A whistleblower was awarded $8.8 million in connection with a groundbreaking settlement by New York State Attorney General Eric Schneiderman. The unnamed individual had alleged that investment managers for Phil Falcone’s Harbinger Capital Partners, a $26 billion hedge fund based in New York City, had failed to pay taxes on performance income for several years.

In the largest-ever recovery of its kind, Attorney General Eric Schneiderman announced last Tuesday that Alabama-based Harbert Management Corporation and top executives at the firm agreed to pay $40 million to settle tax evasion charges. According to Schneiderman:

• Harbert was the fund sponsor for Phil Falcone’s Harbinger Capital Partners, a $26 billion hedge fund based in New York City.
• Harbinger Capital Partners Offshore Manager served as the investment manager for the Harbinger Fund from 2002 through 2009. 
• Philip Falcone and the other members of the investment team operated in New York City, at offices that were located at 555 Madison Avenue in Manhattan.
• As investment manager, Offshore Manager earned performance fee income in an amount equal to 20% of the Harbinger Fund’s net profits.
• Offshore Manager’s members, which included several senior executives at Harbert Management Corporation, were required to pay NYS income tax on this performance fee income earned by Mr. Falcone’s trading activity in New York. 

The basis for the settlement is that, when businesses operate both inside and out of New York City and State, they must apportion for tax purposes that part of their income derived from or connected with New York.

[Click on Schneiderman Announcement for further specifics on the case.]