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NY Times, Nov. 8 2017
How Business Titans, Pop Stars and Royals Hide Their Wealth
By SCOTT SHANE, SPENCER WOODMAN and MICHAEL FORSYTHE
James H. Simons, a reserved mathematician and hedge fund operator from
Boston now approaching 80, is a big Democratic donor. Warren A.
Stephens, a 60-year-old golf enthusiast once called the king of Little
Rock, Ark., inherited a family investment bank and became a booster of
conservative Republicans.
But Mr. Simons and Mr. Stephens are both billionaires who have used the
services of offshore finance — the trusts and shell companies that the
world’s wealthiest people use to park their money beyond the reach of
tax collectors and out of the public eye.
Mr. Simons was the main beneficiary of a private trust, never previously
described, that was one of the largest in the world. In response to
recent questions about the trust, Mr. Simons said that he had
transferred his share to a Bermuda-registered charitable foundation.
Mr. Stephens used an opaque holding company to own an approximately 40
percent stake in a loan business accused by the federal Consumer
Financial Protection Bureau of cheating working-class and poor
Americans. While earning millions from the investment, Mr. Stephens
helped finance a political onslaught against the bureau, never
mentioning his personal connection to the fight.
The details of the two men’s hidden wealth come from the files of
Appleby, founded in Bermuda more than a century ago and considered one
of the world’s top offshore law firms. A collection of 6.8 million
Appleby documents, obtained by the German newspaper Süddeutsche Zeitung
and shared with media organizations through the International Consortium
of Investigative Journalists, offers an inside look at the firm’s
services and customers.
From Utah, Secretive Help for a Russian Oligarch and His JetNOV. 6, 2017
How Business Titans, Pop Stars and Royals Hide Their WealthNOV. 7, 2017
Appleby operates in a rarefied universe of ultra-high-net-worth
individuals, where yachts and private jets are preferred transport and
mansions sit empty because their owner has several others. Some of
Appleby’s customers are also P.E.P.’s — politically exposed persons —
for whom avoiding unwanted attention is a crucial goal.
“The Right People. The Right Places,” reads the slogan on Appleby’s
stationery.
What offshore services offer to a diverse international elite is secrecy
and discretion, along with the opportunity to minimize or defer taxes.
Appleby appears to be more scrupulous than another offshore firm,
Panama-based Mossack Fonseca, about shunning overtly corrupt and
criminal clients, based on a comparison of the Appleby files with the
leaked Panama Papers, which drew global coverage last year.
Appleby board minutes contain lists of “declined business,” including
government officials suspected of corruption and millionaires linked to
organized crime.
Still, some dubious clients slip through. A PowerPoint slide used by
Appleby’s head of compliance discusses terrorist financing and refers to
funds that were “definitely tainted.”
“Some of the crap we accept is amazing totally amazing,” say notes to a
slide about sizing up potential customers.
Even with some potential customers turned away, business has rarely been
better. The ranks of the superrich are growing fast, fueled by
legitimate fortunes in finance, trade and technology — as well as drugs,
embezzlement and bribery. And the offshore finance industry has grown
alongside its customers’ accounts.
Big Names, Hidden Fortunes
The global number of wealthy people with more than $50 million in assets
is about 140,900, half of them in the United States, according to a
recent report from Credit Suisse.
A 2015 Appleby publication written for such clients, “Wealth Structuring
20:20,” features photos of a handsome couple and their children hurrying
to board a sleek personal jet. “Wealth seeks out safe harbours,” one
article is titled. Another advises on “Motivating children of means.”
In emails, Appleby employees fret about how to pamper well-heeled clients.
“Our fees are around 40k and they are the sort of people who I think
would appreciate popping a bottle on closing at Appleby this afternoon,”
a lawyer in the firm’s Grand Cayman office wrote in 2008 of a particular
deal. “Do you have the key to the booze vault? It would need to be
decent stuff as they’ll know their champagne.”
The legal boilerplate in the leaked documents can be eye-glazing until,
as in a 2015 financing agreement, you discover that the deal is for a
spectacular $50 million yacht, the Galactica Star, that Jay-Z and
Beyoncé once borrowed for a vacation.
Appleby had 31,000 American clients, the most common nationality by far.
The firm’s files include a who’s who of the nation’s wealthiest
citizens: prominent Democrats like George Soros, the financier and
philanthropist, and Penny Pritzker, commerce secretary in the Obama
administration; and high-profile Republican supporters of President
Trump, including Sheldon Adelson, the casino magnate, and Carl Icahn,
the private equity investor.
Queen Elizabeth II, according to Appleby documents, used a Cayman
Islands fund to invest in a company that owned a share of a British
rent-to-own company widely criticized for financing the sale of
household items at interest rates as high as 99.9 percent. The leaked
files reveal Madonna’s shares in a medical supplies firm, Bono’s
investment in a Lithuanian shopping center and the Microsoft co-founder
Paul G. Allen’s yacht and submarines.
Around the globe, the documents disclose the holdings of rulers and
politicians. The list includes three former prime ministers of Canada,
the queen dowager of Jordan and at least five members of the Qatari
ruling family.
Another offshore firm, the family-owned Asiaciti of Singapore, whose
files were obtained by Süddeutsche Zeitung, advertises that it helps
clients “preserve wealth from the ravages of litigation,” political
tumult and divorce. Its American customers include physicians,
professional poker players and a Colorado alfalfa farmer. Asiaciti set
up trusts in the Cook Islands for Kevin Trudeau, an infomercial pitchman
in the United States with a trail of legal troubles who sold millions of
copies of such self-help books as “The Weight-Loss Cure ‘They’ Don’t
Want You to Know About.”
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.”
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.
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 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.”
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.”
Spencer Woodman is a reporter for the International Consortium of
Investigative Journalists. Will Fitzgibbon of the International
Consortium of Investigative Journalists contributed reporting.
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