Largest state tax evader settlement in New York yields over $40 million from financial investment firm/ hedge fund

A whistleblower lawsuit brought under the New York State’s False Claims Act has resulted in a settlement of $40 million against a financial investment firm Harbert Management Corp of Alabama. The case alleged that Harbert earned hundreds of millions of dollars through an office in New York for which it paid no income tax to New York, while Harbert paid all Alabama taxes for all of its income. The case raises the question as to why New York is one of only a few states that allows for whistleblower cases to recover unpaid income and excise taxes. The other states should follow New York’s lead.

According to court papers, Harbert organized Harbinger Capital Partners Offshore Managers, LLC, a $26 billion hedge fund that operated out of an office at 555 Madison Avenue in Manhattan. Even though substantial earnings came in through Harbinger, it allocated zero percentage of earnings to New York and it filed no state tax return. The company asserted a position that it had no “nexus” to New York state because it had no income deriving from New York sources. However, Harbinger made hundreds of millions by shorting the subprime mortgage market in 2007.

When business operate both inside and out of New York City and State, they are required to apportion for taxes that part of their income coming from or connected to New York.

For any potential whistleblower working for a financial investment firm or hedge fund or for managers of hedge funds or financial investment firms, the stipulation and settlement agreement in this case is worth reading. I attach the settlement agreement here. Because this is a case brought by a whistleblower under the New York whistleblower statute, that individual, whose name is protected by that law, is entitled to a share of the $40 million recovered by New York in this case. The whistleblower shall receive over $8.8 million.

Interestingly, New York is one of few states which has a whistleblower law that allows claims for recovery against companies and individuals who fail to pay income taxes in the state. In addition, New York is one of a few states which allows for recovery for failure to pay sales taxes in New York. The question is why don’t other states have similar laws, given that so many companies handle their taxes as Harbert did here and so many tax dollars are lost simply because the states don’t know it is happening? By simply amending the state whistleblower laws to allow whistleblowers to report failures to pay these taxes, the states could easily collect what is fairly owed to them.

Jeffrey Newman represents whistleblowers nationwide but did not represent the whistleblower in this case.