Hedge fund chief Thomas Sandell settles New York tax fraud claim

Hedge fund founder Thomas Sandell on Tuesday paid a whopping $105 million to settle claims that he fraudulently evaded New York city and state taxes on more than $450 million on fees he earned, officials said.

The settlement — of 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.

That state law was amended more than a decade ago to allow claims related to purposefully evaded taxes.

The Sweden-born billionaire Sandell, who did not admit wrongdoing, tried to dodge his liability for tens of millions of dollars worth of taxes owed to the city and state for those fees earned in 2017 through his firm, Sandell Asset Management Corp., officials said.

The $105 million settlement covered both taxes and damages, according to state Attorney General Letitia James and city Corporation Counsel James Johnson. The whistleblower’s reward represents 21 percent of that amount.

“The greed that allowed one man to try to avoid paying his fair share of taxes is astonishing,” James said.

“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,” James said.

Chris Doyle, a lawyer who represented Sandell in the False Claims lawsuit, told CNBC, “Mr. Sandell and his companies are declining to comment.”

Sandell closed his hedge fund in 2019 and transformed it into a family office.

In 2007, Sandell’s firm agreed to pay more than $8 million to settle claims by the Securities and Exchange Commission Asset Management of engaging in improper short sales related to trading in a New Orleans-based holding company on the heels of Hurricane Katrina in 2005.

In the latest case in New York, officials said that due to a 2008 change rules related to deferred fee income recognition, Sandell was required to recognize about $450 million in such income in 2017 and pay taxes on that money to the state and city.

“But, to avoid this liability, Sandell left New York to live in London from August 2016 until mid-2019,” officials said in a press release.

“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.”

As part of the scheme, officials said Sandell opened “a shell office” with three employees in Boca Raton, Florida, which he and his company claimed were SAMC’s sole American operation.

That was despite the fact they had agreed to a finding by the Securities and Exchange Commission the company’s principal place of business continued to be New York City.

Even after multiple advisors, including an accounting firm that had prepared his taxes for years, warned Sandell that “his tax position was problematic,” he “nonetheless claimed that he owed no New York taxes on the fee income he recognized in 2017,” the press release said.

Randy Fox, a lawyer for the whistleblower who sued Sandell under the False Claims Act alleging the tax evasion, declined to identify the individual or individuals who created the limited liability corporation, Tooley LLC, that is the named plaintiff in the lawsuit.

Asked what his client or clients would do with the $22,050,000 reward — a fraction of which Fox will get under a contingency fee arrangement — the lawyer said, “I don’t know.”

“At least buy a nice bottle of Champagne,” Fox added.

Fox was the founding chief of the taxpayer protection bureau of the New York attorney general’s office.

He said that Sandell’s alleged evasion was striking because he “already had access to an amazing tax break” which allowed him to invest the money earmarked as fees in a non-qualified retirement plan, where it could earn returns for years before the fees had to be declared for tax purposes.

Fox that 49 states allow whistleblowers to sue under false claims acts which provide for rewards for flagging fraud on government entities.

But about half of those states limit the law for use only to recover damages for fraud related to state-run Medicaid programs, he noted.

Fox said that New York was the only state until recently to allow false claims actions for any kind of fraud. Some states do not bar tax-related false claims suit, but they do not invite those kinds of actions, he said.

“The big question in my mind is why are all of these states leaving money on the table … when you think about the difference between the taxes paid and the taxes owed,” Fox said.

He said that the estimate shortfall in federal taxes actually owed versus those taxes paid are $380 billion, annually.

A less precise estimate says that New York state loses $10 billion per year in taxes that should have been paid, he said.

“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,” said Johnson.

“Hedge funds are obligated to pay taxes just like everybody else, and when they don’t, we’ll use our legal tools and strategies to hold them accountable. Period.”

 

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