On March 2, 2021, the New York Attorney General announced a $105 million settlement against a New York City hedge fund manager and his firm for alleged tax evasion. The claim was filed by a whistleblower client under the New York False Claims Act and represents the largest income tax recovery to date under the statute.
The settlement is likely to encourage more states to allow tax claims under their False Claims statutes and may encourage corporate competitors to bring whistleblower claims for tax claims in an effort to gain a competitive advantage.
In State of New York ex rel Tooley LLC v. Sandell, the New York attorney general’s office claimed that Thomas Sandell and his firm, Sandell Asset Management Corporation (SAMC), failed to pay tens of millions of dollars in taxes on deferred fees for offshore hedge fund investment services performed in New York City.
According to the allegations, Sandell and his company submitted false New York State tax returns that failed to account for more than $450 million in taxable income. As a result, the firm underpaid its state taxes by more than $50 million.
Sandell and his companies earned the income between 1998 and 2008 but were able to use a tax strategy to defer taxes on the income until 2017.
The whistleblower claimed that as 2017 approached, Sandell and SAMC were no longer satisfied with merely delaying paying taxes on the income. Instead, they wanted to avoid the taxes altogether.
To avoid paying New York taxes, Sandell and his companies set up a temporary office in Boca Raton, Florida and pretended that they had moved their operations out of New York in 2017. However, by doing so, Sandell and his companies ignored an SEC filing which stated that their principal place of business in 2017 was in New York.
Sandell’s long-time accountant notified him that his tax position was problematic, but Sandell nonetheless claimed that he did not owe taxes on the income recognized in 2017.
The whistleblower alleged that Sandell and his companies then filed false tax returns, knowing that more than $450 million was earned in New York and subject to New York taxes.
Sandell and his businesses agreed to settle the claim but neither admitted nor denied any wrongdoing.
The New York False Claims Act allows whistleblowers, known as qui tam relators, to receive a percentage of the funds recovered by the government in tax-related lawsuits. Supporters claim that these statutes incentivize whistleblowers to report tax fraud and encourage people with information to assist the government in identifying and proving fraud that might otherwise have never been discovered.
In the Sandell case, allegations of a New York False Claims Act were filed by a corporate qui tam whistleblower who has not been identified beyond its corporate name. The Sandell relator is receiving $22.05 million, which represents 21% of the settlement. The relator can also sue separately for attorneys’ fees and costs against the defendants.
The False Claims Act and state statutes that are modeled after it generally exclude tax claims from their purview. However, a growing number of state false claims acts, including those in New York and Washington, D.C., have been amended to expressly allow tax claims.
While the Sandell settlement serves as a reminder that most tax claims are not covered under the False Claims Act, businesses and individuals should be aware of the growing trend toward allowing states to recover tax money under state false claims acts.
Because the Sandell settlement involved such large sums of money, it may encourage other states to consider similarly amending their false claims statutes to explicitly allow tax claims. This, in turn, may encourage more whistleblowers to assert these claims.
Corporate competitors may also allege False Claims Act violations as whistleblowers in efforts to gain a competitive advantage.
Hope Lefeber has been defending people accused of crimes in federal court for more than 30 years. She began her career as an enforcement attorney for the United States Securities & Exchange Commission (SEC), where she learned first-hand how the government prepares and prosecutes white-collar criminal cases. Today, she uses that experience to defend people accused of crimes in federal court.
Ms. Lefeber has earned a reputation as a fierce defender of her clients’ rights and is highly respected among her colleagues in the federal bar, federal court judges, and her clients. She vigorously opposes prosecutorial overreaching and believes that an aggressive defense is the best way to achieve favorable results in a criminal case.
Ms. Lefeber has defended executives at Fortune 500 Companies, businessmen and women, professors, doctors, accountants, healthcare professionals, and lawyers who have been charged with crimes in. She has lectured on federal criminal law topics and has appeared on TV as a legal expert.
If you are facing allegations of federal tax fraud, Hope Lefeber should be your first call. Contact Ms. Lefeber today to schedule a confidential consultation to discuss your case.