The New York AG’s Private Equity ‘Scandal’ That Isn’t

February 23, 2016, 3:10 PM UTC
Eric Schneiderman NY AG
NEW YORK, NY - FEBRUARY 11: New York Attorney General Eric Schneiderman speaks at a news conference to announce enforcement action against Morgan Stanley on February 11, 2016 in New York City. New York Attorney Schneiderman announced Morgan Stanley will pay a $3.2 billion settlement over the bank's practices leading up to the financial crisis. (Photo by Eduardo Munoz Alvarez/Getty Images)
Photograph by Eduardo Munoz Alvarez — Getty Images

Several media outlets last week reported on $125,000 in recent campaign donations made by California-based private equity executive Robert Smith and his wife to Eric Schneiderman, the New York attorney general who in 2012 subpoenaed at least a dozen private equity firms over possible tax-dodging activity. On the surface it looked pretty bad, particularly given that Smith and his out-of-state colleagues from Vista Equity Partners have become some of Schneiderman’s largest backers, having previously contributed another $182,000 since 2010.

After investigating the situation, however, we’ve found no evidence of conflict.

Schneiderman’s 2012 investigation was related to something called “fee waivers,” a controversial strategy through which private equity fund managers lower their tax bills by reclassifying management fees (on which they pay ordinary income tax rates) as fund commitments (on which they would pay capital gains rates, assuming investment profits). You may recall this being raised as a national issue during the 2012 presidential race, due to the use of “fee waivers” by Mitt Romney’s former firm, Bain Capital.

The case is currently under court seal, but multiple sources tell me that Schneiderman’s legal standing was something called the New York False Claims Act. This particular rule is specific to New York-based entities or, in the case of alleged tax fraud, those paying substantial state taxes in New York. So a firm like Bain Capital ― which is based in Boston but has a satellite office in New York ― was subpoenaed. Vista Equity Partners ― whose offices are in California, Illinois and Texas ― was not (even though it has allowed for the use of fee waivers).

In other words, Vista’s exclusion was about basic geography rather than about generous campaign contributions.

Moreover, a source familiar with the investigation says that it never ultimately went very far, in large part because outside counsel for the private equity firms attested to having designed fee waivers in the first place, thus making it much tougher to pin false claims on the firms themselves (which had to have “knowingly” flouted the law).

So why is an out-of-stater contributing so much to a New York AG in the first place?

Sources say that Robert Smith and Schneiderman met several years ago via a mutual friend, and bonded over a love of jazz music and various other nonprofit endeavors. For example, Schneiderman is a supporter of the Louis Armstrong House Museum in Queens where Smith sits on the board, and both have the same photo of Armstrong hanging in their offices. The two men also each attended a New York City gala for The Opportunity Network last year, and Smith’s wife is said to have particular interests around foster care and human trafficking ― two issues around which Schneiderman has taken strong stands.

“To avoid even the appearance of a conflict between the duties of his office and the need to raise campaign contributions, every contributor to Attorney General Schneiderman’s campaign committee is vetted and required to certify that they and the entities they own or control have no matters currently pending before, or recently resolved, by his office,” says Damien LaVera, communications director for the AG’s office. “A full and complete review of Eric Schneiderman’s record would paint a clear picture of an Attorney General who will go after anyone who tries to take advantage of New Yorkers no matter how rich or powerful they are, or to whom they have given political contributions.”

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