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Posted by on Aug 24, 2012 in At TMV | 16 comments

The Gawker Bain Document Dump

WASHINGTON – Today Mitt Romney has an op-ed in the Wall Street Journal on his days at Bain Capital.

“I’m not sure Bain Capital could have grown or turned around some of the companies we invested in had we faced today’s anti-business environment. Andy Puzder, the chief executive of CKE Restaurants Inc., which employs about 21,000 people at Carl’s Jr. and Hardee’s restaurants, has said that the “current unfriendly economic environment perhaps best explains why American companies are sitting on over $2 trillion which they could invest.” [Wall Street Journal]

Fortune‘s senior editor Dan Primack takes issue with Mr. Romney on this.

But we do know two things that shed doubt on Romney’s broader, anti-Obama point: 1. Private equity firms are doing just fine. In fact, take a look at benchmark returns from Cambridge Associates… […] Third, the primary driver of bottom-line trouble since Apollo took over was the massive amount of debt — and a dividend recap — related to Apollo’s acquisition. In fact, there’s a good case to be made that CKE might have been better off without Apollo, at least from a balance sheet perspective (I can’t speak to its strategic value). Not exactly a good case study for a private equity exec who wants to be president…

It comes the day after a massive total of 950 classified documents were released and uploaded by Gawker, a noted gossip site that now takes its place beside other freedom of information new-media outlets to decide that transparency and openness matters more than knowing what you’re dumping into the public bloodstream. They’re saying, we got the goods, now you read them and be the judge.

From Gawker’s John Cook on Thursday:

…Gawker has obtained a massive cache of confidential financial documents that shed a great deal of light on those finances, and on the tax-dodging tricks available to the hyper-rich that he has used to keep his effective tax rate at roughly 13% over the last decade.

Today, we are publishing more than 950 pages of internal audits, financial statements, and private investor letters for 21 cryptically named entities in which Romney had invested—at minimum—more than $10 million as of 2011…

The revelation set legal eagles, tax experts, political analysts and average citizens to being the unpacking. An analysis from Victor Fleischer is interesting. Fleischer is a law professor at the University of Colorado Law School and has taught at the law schools of UCLA, Georgetown, Illinois, Columbia, and NYU. The excerpt below comes from his analysis titled Romney’s Management Fee Conversion:

Fund VII. Gawker today posted some Bain documents today showing that Bain, like many other PE firms, had engaged in this practice of converting management fees into capital gain. Unlike carried interest, which is unseemly but perfectly legal, Bain’s management fee conversions are not legal. If challenged in court, Bain would lose. The Bain partners, in my opinion, misreported their income if they reported these converted fees as capital gain instead of ordinary income.

[…] To be clear, there is some economic risk, and presumably this is how Bain’s tax counsel justified its reporting. The economic risk is that the priority profit must come from future profits, presumably from the investment to which the converted fee is allocated. On the other hand, the managers get to choose which investment in the portfolio they want to skim, and they are in a good position to know which investments are safest. Because the fees come off the top, they are not subject to real investment risk, but only the limited risk that even their best investments will decline in value, every single quarter, for the rest of the life of the fund. Even in 2009, an iffy year for Fund VII, the priority profit share increased in value by $3.8 million.

(UPDATE: Here’s another example. Bain Capital Fund X LP reported that it converted $338 million as of the end of 2009. At a 20% tax rate differential, that $67 million in taxes unpaid. Plus deferral.)

Bottom line: Mitt Romney has not paid all the taxes required under law.

What else will be uncovered who knows and whether it’s substantive enough for more tax experts to weigh in we’ll have to wait to see. But considering the too big to fail banking world in which we live that has stricken our ability to function financially in a myriad of ways, with the tax code something that everyone agrees needs to be rewritten, how Mitt Romney utilized the tax code at Bain Capital, as well as in his own life if that can be known, should be of interest to people considering Mr. Romney wants to live in the White House.

Taylor Marsh, a veteran political analyst and former Huffington Post contributor, is the author of The Hillary Effect, available at Barnes and Noble and on Amazon. Her new-media blog www.taylormarsh.com covers national politics, women and power.

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