Ray Lane’s $100 Million Tax Bill Inflated by Dot-Com Bomb
For Ray Lane, the years after leaving Oracle Corp. (ORCL) with a $1 billion fortune were supposed to cement his reputation as a shrewd Silicon Valley executive.
Instead, he’s dogged by a $100 million tax bill stemming from a failed shelter built on startups, including one called Kleptomaniac.com and another specializing in technology to replace police radar guns. Fallout from the liability has tarnished the reputation of the son of a steel-mill engineer from Pennsylvania with a taste for expensive cars and multimillion-dollar homes.
Lane’s settlement with the Internal Revenue Service after a dozen years of tussling coincided with upheaval in his professional life in recent months. Lane, 66, stepped down as Hewlett-Packard Co. (HPQ)’s chairman, retired from active investing at venture-capital firm Kleiner Perkins Caufield & Byers and quit the board of failing electric-carmaker Fisker Automotive Inc. The events reflect changing fortunes for an ambitious executive who demonstrated prowess at overseeing businesses early on, yet proved less adept at managing money and judging corporate deals.
“We pay directors big bucks to understand complicated financial transactions, so it’s a red flag when they get into trouble” with their personal finances, said Nell Minow, co-owner of GMI Ratings Inc., which evaluates corporate boards.
Lane’s decision in 2000 to invest $25 million in a package of dot-com era startups were part of a strategy to shield some of his then-surging wealth from taxes, creating a $251.7 million shelter that the government later declared invalid, according to papers filed in U.S. Tax Court.
Lane, who joined Hewlett-Packard’s board in 2010, remains a director at the personal-computer maker.
At Oracle, Lane was known as a savvy operator who remade the software company’s sales force to emphasize long-term relationships instead of short-term deals, bolstering ties with important customers. Yet his investment picks -- pouring millions of Kleiner’s and his own money into struggling electric-luxury carmaker Fisker, betting on unsuccessful green technology companies for Kleiner Perkins and backing Hewlett-Packard’s value-destroying Autonomy Corp. acquisition -- have been much less successful.
“HP’s board owes shareholders some kind of response about why they want to continue with Lane as a director,” Minow said.
Lane’s “leadership is reflected in the early success we’ve had turning the company around,” Hewlett-Packard Chief Executive Officer Meg Whitman said in a statement the day Lane stepped down as chairman. “I’m grateful that Ray will continue to serve.”
The startups at the center of Lane’s earlier investments reflected the go-go period of the late 1990s, when many new companies commanded lofty valuations only to flame out when their business models proved faulty.
Lane’s tax-shelter strategy involved companies called Vanadium Partners Fund LLC and Velocity Partners Fund LLC. The latter made payments to two other entities, Veritas Cambridge Fund LLC and Vector Calculus Fund LLC. Those funds, in turn, bought warrants, or rights to purchase equity in the startups at a given price.
Vector, for example, reported paying $2.1 million for a warrant in RocketGas Inc., described in court papers as a business “that will revolutionize the stagnant petroleum industry.” Its business model was “bringing services that have only been available at gasoline stations directly to customers at home or work.” The company projected revenue $509 million by 2005, according to the filings.
Lane’s investments also found their way to a startup called Kleptomaniac.com, an “e-commerce solutions provider” that built websites for retailers. The company projected 2004 sales of $151 million. It was sold in December 2000 to lifestyle and dating website Gay.com. The founder of the website, Mark Elderkin, said it was acquired by new owners in the late 2000s.
Vector also reported spending $4.9 million for a warrant in Spectrum Target Detection Inc., which developed a traffic-radar gun using echo-cancellation technology that “was expected to replace traditional speed measuring devices used by law enforcement agencies,” according to court papers. No one answered the phones at the Gatineau, Quebec-based company.
Another startup, StorageQuest Inc., developed data-storage technology and projected sales of $47 million by 2004. Lane’s fund said it paid $3 million for a warrant in the company. Its CEO, Marwan Zayed, said Ottawa-based StorageQuest is now a $2 million company.
“Like most high-tech startups which seemed so attractive in 2000, that high-risk, high-reward portfolio proved worthless within three years,” one of Lane’s lawyers argued in a court filing, seeking to show the companies were investments intended to generate a profit, not losses.
Losses for those companies and one other totaled about $17 million, according to court papers. The warrants for all five companies “became worthless,” Lane’s attorneys said.
“I’m embarrassed I didn’t tear it apart,” Lane said of the investment strategy in a telephone interview this month. “I know it sounds stupid but I can’t describe” how the partnerships turned a $25 million investment into what was supposed to be an income-shielding loss 10 times greater, he said.
The IRS found in December that Lane’s shelter improperly offset his income from stock options with losses.
“Taxpayers like me are typically put into these things by advisers,” Lane said. “These products all looked good” until the collapse of the Internet bubble, he said.
The plunge in the value of tech companies flush with Internet-mania cash took the Nasdaq Composite Index from 5,049 in March 2000 to 1,840 a year later and suppressed demand and funding for startups’ products for years afterward.
The IRS argued that Lane’s investments in the companies really were “payments of fees to promoters of listed and/or abusive tax avoidance transactions” to allow him to participate in a tax shelter dubbed POPS.
That’s an acronym for Partnership Option Portfolio Securities, part of a larger family of tax shelters popular with investors in the late 1990s that sought to eliminate tax bills on capital gains. The idea was that any gains would be attributed to an entity that would be indifferent to the tax. Tax-offsetting losses would be attributed to another entity. POPS have since fallen out of use amid attacks by the IRS.
Lane used the POPS strategy to generate a $251.7 million “non-economic loss” for 2000 in Vanadium, the IRS said.
Lane employed the shelters after walking away from Oracle in mid-2000 with more than $1 billion in stock and stock options.
The path toward the excesses of Silicon Valley’s technology boom stretches from McKeesport, Pennsylvania, a blue-collar town near Pittsburgh, where Lane was born the son of an engineer who designed rolling equipment for a steel mill.
Educated at West Virginia University, Lane began his career at International Business Machines Corp. soon after his graduation in 1968. He joined the Armonk, New York-based company during its heyday after the invention of the mainframe and worked in product management and marketing.
Later, he served as an executive at Ross Perot’s Electronic Data Systems and then Booz Allen Hamilton, where he led a group whose purpose was helping consulting clients use information technology to improve businesses.
He got the chance to amass great wealth in 1992, when he was recruited as an Oracle executive by Larry Ellison, rising to president and chief operating officer of the world’s largest database-software maker.
To lure Lane to California from Texas, where he then worked for Booz Allen, Ellison increased the number of options he offered to 300,000 from 100,000, the San Francisco Chronicle reported in 1997. He left Oracle mid-2000 amid strategy differences with Ellison.
Lane joined Menlo Park, California-based Kleiner Perkins that summer. During more than a dozen years there, he backed 13 companies, according to Kleiner’s website. Only four went public or were acquired, according to the site. These include Vertica, a data-analysis provider acquired by Hewlett-Packard for an undisclosed sum in 2011.
Besides information-technology deals, Lane invested in green technology companies, including Luca Technologies Inc., GreatPoint Energy Inc., and Aquion Energy Inc. That field has been less successful for Kleiner.
The mixed investing record hasn’t kept Lane from a lavish lifestyle in keeping with Silicon Valley’s wealthy. A lover of fine wine and fast cars, Lane bought Ellison’s Ferrari for $57,500 early in his Oracle career. He later bought another vehicle from the company for $100,000, according to Oracle’s 2000 proxy. He, like the Silicon Valley entrepreneurs and investors he socialized with, competed over the size and number of cars and homes they own, according to a person familiar with Lane, who didn’t want to be named because the matter is private.
Even though Lane’s net worth has fallen since leaving Oracle a billionaire on paper, he said he can satisfy the obligation to the IRS.
“Not ever have I considered personal bankruptcy,” Lane said. “I would not have settled if I couldn’t pay the bill.”
For more than a dozen years, Lane and his lawyers wrangled with the IRS over the amount he owed. In 2004, Lane was among petitioners who sought to keep their names as tax-shelter clients private in a Justice Department investigation of accounting firm BDO Seidman LLP, according to court papers.
Lane filed a series of extensions with the agency -- about one every 18 months -- that prolonged the case. The latest extended it into 2014.
“They let this thing sit for 12 years,” he said. “I never received a tax bill because I signed an extension. I don’t think they ever did send a tax bill.”
The IRS ruled on Dec. 5 that Lane’s shelter was invalid, disallowing all income and losses claimed by Vanadium. The agency had planned to depose Lane on March 29 in Newark, New Jersey, though it was willing to conduct an interview instead, court papers show. Lane’s attorney declined both offers. The case was set for a Tax Court trial in October.
In May, Lane opted to settle instead, signing the $100 million agreement with the IRS. Lane and his lawyers’ discussions about resolving the dispute became more intense late last year and came to a head just as he was facing unrest among shareholders of Palo Alto, California-based Hewlett-Packard, the world’s largest personal computer maker.
A March 20 vote of Hewlett-Packard investors at the company’s annual meeting delivered a rebuke to Lane and some other directors by re-electing them narrowly.
Investors were chagrined by the company’s acquisition of Autonomy, a maker of data-analysis software, which led to an $8.8 billion writedown and accusations by Hewlett-Packard of accounting falsehoods at the firm before it was acquired.
After the meeting at Silicon Valley’s Computer History Museum, Lane was dismayed that he wasn’t given what he thought was enough credit for remaking the company’s board and ousting CEO Leo Apotheker, who made the Autonomy purchase, a person familiar with Lane’s thinking said. Lane stepped down from the chairmanship in April.
Apotheker said in November that due diligence on the deal had been “meticulous and thorough” and he was “stunned” by Hewlett-Packard’s allegations that Autonomy misrepresented results. Autonomy managers led by former CEO Mike Lynch have denied wrongdoing.
Meanwhile Fisker, which has raised an estimated $1.2 billion in venture capital, including millions of Lane’s own money, was being plagued by quality issues, an Energy Department loan it couldn’t repay, the bankruptcy of its battery supplier and the destruction of hundreds of its low-slung luxury Karmas in Superstorm Sandy. Lane became a partner emeritus at Kleiner Perkins in April, and left Fisker’s board in May.
Lane’s change in status at Kleiner Perkins had been in the works for a year and was unrelated to his personal financial matters, a person close to the venture-capital firm said.
Fisker declined to comment, said Tony Knight, a spokesman for the company at Sitrick & Co. in Los Angeles.
Michael Thacker, a Hewlett-Packard spokesman, said, “This is a personal matter for Mr. Lane that does not involve HP. ”
Lane, who turns 70 in December 2016, has said he wants to spend half his time on personal pursuits by then, while continuing to serve on the boards of startups. He is chairman of Carnegie Mellon University’s board of trustees and vice chairman of the Special Olympics.
Lane also plans to stay on Hewlett-Packard’s board into next year, according to a person familiar with his thinking.
His financial difficulties could cast a pall over the remainder of his tenure, said Rakesh Khurana, a Harvard Business School professor who has written about corporate governance.
“Historically board members have been selected more for the reputation they bring to companies than anything else,” Khurana said. “They’re supposed to be signals of confidence in a company.”
To contact the reporters on this story: Aaron Ricadela in San Francisco at firstname.lastname@example.org; Andrew Zajac in Washington at email@example.com; Carol Hymowitz in New York at firstname.lastname@example.org