Hedge Funds Accuse Accuser Of Funny Stuff On Taxes

Mar 14 2012 | 1:06pm ET

The hedge funds accused by Fairfax Financial Holdings of market manipulation and insider-trading are seeking a measure of revenge against the Canadian insurer.

One of the hedge funds, Kynikos Associates, SAC Capital Advisors and Third Point, made a complaint about Fairfax to the Internal Revenue Services' whistleblower office. According to the hedge fund, relying on one of their expert witnesses in the Fairfax case, the insurer used trickery to claim $400 million in tax benefits from 2003 through 2006, The New York Times reports.

Fairfax offset its own losses against income from its reinsurance subsidy, Odyssey Re Holdings. The only problem was, Fairfax didn't own the necessary 80% of Odyssey in 2003. Rather than buying the $78 million in Odyssey shares it needed to reach that threshold, it borrowed them—and, according to the hedge fund, borrowing is not the same as owning, and is the difference between a legitimate $400 million benefit and fraud.

Certainly, tax law expert Edward Kleinbard, hired by the hedge funds, doesn't think it’s the same thing, and has produced a 60-page report to show—and testified that—the deal was a sham.

"Fairfax borrowed shares to no economic effect simply to create the impression that it owned them," he wrote. "Fairfax did not accomplish any business objective through this transaction, but rather simply paid a fee to [Bank of America] to acquire a false claim to file a consolidated federal income tax return with Odyssey Re."

Fairfax did get Ernst & Young to sign off on the deal, but, Kleinbard wrote, the auditor's decision was based solely on what Fairfax told it about the deal. And BofA seemed to question Fairfax's plans—although the executive who managed the deal later changed his mind.

Borrowing the shares "does not provide true economic ownership of the ORH shares to Fairfax," Robert Giammarco wrote in an e-mail at the time. But testifying in 2011, after a stint as executive vice president of Odyssey, Giammarco said, "I think I just got it wrong."

It is unclear whether the IRS has taken up the whistleblower complaint.

"Fairfax owned these shares and was properly consolidated," Michael Bowe, a lawyer for Fairfax, said. "Only defendants and their paid experts, like Mr. Kleinbard, argue Fairfax did not have an economic interest in these shares."

Fairfax has seen its lawsuit against those defendants slowly whittled away after more than five years of litigation. In fact, one of the defendants isn't a defendant anymore; last year, a judge dismissed Fairfax's case against SAC.


In Depth

Q&A: Neil Azous Talks Global Macro Investing

Nov 24 2014 | 12:41pm ET

Neil Azous is the founder and managing member of Rareview Macro, an advisory firm...

Lifestyle

Griffin Selling Chicago Apartment

Nov 26 2014 | 11:40am ET

Citadel Investment Group’s Kenneth Griffin is making clear to his estranged wife...

Guest Contributor

Why The Big Money Is Going To Europe

Nov 14 2014 | 6:03am ET

Peer-to-peer lending was invented with the individual investor in mind. But despite...

 

Sponsored Content

    For Hedge Funds, Mastering Data Is Key To Success

    Nov 4 2014 | 9:45am ET

    Data management is important to every business, but for hedge funds, it is critical. FINalternatives recently asked Peter Sanchez, CEO of Northern Trust Hedge Fund Services, how fund managers can deal with the demands of managing data while at the same time remain transparent and abide by operational best practices. Read more…

Editor's Note

    Guidelines for Guest Articles

    Oct 22 2014 | 9:46am ET

    We are always looking for guest articles from hedge fund managers and buy-side firms.

    If you are interested in submitting a contributed piece for possible publication on FINalternatives, please take a look at the specs. Read more…

 

Futures Magazine

November 2014 Cover

Building a better market

Reg NMS created a huge bifurcation in equity markets and while much of what has followed has been positive, in terms of lower fees and greater liquidity, many traders would like to see the market come...

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.