Records from an offshore hideaway show how an American billionaire grew one of the world's largest trusts and another owned part of a company accused of ...and more »
Serving a Growing Elite
Founded in 1898 by a British officer, Maj. Reginald Appleby — an avowed opponent of taxation — Appleby now has offices in nearly all the world’s tax havens: Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Hong Kong, the Isle of Man, Jersey, Mauritius, the Seychelles and Shanghai.
Such locations offer low or zero tax rates, companies consisting only of a postbox, and accountants and lawyers skilled at hiding money.
In a statement, Appleby said the firm had done nothing wrong. “We are an offshore law firm who advises clients on legitimate and lawful ways to conduct their business,” the statement said. “We do not tolerate illegal behaviour.”
Share of pre-tax U.S. income, by percentile.
In recent years, billionaires’ fortunes have grown by an average of 7 to 8 percent a year, while total wealth has grown at just 3 percent annually, said Gabriel Zucman, an economist at the University of California, Berkeley. Globalization, deregulation and declining taxes have all been factors.
“The other important thing is the rise of the global, cross-border wealth management industry,” including Appleby, Mr. Zucman said.
The richest 1 percent of the world’s population now owns more than half of global wealth, and the top 10 percent owns about 90 percent.
“The data suggests that most of the gains at the top are coming at the expense of the rest of the population,” Mr. Zucman said. That conclusion is shared by many other scholars.
The wealthy use the power that accompanies their money, he said, to exert political influence, reduce taxes and regulation — and hire experts to keep their money safe.
James H. Simons, a mathematician and hedge fund founder who was the beneficiary of a hidden offshore trust, one of the largest in the world. Credit Fred R. Conrad/The New York TimesMinimizing Taxes
Mr. Simons, the hedge fund billionaire, was a young math professor in 1974 when a Colombian friend established a trust in Bermuda on his behalf using a gift of $100,000 to him, his parents and his descendants. American tax authorities would consider the Lord Jim Trust, as it was named, a foreign entity, limiting the visibility of the Internal Revenue Service into its holdings and its ability to tax its funds until it made distributions to the Simons family. (Appleby did not create the trust but later provided legal advice.)
In 1982, Mr. Simons founded Renaissance Technologies, a New York-based hedge fund whose secret trading algorithms soon generated rates of return that became storied on Wall Street. Over the next three decades, Renaissance became one of the most lucrative hedge funds on the planet, making Mr. Simons a billionaire many times over.
Mr. Simons, in response to questions, said that when he and his family received distributions from the Bermuda trust, they were reported to the I.R.S. But Mr. Simons said he and his relatives took out only limited amounts, mainly in the early years of the trust, whose main investments were Renaissance funds that enjoyed spectacular returns.
As Renaissance’s investments grew, so did its footprint in American life. Mr. Simons became one of the country’s top political donors. During the last election cycle, he was the sixth-largest contributor to political candidates and causes, giving more than $26 million, nearly all to Democrats, including $11 million to Priorities USA Action, a political action committee supporting Hillary Clinton.
Mr. Simons’s business partner Robert Mercer has also been an Appleby client. He was an influential backer of Donald J. Trump’s presidential campaign, contributing more than $3 million. Credit Oliver Contreras for The Washington Post, via Getty ImagesMr. Simons’s business partner and Renaissance’s departing co-chief executive, Robert Mercer, rose to the highest ranks of Republican donors and became an influential backer of Donald J. Trump’s presidential campaign, contributing more than $3 million. A major funder of Breitbart News, Mr. Mercer influenced critical decisions of Mr. Trump’s candidacy, such as the hiring of Stephen K. Bannon, then Breitbart’s executive chairman, as the campaign’s chief executive. Mr. Mercer has also been an Appleby client.
In 2014, a Senate committee accused Renaissance and another hedge fund of using a complex accounting maneuver to improperly avoid taxes. Renaissance is still fighting the resulting tax bill, estimated at $6.8 billion.
As the tax dispute has proceeded, Mr. Simons is now estimated to be the 25th-richest person in the United States, with a net worth estimated at $18.5 billion, according to the Forbes list of richest Americans. But such rankings, important yardsticks in the study of global development and inequality, often rely on incomplete public data.
Mr. Simons’s Lord Jim Trust offers one example. Though the trust has been listed in various filings, a 2010 document in Appleby’s files provides details for the first time. If it had been fully accounted for in calculating his net worth, he would have vaulted even higher in the ranks of the superrich.
Yet factoring the trust into his wealth isn’t so straightforward, because Mr. Simons says his share is now in an offshore charity, Simons Foundation International. In 2010, he and his wife, Marilyn, signed the “giving pledge” established by Bill Gates and Warren Buffett, vowing to give “the great majority” of their wealth to philanthropic purposes.
A person familiar with Simons Foundation International, who was not authorized to speak on the record about it, said it had $8 billion in assets. That is more than double the approximately $3 billion in Mr. Simons’s New York-based Simons Foundation, whose mission of funding scientific research and education is shared by the Bermuda foundation.
“So far it has not been very active,” Mr. Simons wrote in a response to questions from The Times. “In future years, as my income decreases and ultimately ceases, SFI will play an increasingly larger role in funding.”
But the Simons Foundation International operates in obscurity. Though it would easily rank in the top 10 foundations in the United States, it has no website.
Mr. Simons said that keeping the foundation in Bermuda made it easier to give to charities that weren’t American and also avoided the minimal annual giving requirements that foundations must follow in the United States.
Ray D. Madoff, a professor of law at Boston College who focuses on philanthropies and taxes, said that in terms of oversight and transparency, “the first sin was whatever it was that allowed however many billions of dollars of a U.S. citizen to be growing tax free in Bermuda.”
But Michael G. Pfeifer, a Washington lawyer who specializes in estate planning for wealthy people and helped write the tax rules governing overseas trusts, said that Mr. Simons merely followed the rules.
“I would have told the guy, ‘You’ve got this money offshore — just leave it offshore,’” Mr. Pfeifer said. “And he did.”
Warren A. Stephens, a billionaire investor and donor to conservative causes. He used opaque holding companies to own a stake in a payday loan business the government accused of cheating working-class and poor Americans. Credit Andrew Harrer/Bloomberg, via Getty ImagesFines and Restitutions
If Mr. Simons’s motive for setting up offshore entities is complex, Mr. Stephens’s seems more obvious.
In late 2011, representatives of Mr. Stephens and his business partner, James R. Carnes, asked Appleby to incorporate two offshore companies as part of a plan to help Native American tribes set up lending operations, a common business tactic because such ventures can claim tribal immunity against outside legal challenges.
The new venture’s parent company, Hayfield Investment Partners, was incorporated in Delaware — considered a tax haven like a half-dozen other American states, underscoring that secrecy and tax advantages are not limited to palm-dotted tropical islands. Hayfield already had a separate subsidiary called Integrity Advance, an online payday loan company whose lending practices were coming into the cross hairs of regulators across the United States.
Documents in Appleby’s files show that Mr. Stephens and his funds owned 40 percent of Hayfield, which received additional investments from executives of Stephens Inc., the family investment bank, and acquaintances like the golf star Phil Mickelson, who contributed $12,000.
It did not take long for Integrity Advance to generate complaints from borrowers and regulators. People short of cash who took out small loans would later see large withdrawals from their bank accounts for interest and services fees that often far exceeded the amount they originally borrowed.
By November 2012, Integrity Advance had received cease-and-desist letters from state regulators in Connecticut, Kentucky, Illinois, Mississippi and South Carolina. In May 2013, a Minnesota district court ordered the company to pay nearly $8 million in civil penalties and victim restitution, saying that the firm had targeted financially vulnerable citizens with interest rates as high as 1,369 percent.
One borrower, Nils Paul Warren, a broadcast audio technician for Nascar in Orlando, complained to Florida regulators that he’d had to shell out more than $1,300 to repay a short-term $500 online loan he got from Integrity Advance in 2009 — a sum far greater than what he had expected.
“I think the bulk of their clientele are people who are a paycheck away from being homeless,” Mr. Warren said in an interview.
As complaints mounted, Mr. Stephens and Mr. Carnes sold part of Integrity Advance to a pawnshop-style loan company, Ezcorp. Eventually the Consumer Financial Protection Bureau accused Integrity Advance of “false and deceptive” tactics, and last year, an administrative law judge recommended to the head of the bureau that the company and Mr. Carnes, its chief executive, pay more than $51 million in fines and restitution to borrowers. Integrity Advance and Mr. Carnes are appealing the ruling.
In its legal action against Integrity Advance, the bureau emphasized Mr. Carnes’s 52 percent ownership of Hayfield, the parent company. Neither regulators nor the news media has ever mentioned Mr. Stephens’s sizable stake. (Mr. Stephens declined to comment.)
If he kept quiet about his role in the embattled payday loan business, he showed no similar reticence in attacking the consumer bureau. In June 2013, he told The Wall Street Journal that the bureau bore some blame for lagging business growth. “The stories we hear about that are pretty scary,” the billionaire said.
During last year’s campaign, Mr. Stephens contributed $3 million to Club for Growth, a conservative political action committee that has pushed Congress to strip the bureau’s enforcement powers.
Along with helping bankroll such Washington battles, Mr. Stephens has recently used his investment bank, Stephens Inc., to start an online video series called “This Is Capitalism” to improve millennials’ opinion of free-market economics.
In his introduction, Mr. Stephens wrote that he hoped the series would counter the notion that the free market is “a system that enriches a few at the expense of the many.”
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