Posts Tagged ‘taxes’

Disclosure:  This post is both broad and detailed so that interested analysts and journalists can gather key facts and form their own opinion.   Reviewing incredible schemes such as this orchestrated by Robert Mercer and Jim Simons often attract teams of analysts and reporters.  This post is original fact checked independent research available free on the internet.

In order to understand Robert Mercer’s brilliant financial engineering,  let’s begin our analysis using three outstanding local Portland beers.  They are Rogue Brewery’s Shakespeare Stout, Widmer’s Hefeweizen and Deschutes Breweries Fresh Squeezed IPA.

All three beers are distributed by Portland based Columbia Distributing, one of the nations largest beer distributors, which was purchased by the Jim Simons controlled investment fund Meritage in 2012.  Simons along with Robert Mercer is Co-CEO of the $100 billion Rentec hedge fund.

While Meritage CEO is listed as Nat Simons, Jim Simons son,  the elder Simons holds the controlling ownership position per SEC filings, owning more than 75 percent of the Meritage fund.

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This analysis will unravel the relationship between Rentec’s Medallion fund, its company retirement plan,  the Meritage private equity fund, which purchased Columbia Distributing in 2012, and numerous tax exempt foundations including those of Jim Simons, Nat Simons and Robert Mercer.

The key to understanding this financial engineering feat is analyzing the Medallion fund, which is managed by Renaissance Technologies.  This hedge fund is indeed the unifying thread.


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    Senator McConnell’s Dilemma:   To Serve Patients or Investors?

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When evaluating health care investments it is important to analyze the structure of leading drug and medical equipment companies.  A close look indeed reveals a derivative driven system in which private equity and hedge funds increase demand for drug payments by purchasing the rights to the cash flows from key drugs.  Patients are indeed unaware that many of the drugs they consume are now owned in part by private equity investors.


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Warren Buffett has announced his largest buyout in history, the $38 billion takeover of Portland, Oregon based Precision Castparts.  This is almost twice the size of the Heinz takeover, one of his largest prior takeovers.

Heinz and other Buffett enterprises, including Burlington Northern and Pacific Power, are having a strong negative impact on the Oregon economy.

This includes potato farmers in Eastern Oregon who had a win/win long term relationship with Heinz cancelled, and local communities battling to prevent oil and coal from being shipped by rail thru their communities without adequate safety guidelines.


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In the world of chess being too aggressive at the outset, advancing too far, is perilous. For Romney, his refusal to acknowledge his aggressive financial engineering and tax avoidance strategies could indeed result in an open convention.  One in which the party is free to forward a higher quality candidate.

Here is a list of the facts surrounding the Reid Romney dispute:

1)  On July 20, 2012 I published a blog post noting for the first time that Mitt Romney has not filed the required 990-T form and paid the related UBIT tax with his 2010 tax return, nor has he made this required filing in prior years.   This filing is essential for tax exempt accounts, including IRAs, if they contain related business interests, what I call leveraged transactions in Romney’s case since Bain is an LBO firm.

Remarkably, these 990-T filings are all publicly available by law.  One need only write to the IRS, specify the taxpayer, and within 30 days you will receive a reply if these 990-T filings have been made.   My request regarding Romney applied from 1992-2011, 19 years, and the IRS confirmed none had been filed.

2)  On July 31, 2012 Harry Reid made a claim to the Huffington Post that Romney paid no taxes for more than 10 years.  While Romney may claim that he paid “lots of taxes,” Reid is technically correct in that he has failed to pay taxes on the largest share of his wealth, what is believed to be an IRA worth as much as $100 million, for more than 10 years.

3)  Romney’s only defense is to claim that all his Bain related IRA investments were through foreign blocker corporations, thereby using a loophole that eliminates the need to file the 990-T and pay the required UBIT tax.   Disclosing this of course proves Reid’s claim regarding him paying no taxes, even though he may have used a technically legal scheme.  It is unlikely the public will care that Romney paid other taxes when he has avoided significant required taxes on Bain deals in his largest asset, the IRA.

4)  Worse for Romney would be what is noted in the July 20, 2012 blog post, that being that many of his investments, in particular those in BCIP Trust Associates I and II, were via a Delaware Partnership, not availing him of the foreign blocker exemption.  SEC documents clearly indicate this is the case.  The most recent personal financial disclosure shows BCIP Trust Associates III in his IRA, a foreign blocker, yet previous filings show domestic partnerships.

Even more troubling for Romney would be any transfer of Bain interests from the Delaware based partnerships, non valid blockers, since domestic partnerships are fully subject to UBIT,  to foreign blocker corporations such as BCIP Trust Associates III, after the initial investment, that is re-characterizing the fundamental nature of the partnership.

5)  Prior to 2008 Bain Capital utilized a scheme involving SEP IRAs that allowed employees, including Romney, to invest in Bain deals.  My best guess is that Reid’s office asked someone at Bain to look at the July 20 blog post and they confirmed that while at Bain they also filed no 990-Ts.  What this means, since the SEP is a company sponsored plan,  is that no one likely made the required filing, including Romney.  This simply confirms my original analysis.

Reid therefore stands on sound footing with his claim and the Romney campaign is foolishly self destructing by not coming clean and clarifying the issue.

Romney should step up, say they have a problem and commit to fixing it, but this of course would cost his fellow associates at Bain a bundle in back taxes.

Observing this conflict between Reid and Romney,  Paul Volcker comes to mind.  In particular Volcker’s assertion that engineering belongs in product development, not finance.

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With all the stories on Romney’s finances, many of which resulted from my observations regarding his tax returns and investment accounts, in particular his IRA, and the interaction of the trusts, foundation and Bain Company filings, the most important story is still untold.

Here it is, the story that could likely open the Republican convention to draft a new candidate.  I have been unsuccessful in getting a major reporter to tell the story, so I guess I’ll just have to tell it myself.

I’ll lay it out in simple steps with no conclusions or opinions.  It is simply astonishing that the media has not told this story.

1)  While head of Bain Capital, Mitt Romney set up a SEP-IRA pension plan that allowed employees to invest in Bain deals.  Mark Maremont of the WSJ did a fine story on this.

2)  IRAs are tax exempt and like other tax exempts must file a special return, a 990-T, if they are invested in leveraged transactions.  This is as straightforward as requiring employers to pay unemployment insurance for employees as part of periodic payroll transactions.  The purpose of the 990-T is to recognize the UBIT or Unrelated Business Income Tax, the rate of which approximates the corporate rate of 35 percent.

Congress adopted this approach for obvious reasons in that if an investor was getting tax exempt income in an IRA, let’s say interest income on a leveraged debt offering, and on the other side of the fence the borrower was taking large interest expense deductions, the net impact would be a double deduction and a grossly dysfunctional tax system.

3) Bain Capital is a leveraged buyout firm in which employees invested in numerous “Bain Deals” via their IRA accounts.  These investments are leveraged and clearly subject to UBIT tax.  Other leading private equity firms do not allow employees to invest in their own deals via IRA accounts.

4)  All 990-T returns, including those relating to IRAs, are by law public.  One need only make a request to the IRS.  In April, I made such a request for Bain and 12 top executives, including Romney, for their SEP IRAs covering the period 1992-2007.  The IRS responded none had been filed.  In addition, I also confirmed no filings were made from 2008-2011 with respect to the new Bain Capital Pension Plan set up by Ropes and Gray in which the official retirement age is 23 (not a misprint).   Maremont of the WSJ also reported on this “unusually young” retirement age.

5)  The only way to escape the 990-T requirement and UBIT tax is to make the investment through a foreign blocker corporation.   Domestic corporations are fully subject to the UBIT and leading law firms are very careful in structuring partnerships to account for this, that is, making sure such investments go through a foreign blocker corporation.

6)  Edgar Online is a public corporation ticker, EDGR, effectively controlled by Bain Capital via a convertible bond issue.  SEC filings clearly indicate this control, summarized in Edgar Online’s executives own words.

Edgar Online is in the business of summarizing  SEC data in user friendly formats that are widely used in the financial and media world.  Many leading databases including Lexis Academic, which is available in most public libraries, use Edgar Online.  One need only search for Mitt Romney using the Lexis Academic database, while specifying a search database of “SEC Filings” from 1/1/2000-12/31/2003 to see a list of references.

7)  In but one example, on February 13, 2000, SMTC Corp, ticker SMTX, filed a 13G report on behalf of Bain Capital.  Under section Item 2a, Name of Filing Person, it specifically states that BCIP Trust Associates II is a Delaware partnership, not a foreign blocker corporation.   This form also states Romney is the sole shareholder of Bain Capital and the only “control person” capable of declaring a special dividend.

8)  ERISA rules require pension plans to be trusts.  For example, if I want to set up a pension plan for Joe’s Consulting with TD Ameritrade, the title for each participant’s account would be Joe’s Consulting Pension Trust FBO followed by the employee name.  For example, Joe’s Consulting Pension Trust FBO Jane Doe would be one employee and Joe’s Consulting Pension Trust FBO Mitt Romney would be another.  The reason is to make absolutely certain each employee’s assets are held in and protected by a separate trust, which is required by ERISA rules.

In Romney’s IRA, note that he is not invested in BCIP Associates II but rather BCIP “Trust ” Associates.  The key word “trust” is a calling card for the IRA.  This can be seen in his recently filed 2012 Personal Financial Disclosure Statement.  Note that the most recent filing shows BCIP Trust Associates III, not II.  Trust III is identified as a foreign blocker in SEC filings yet in previous filings Romney was in Trust II and its predecessor, both domestic Delaware Corporations.

9)  The 13G filing regarding SMTC Corporation on behalf of Bain, referred to in item 7 of this analysis, specifically says BCIP Trust Associates II is a Delaware Corporation, not a foreign blocker.

If this SEC filing is accurate, and it certainly is, then not only Romney, but many other Bain employees have failed to file the required 990-T returns and pay the necessary UBIT tax.   Other leading private equity firms, including KKR and Blackstone, do not allow employees to invest in company deals via retirement accounts for good reason.  Perhaps Bain just got too greedy, consistent with its fees being 50 percent higher than the industry average.

There is a whole cottage industry of law firms that advise tax exempt investors on how to avoid UBIT by using foreign blocker corporations.  These clients include leading endowments such as Harvard and Yale, foundations such as the Gates Foundation and public pensions.

Romney says he trusts his advisors, yet that was clearly a mistake.  They have failed him in not only setting up a valid blind trust, but also a credible investment approach for a Presidential candidate.  See February 22, 2012 blog post for related material and comparison to Bill Esrey, former CEO of Sprint.

More importantly, if these filings made by one of Bain Capital’s portfolio companies, SMTC, and summarized via another entity they effectively control, Edgar Online, are accurate, then Romney is indeed involved in a massive tax fraud and by nature disqualified from being a viable candidate for President.

This is not complicated and hopefully someone will elevate it from the obscurity of a blog to where it belongs, front page top right above the fold on a Sunday.

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