 year, the chief administrative officer received advice from outside accounting professionals that New York tax would be due on the fee income. The chief administrative officer notified other members of Offshore Manager, who would ultimately be paying the tax, of the problem, characterizing this advice as me y “initial.” Just one week after receiving this advice, the chief administrative officer described the position that no New York tax was due on performance fee income as “unsupportable,” in a document sent to outside accountants seeking a recommendation on the question. The same day, however, the chief administrative officer sent an email indicating that Offshore Manager “may get aggressive” in taking the position that all of its relevant income was from Alabama.

One week later, Offshore Manager’s controller signed a tax return that apportioned zero percent of its performance fee income to New York State, even though there is no indication that the accountants changed their initial assessment of the about the tax liability, or that there was any written endorsement by other outside professionals. Instead, Offshore Manager apportioned all performance fee income to the lower-tax state of Alabama, where Harbert Management’s headquarters were located and where back office and support functions for the Harbinger Fund were conducted. The 2004 return did not mention the existence of its Manhattan office, listing only the Alabama address in response to the return’s instruction to list all places “both in and out of New York State, where the partnership carries on business.” The return denied any nexus to New York State.
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