Romney's Bain Capital under investigation for tax dodging

New York's attorney-general starts examining private equity firms

Bain Capital – the company formerly run by Republican presidential candidate Mitt Romney – is among a number of private equity firms being investigated for underpayment of taxes, according to a report in the Financial Times:

[New York's attorney-general, Democrat Eric] Schneiderman has issued subpoenas as part of an investigation into the “fee-waiver” strategy, in which executives invested management fees paid by investors back into one of the investment funds. Any profits on those fees would be taxed at the capital gains rate – a much lower tax rate than if it were treated as ordinary income. There is debate over whether the strategy is legal, aggressive or illegal. The strategy was risky and could have resulted in losses for the manager if the investment funds were not profitable.

The fact that Bain Capital is being investigated has led to some – including one "private equity executive" quoted by the FT – to brand the move as a political one, but other equity groups are being investigated as well, including KKR (part owners of Alliance Boots, amongst others) and Apollo Group (an education-focused firm which owns one of Britain's two private universities, BPP University College).

Bain is being roped into the investigation – run by the state's Taxpayer Protection Bureau – due to the hundreds of pages of the company's internal financial documents which were leaked by Gawker, which reveals that the Bain partners save more than $200m in federal income taxes and more than $20m in Medicare taxes.

The New York Times reports that there is widespread belief that the practice is not only legal, but ethically justifiable as well:

Tax lawyers have justified the arrangements by arguing that converting the management fees into carried interest, which could lose some or all of its value if a fund does poorly, entitles the managers to the lower capital gains rate, which is intended to help mitigate the risks taken by investors.

“They’re risking their management fee — they’re giving up the right to that management fee in any and all events,” said Jack S. Levin, a finance lawyer whose firm has represented Bain on some matters. Mr. Levin said he did not consider the practice risky or even aggressive.

“The I.R.S. has known that private equity funds have been doing this for 20 years,” he said.

If the move is politically motivated, it's likely to prove rather successful. Romney's tax status has been under examination since the day he made his first presidential bid, and he has been extremely unwilling to reveal anything but the barest minimum of information about it. The most compelling theory as to why is the suggestion that, in 2009, he may have taken advantage of an IRS amnesty into illegal Swiss bank accounts. And the status of Romney at Bain is similarly murky.

All of which is to say that the candidate has the whiff of financial impropriety floating around him most of the time, and it doesn't take much from, say, a Democratic attorney-general to make more bad news for him.

Obama and – Bane? Bain? Romney. Obama and Romney.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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The 7 brilliant arguments Theresa May once made against Brexit

Just in case you missed them. 

“Just listen to the way a lot of politicians and commentators talk about the public,” the Prime Minister Theresa May told the Conservative party conference in October. “They find your patriotism distasteful, your concerns about immigration parochial, your views about crime illiberal, your attachment to your job security inconvenient.

“They find the fact that more than seventeen million votes decided to leave the European Union simply bewildering.”

Of course, there was a time not that long ago, when May too found the idea of Brexit pretty bewildering herself. Nicknamed “submarine” during the EU referendum campaign for her low-key support for Remain, she nonetheless had made up her mind it was the right thing to do. 

In a recording obtained by The Guardian, she told an audience at Goldman Sachs that “the economic arguments are clear”. She continued: 

“I think being part of a 500m trading bloc is significant for us. I think one of the issues is a lot of people invest here in the UK because it’s the UK in Europe. 

“I think if we were not in Europe, there would be firms and companies who would be looking to say do they need actually to develop a mainland European presence rather than a UK presence.

But if that hasn’t convinced you, luckily May also made a public case for Remain on 25 April 2016. Here are some of her best points:

1. There’s no such thing as total sovereignty

At conference in October, May said Britain was leaving “to become, once more, a fully sovereign and independent country”. 

But in April, she said that “no country or empire in world history has ever been totally sovereign”. Nation states, she said, have to make a trade off between agreeing to cede some sovereignty “in a controlled way” to prevent a greater loss of sovereignty in an uncontrolled way, such as “military conflict or economic decline”. 

2. It's safer to Remain

In her conference speech, May said she wanted a Brexit deal to include “co-operation on law enforcement and counter-terrorism”. 

In April, though, the then-Home secretary thought it would be a lot simpler just to stay in the EU. She predicted that while a Brexit Britain would still share intelligence, “that does not mean we would be as safe as if we remain”.

For example, May helpfully pointed out, a Britain outside the EU would have no access to the European Arrest Warrant, which allowed her department to extradite more than 5,000 people from Britain to Europe in the last five years. 

She also distinguished between the EU’s freedom of movement rules, and border checks, declaring: “Some people say the EU does not make us more secure because it does not allow us to control our border. But that is not true.”

3. Rules are better than no rules

At conference, May said Brexit would mean “our laws made not in Brussels but in Westminster”. Anyone who believed they were a “citizen of the world” was in fact “a citizen of nowhere”. 

Back in April, she had a more nuanced view. She said Europe had “stumbled its way to war in 1914” because of the “ambiguity of nations’ commitments to one another”. 

She declared: “Nobody should want an end to a rules-based international system.” Although, she did add that reconciling these international systems with democratic government was “one of the great challenges of this century”. 

4. It could break up the UK

In her speech at conference, May took aim at the Scottish Nationalist Party when she blamed “divisive nationalists” for threatening to drive the UK apart. 

When she spoke in April, though, it seemed she might be talking about a different set of nationalists. “If Brexit isn’t fatal to the European Union, we might find that it is fatal to the Union with Scotland,” she warned. 

Scots are more likely to be in favour of the EU than voters in England and Wales, she noted: 

“I do not want the people of Scotland to think that English Eurosceptics put their dislike of Brussels ahead of our bond with Edinburgh and Glasgow. I do not want the European Union to cause the destruction of an older and much more precious Union, the Union between England and Scotland.”

5. Brexit endangers Britain’s financial services industry

In her conference speech, May described London as “the world’s leading financial capital”. 

But according to May circa April 2016, it might not be for much longer. She warned that outside the EU: “There would be little we could do to stop discriminatory policies being introduced, and London’s position as the world’s leading financial centre would be in danger.”

6. Negotiating trade deals won’t be easy

May is a believer in free trade – her conference speech was peppered with references to it – and she has appointed Liam Fox as International Trade secretary to broker new deals.

And she knows how hard that will be. In her April speech, she noted Britain would have to replace 36 existing trade agreements with non-EU countries: “While we could certainly negotiate our own trade agreements, there would be no guarantee that they would be on terms as good as we enjoy now.”

7. Nor is staying in the single market

Even in April, May was clear she thought Britain could survive Brexit, but she was not sure whether it would do so better off.

As she put it: 

"The reality is that we do not know on what terms we would win access to the single market.  We do know that in a negotiation we would need to make concessions in order to access it, and those concessions could well be about accepting EU regulations, over which we would have no say, making financial contributions, just as we do now, accepting free movement rules, just as we do now, or quite possibly all three combined.  

"It is not clear why other EU member states would give Britain a better deal than they themselves enjoy."

Couldn't agree more, Prime Minister. 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.