One has to think that most of the rich men who entered accused pedophile Jeffrey Epstein’s orbit are glad they aren’t Leon Black. The disgraced private equity billionaire had a purported professional relationship with Epstein in which Black gave Epstein unseemly amount of money for tax advice….when Epstein was in no way, shape or form a tax professional and all of his ideas were rechecked by actual experts who were paid a pittance compared to the eye-popping $158 million Epstein received. Not only did that arrangement get a fair bit of eyebrow raised press coverage, but the Senate Committee on Finance is also, with limited success, trying to go proctological on the Epstein advice as a case study in how super rich men avoid, and perhaps evade, taxes.
And just as the Senate publicized its probe into Black’s big tax savings and Black’s evident egregious overpay for Epstein’s tax services, and its dissatisfaction with how forthcoming Black has been, comes a new lawsuit alleging that Black raped an autistic 16 year old in 2002 at Epstein’s Manhattan townhouse.
Now admittedly, Black claims that Epstein’s ideas saved Black $1.6 billion in taxes. But tax pros are not paid on a commission basis. And for $158 million, Black could have hired the very best tax attorneys in the world many times over.1
This sort of generosity is particularly out of character in private equity, as is the fact that there was no fee agreement between Epstein and Black. The top dogs are very conscious of getting value for their money. And recall specifically that Black’s Apollo was extract due to the huge volume of legal fees paid by the funds Apollo managed. But the SEC sanctioned Apollo for hogging the discounts for benefit of Apollo, not the funds’ investors.
The press is doing readers a disservice by not making clear that pretty much all of the bad facts regarding Black’s tax and investment dealings with Epstein came out a while back, eventually forcing Apollo to dethrone Black because even normally sheep-like private equity investors were finding the whole affair too unseemly to stomach. From our February 2021 post:
Apollo’s efforts to contain the fallout from co-founder and now former CEO Leon Black having paid boatloads in fees and loans to Jeffrey Epstein after he was convicted of child prostitution are not succeeding.
As we’ll discuss shortly, Apollo had commissioned an whitewash investigation by law firm Dechert to reassure investors that nothing too unsavory had happened, and get them to stop their capital strike against the giant fund. However, the Financial Times reported yesterday that the UN’s pension fund is keeping Apollo on a watch list and the Pennsylvania Public School Employees Retirement System is sticking to its guns: From the Financial Times:
A report by lawyers for Apollo Global Management into the ties between Leon Black and the late paedophile Jeffrey Epstein is “not enough” to remove the company from a watch list of investments that require extra scrutiny, a top UN pension fund official has said…
The Pennsylvania Public School Employees’ Retirement System, which said in October it was not considering any new investments with Apollo, showed no sign of reconsidering its position in the wake of the Dechert review…
The $40bn Connecticut Retirement Plans and Trust Funds said it had “reviewed Apollo this spring and determined, based on a variety of due diligence criteria, they did not meet our standards for making a new capital commitment”.
….So why are many, and perhaps most, big pension fund investors not satisfied with the Apollo report? The short version is bad headlines plus bad details.
The UN pension fund acted after the first big media story on the troubling close relationship between Black and Epstein: Bloomberg’s Jeffrey Epstein Had a Door Into Apollo: His Deep Ties With Leon Black, in July 2019. But as we pointed out then, most investors, like CalPERS, merely went into pious hand-wringing mode.
The scandal grew to an entirely new level last October, when the New York Times broke the story that insiders reported that Black had paid at least $50 million and perhaps over $75 million in fees to Epstein from 2012 to 2017. After Black’s mumbled denials and foot shuffling failed to calm rattled investors, Apollo commissioned Dechert to poke around and put the best possible spin on the facts.
Apparently just about everyone with an operating brain cell reacted as we did when the report came out: Why Apollo’s Palace Coup Against Leon Black and Further Disclosures on Jeffrey Epstein Are Not Reassuring.
Dechert did say there was no evidence that Black was caught up in Epstein’s illicit activities or that Epstein had even tried foisting an underaged girl on him. However, that was about as good as the good news got.
First, the numbers were so much worse than what the Times had initially found. The report stated that Black had paid $158 million, more than twice as high as the Times’ original top figure, plus $30 million in loans, only $10 million of which had been repaid.
Second was that the claims about what all that money was for were wildly implausible. From our post:
The shock value of the magnitude of the payments to Black may succeed in diverting press and investor eyes from the real scandal here: what was Black paying for? And was Apollo implicated? Bear with me, because the supposedly reassuring excerpts from the report by law firm Dechert actually suggest that Apollo was involved too….
This is how Dechert attemptsed to justify the transfers from Black to Epstein. From the Wall Street Journal:
Mr. Black “believed, and witnesses generally agreed, that Epstein provided advice that conferred more than $1 billion and as much as $2 billion or more” in tax savings, the report states.
It also supports Mr. Black’s contention that he paid Epstein a fee he believed was roughly equivalent to 5% of the value that the late financier generated on an after-tax basis.
We’ll deal with the second howler first, that someone like Black would pay for mere advice on a percentage of results basis. As Black knows well, the people who get rich to very rich attach themselves to capital and get paid a percentage for performance, such as brokerage or asset management fees. Black, who buys legal services from the very best firms in the US in bulk, would know he could hire the most cunning tax lawyers in the US for a fraction of what he paid Epstein. He could even have financed a firm with the very best minds in the industry for this kind of dough. And in earlier accounts, Black also asserted that all of Epstein’s advice was vetted by independent experts.
So it seems reasonable to think that Black was not paying just for advice but some kind of execution too, as in moving funds and engaging in sham transactions to recharacterize the economic substance or apparent ownership of funds.
So it’s hard to see Dechert with a straight face parroting Black’s defense that he was paying 5% of the economic value of what is presented as mere tax advice as if that were a reasonable compensation arrangement.
But let’s go back to the first eyepopper: tax savings of $1 billion to over $2 billion.
Let’s be charitable and use Black’s maximum applicable tax rate: a marginal tax rate of about 50% for Federal, New York state and New York city income taxes. That means the amount of Leon Black personal income subject to Epstein’s wizardry, again charitably assuming he managed to find a way to bring Black’s taxes from 50% to zero, would be double the savings, or $2 to $4 billion.
If you read the post, we worked though the implications. It seems impossible to get to anything like these numbers unless you assume some of the income came from fees and expenses coming directly from the portfolio companies which did not go through Apollo. But for Black to achieve different tax outcomes than he’d received before, the income would have had to be distributed or characterized differently. That requires the cooperation of portfolio company employees, who are managed and controlled by Apollo, not Black personally.
Back to the present post. All of the detail above may be more than you wanted to know, but it should also make clear that what went on does not even remotely pass the smell test despite Apollo hiring a fancy firm to apply liberal amounts of porcine maquillage. And too few appear to have considered the idea that Black may have involved Apollo employees or those of investee companies in his scheming.
Three scandals hit Black this week: the announcement that he paid $62.5 million to the Virgin Islands to buy his way of any potential Jeffrey Epstein litigation. That number suggests Black was very exposed and the Virgin Islands has a pretty good idea of that too.
Then we have the revelation that Black’s woes with respect to his Epstein tax shelter dealings have not gone away by virtue of the Senate probe, launched last June but made public on Tuesday. From Reuters:
The U.S. Senate’s Finance Committee on Tuesday revealed an ongoing probe into private equity billionaire Leon Black’s financial ties with disgraced late financier Jeffrey Epstein, and said the investigation “uncovered serious tax issues.”
“The investigation has uncovered serious tax issues and other concerns with trusts and structures Black executed to avoid over $1 billion in future gift and estate taxes,” the panel said….
The Senate panel said that a reported $158 million of payments in several installments from 2012 to 2017 by Black to Epstein for financial advice seemed “inexplicably large,” given that Epstein was “neither a licensed tax attorney nor a certified public accountant.”
The panel also alleged Black “has refused to answer questions or provide any documents that could demonstrate how Epstein’s compensation for tax and estate planning services was determined or justified.
A spokesperson for Black said the billionaire had “cooperated extensively” with the panel’s probe and provided detailed information.
“The transactions referenced in the Committee’s letter were lawful in all respects, were conceived of, vetted and implemented by reputable law firms and tax and other advisors, and Mr. Black has fully paid all taxes owed to the government,” Black’s spokesperson said in an emailed statement.
The New York Times also pointed out:
The investigation by the Senate Finance Committee is part of an inquiry into tax shelters that the superrich use to “avoid or evade paying federal taxes, including gift and estate taxes,” according to the 16-page letter. In April, the committee requested information from Harlan Crow, a billionaire real estate developer, about his tax treatment of gifts to Justice Clarence Thomas of the Supreme Court.
If you compare this recap to the details already in the public domain, it sure looks like the Senate has not learned much, despite claiming they (among other things) were picking at inconsistencies in the Dechert report. And the list of follow-up questions does not look inspired.2
The fact is that rich people are allowed to be sloppy and stoopid and not paper up business dealings. It may seem obvious that a guy like Black must have had some not-savory reasons for deviating from sound practice, but bad appearances are a long long way from proving misconduct.
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1 Specifically, one would assume Black would have strong incentives to get his tax advice from a tax attorney, since the communications and work would be attorney-client privileged. However, attorney-client privilege is subject to a crime-fraud exception. Justia provides a careful explanation, including that the carveout typically applies to ongoing or prospective misconduct, not past crimes. Law firm Lubin Austermuehle gives a more layperson-friendly writeup:
The attorney-client privilege is a privilege that protects communications between a client and attorney from discovery or disclosure. The privilege is not absolute, however. It does not, for instance, protect statements made by a client to an attorney meant to further or conceal an intentional breach of fiduciary duty or crime. This recognized exception to the attorney-client privilege is known as the crime-fraud exception.
One court described the crime-fraud exception and the rationale behind it by explaining that “the crime-fraud exception encompasses a fraudulent scheme, an alleged breach of fiduciary duty or an accusation of some other wrongful conduct. Advice in furtherance of a fraudulent or unlawful goal cannot be considered ‘sound.’ Rather advice in furtherance of such goals is socially perverse, and the client’s communications seeking such advice are not worthy of protection.”
Now it may be that Black was overpaying Epstein to buy his silence with respect to their extracurricular activities. But it’s not hard to imagine that Black was using these tax schemes to launder money, particularly given how much of Black’s wealth was in art. Or perhaps Black had done a dirty to his Apollo partners or its investment funds. Remember that Apollo was at the center of a massive pay-to-play scandal at CalPERS that landed its CEO Fred Buenrostro in Federal prison for taking bribes.
2 Theoretically the Senate Committee could play hardball and try to get Black’s tax returns. But I doubt that would work. My understanding is Congress would have to have a bona fide legislative intent and it’s hard to see what one could be. And even if they got them, they’d be vanishingly unlikely to able to see how the Epstein tax structuring advice played out in them.