Harbert Management to Pay $40 Million Over Tax-Dodging Claim

  • Accord will resolve a probe by New York’s attorney general
  • Firm’s fees earned through the Harbinger Capital hedge fund

Harbert Management Corp., the investment management firm started by one of Alabama’s richest families, agreed to pay New York $40 million to resolve claims over unpaid taxes on performance fees earned in the state by the hedge fund it helped found, Harbinger Capital Partners.

The accord with Harbert, which provided seed money for the $26 billion Harbinger Capital in 2001, is the largest whistle-blower recovery in the state’s history, New York Attorney General Eric Schneiderman said Tuesday in a statement. Neither Harbinger nor founder Philip Falcone, whose trading activity in Manhattan generated the fees in the case, are accused of wrongdoing.

“Our investigation uncovered a brazen and deliberate decision to avoid paying millions in taxes owed to New York State," Schneiderman said. “Harbert Management made a clear choice to skirt the rules and as a result, ordinary New York taxpayers were left footing the bill."

Andy Merrill, a spokesman for Harbert, said the company denies wrongdoing in the case, adding that none of the income at issue was received by the company.

The company "presented substantial evidence demonstrating that our filing position was adopted in good faith, and in consultation with leading external tax advisers," Merrill said in an emailed statement.

Performance Fees

The performance fee income at issue was earned from 2004 to 2009 by Alabama-based members of Harbinger’s investment manager, including Harbert Management Chief Executive Officer Raymond J. Harbert and other senior executives, according to the filing. Schneiderman didn’t identify the whistle-blower, whose name is redacted from an April 3 settlement agreement filed in New York state court in Manhattan.

Paul Holmes, an external spokesman for Harbinger Capital, declined to comment.

Harbert, based in Birmingham, should have started paying New York income tax by 2004, but the company ignored the advice of outside accountants and apportioned none of its performance fee income to the state in a tax return that didn’t mention the company’s office in Manhattan, according to the statement.

Falcone, who became a billionaire after betting against the U.S. housing market, in 2014 stepped down as chairman and chief executive officer of the publicly traded Harbinger Group Inc. -- since renamed HRG Group -- to focus on his hedge fund and investments including a holding company.

Falcone had been barred in 2013 from the industry for at least five years as part of a settlement with U.S. regulators who accused him of improperly borrowing money from his fund to pay his personal taxes and giving preferential treatment to some investors. He didn’t admit to any wrongdoing under that deal.

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