Hedge fund boss Thomas Sandell settles the tax fraud lawsuit in New York

The hedge fund founder Thomas Sandell paid a whopping $ 105 million Tuesday to settle claims he fraudulently evaded New York and state taxes on more than $ 450 million for fees earned.

The settlement – which will reward a whistleblower with more than $ 22 million – 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 claims related to intentionally evaded taxes.

Swedish-born billionaire Sandell, who did not admit wrongdoing, tried to evade his liability for tens of millions of dollars in taxes paid to the city and state for the 2017 by his firm Sandell Asset Management Corp. fees earned were said to have been owed.

The $ 105 million settlement covered both taxes and damages, according to Attorney General Letitia James and City Company attorney James Johnson. The whistleblower’s reward is 21 percent of that amount.

“The greed that has made it possible for a man not to pay his fair share of taxes is amazing,” said James.

“Thomas Sandell and his company got New York taxpayers out of the tens of millions of dollars in a single year – putting a huge strain on our system and forcing ordinary New Yorkers to bear the cost,” said James.

Chris Doyle, an attorney who represented Sandell in the false claims lawsuit, told CNBC, “Mr. Sandell and his companies have declined to comment.”

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

In 2007, Sandell’s company agreed to pay more than $ 8 million to settle claims by the Securities and Exchange Commission Asset Management for improper short sales in connection with trading in a New Orleans-based holding company following the hurricane Katrina in 2005.

In the most recent case in New York, officials said that due to a change in the rules for 2008 regarding the recording of deferred fee income in 2017, Sandell was required to record approximately $ 450 million in such income and pay taxes on that money to the state and the city to pay.

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

“And while SAMC continued to operate in New York City, Sandell and SAMC have taken steps to create the impression that SAMC is no longer operating in New York City, often with the assistance of an international accounting firm.”

As part of the program, officials said Sandell, with three employees, opened a “Shell office” in Boca Raton, Fla., Which he and his company claimed was SAMC’s only American operation.

Despite the fact that they agreed to a determination by the Securities and Exchange Commission, the company’s main place of business continued to be New York City.

Even after several consultants, including an accounting firm that had prepared its taxes for years, warned Sandell that “his tax position was problematic,” he still claimed he did not owe New York taxes on fee income, a 2017 press release said.

Randy Fox, an attorney for the whistleblower who sued Sandell for tax evasion under the False Claims Act, declined to identify the person or individuals who formed the limited liability company Tooley LLC named as plaintiffs in the lawsuit .

When asked what his client or clients would do with the $ 22,050,000 reward – a fraction of which Fox will receive under a contingent fee agreement – the attorney said, “I don’t know.”

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

Fox was the founding director of the New York Attorney General’s Taxpayer Protection Office.

He said Sandell’s alleged circumvention was suspicious because he “already had access to an amazing tax break” that allowed him to invest the money earmarked as fees in an unqualified retirement plan that could generate returns for years before that Charges levied had to be declared for tax purposes.

Fox reported that 49 states allow whistleblowers to sue under false claims that provide rewards for reporting fraud to government agencies.

However, the law only limits about half of these states to compensation for fraud related to government Medicaid programs.

Fox said that until recently, New York was the only state that allowed false claims for damages for any type of fraud. Some states don’t prohibit tax claims for false claims, but they don’t encourage such actions, he said.

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

He said the estimated shortfall in actual federal taxes owed versus taxes paid is $ 380 billion annually.

A less accurate estimate is that New York State loses $ 10 billion annually in taxes that should have been paid, he said.

“Tax revenue pays for vital city services. When a deadly pandemic has gutted the economy and weighed heavily on our city’s budget, every dollar counts,” Johnson said.

“Hedge funds, like everyone else, are required to pay taxes, and if they are not, we will use our legal tools and strategies to hold them accountable. Period.”

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