In March 2015, an unnamed whistleblower filed a qui tam
action in New York State Supreme Court under the state’s False Claims Act against Harbert Management Corporation, Harbinger Capital Partners Offshore Manager LLC and others. The suit asserted that those entities, as well as several affiliated entities and individuals, had failed to report and pay New York State income tax on millions of dollars of performance fee income derived from their fund management activities in New York. For more on the tax treatment of performance fee income, see “Are Compensatory Options on Offshore Hedge Fund Shares Subject to the Anti-Deferral Provisions of Internal Revenue Code Section 457A?
” (Jun. 13, 2014). Several parties to the action recently entered into a Stipulation and Settlement Agreement (Stipulation) pursuant to which the respondents have agreed to pay over $40 million in the aggregate, including an award of more than $8.8 million to the whistleblower. The settlement is the largest such recovery in New York and serves as an important reminder that fund managers must comply with the tax regime of each jurisdiction in which they operate. This article analyzes the terms of the Stipulation and its potential ramifications on the hedge fund industry. For coverage of actions involving Harbinger, see “Settlement by Harbinger’s Former COO Calls Into Question the Utility for Hedge Fund Manager Executives of Indemnification Provisions in Fund Documents and D&O Insurance Policies
” (Aug. 1, 2014); “Important Implications and Recommendations for Hedge Fund Managers in the Aftermath of the SEC’s Settlement With Philip A. Falcone and Harbinger Entities
” (Aug. 22, 2013); and “SEC Charges Philip A. Falcone, Harbinger Capital Partners and Related Entities and Individuals With Misappropriation of Client Assets, Granting of Preferential Redemptions and Market Manipulation
” (Jun. 28, 2012).