by Linda Beale
Romney, Family Business, Carried Interest, and potential conflicts of interest
Just a quick note this morning on an interesting article in the October 29, 2012 edition of The Nation magazine, Lee Fang, Romney Family Business: Investors in Tagg Romney’s firm, Solamere Capital, could hit the jackpot if his father wins, The Nation (Oct. 29, 2012), at 18.
Marc Leder, the wealthy investor who hosted the Romney fundraiser last May in Boca Raton where Romney made his comment disparaging almost half of Americans as personally irresponsible and happy to depend on government, is just one of several high-powered investors linked to the Romney family business empire. The Nation article describes it this way.
In 2008, … [Romney’s] eldest son Tagg and his chief fundraiser Spencer Zwick formed Solamere Capital, a private equity firm …. What Tagg lacked in experience in the world of high finance, he made up for with a vast network of political connections forged through his father, who seeded the firm with $10 million and was the featured speaker at its first investor conference in January 2010. …
Unlike most private equity firms…, Solamere specializes in something else: billing itself as a ‘fund of funds’ with ‘unparalleled networks’, it provides investors with ‘unique access’ to an elite set of other private equity firms and hedge funds.
Solamere, a firm predicated on its founders’ relationship with Romney, presents a channel for powerful investors to influence the White House if he wins. …
The looming matters range from general matters that affect all private equity firms–such as tax changes or the new rules mandated by the Dodd-Frank financial reform bill–to more specific concerns relating to businesses owned or controlled by Solamere’s partner firms. Many of these businesses, in fact, depend on government contracts; indeed, some have been accused of fleecing taxpayers…. A Romney administration could directly affect the profitability of these companies–and, by extension, potentially the success of Tagg’s venture….
Take Leder … whose Sun Capital firm bought a stake in the Scooter Store last year. The company, known for its ubiquitous television ads promising seemingly free motorized wheelchairs for Medicare beneficiaries, has struggled as the Centers for Medicare and Medicaid Services, the federal agency that governs the programs, implements rules to curb rampant billing fraud. …80 percent of the claims for scooters and power wheelchairs did not meet Medicare requirements, meaning that $492 million a year is being improperly spent. In 2007, the Scooter Store gave up $13 million in Medicare payments and paid $4 million to settle with the Justice Department over allegations that it had overbiled for its electric wheelchairs. … Disclosures … suggest that pressuring the government is the only way [Leder’s] investment in Scooter Store can turn a profit. Since Leder’s firm invested in the Scooter Store, the company has spent nearly $900,000 on lobbyists to push back on [the] two latest challenges to its motorized-scooter empire.
Records indicate the firm [Solamere Capital] was incorporated at the same Boston office where Romney’s campaign headquarters had been located, and later shared an office address with Romney’s PAC. Zwick … has been referred to as Romney’s ‘sixth son.’ And by all accounts, he’s one of the most trusted advisers in Romney’s circle. … [I]n February 2008, Solamer Capital registered with the State of Massachusetts. Zwick and Tagg joined with Eric Scheuermann, a former Jupiter Partners executive, as the three managing partners of the firm. Scheuermann was the only one with prior experience in private equity. … However, success for the firm seemed preordained. … Solamere surpassed its $200 million fundraising goal with help from an elite set of ‘high net worth’ individuals, many of whom are close Romney allies. … The three managing partners will receive $16.8 million in management fees over the first six years, as well as ‘performance-based incentive’ pay. … A tax return filed by Mitt and Ann Romney, made public in September, showed that Solamere has used an array of Cayman Islands entities … [It] likely uses ‘blocker corporations’ to help its tax-exempt investors avoid paying the unrelated business income tax.
In June, the Romney campaign announced that if he’s elected, the candidate would move his assets into a federally qualified blind trust, and would also likely sell off any assets that ‘are not fully compliant with federal disclosure and other rules applicable to the office of the presidency.’ But if Romney wins, there’s almost no chance that the underlying assets of his son’s firm, Solamere, will be revealed. Solamere could have assets involved in healthcare, energy, telecommunications or any number of other industries, but the public will be left in the dark.
What is known is that Solamere’s private equity partners are eager to influence the federal government. Three of the firms listed in the Solamere prospectus–Sun Capital Partners, TPG Capital and TA Associates–are currently financing a lobbying campaign under a trade group called the Private Equity Growth Capital Councill (PEGCC), which is seeking to influence a number of tax and regulatory decisions. The PEGCC has spent nearly $5.8 million on federal lobbying over the past three years, and untold millions this year on a public relations campaign in swing states to improve the image of private equity–a strategy seen as designed to benefit Romney’s campaign. One of the primary concerns of the PEGCC … is that the carried interest loophole, which allows wealthy investment managers to be taxed [on their compensation for services] at only the 15 percent capital gains rate, may be closed. The group has also …held meetings with regulators to complain about the Dodd-Frank financial reform bill’s mandates.
Other Solamere investment partners own businesses that face imminent regulatory action [including SCF partners, Rockwater Energy Solutions, and IPS Canada].
Meanwhile, HIG Capital–one of the largest Solamere partners, with nearly $10 billion of equity capital–owns a number of other firms that are closely monitoring the federal government. One area where private equity firms have made lucrative investments is the new industry of dental management companies that bill Medicaid. In November 2011, Senators Chuck Grassley of Iowa and Max Baucus of Montana opened an investigation in response to allegations that these corporate-controlled dentists have abused children.
The Medicaid reimbursements for the dental management companies offer a revealing look at the underlying business model being pursued by the Romney-supporting private equity firms: big government, when harnessed to industry-friendly regulators, can mean big profits. Many of these private equity-owned companies rely on federal and state contracts, from HIG Capital’s Hart Intercivic, a voting machine company, to EnviroFoam Technologies, a biological and chemical decontamination firm that does business with the US military and is owned by Peterson Partners, a private equity firm listed in the Solamere prospectus.
Asked about the rising cost of colleges …, Romney said that students should take a look at for-profit colleges like Full Sail Uniersity …. Weeks later… Romney hailed the ‘advent of for-profit institutions of higher learning’ for providing competition with public and private universities. He again volunteered Full Sail University as a good example of how students can ‘hold down the cost of their education.’
What Romney neglected to mention is that Full Sail University–in fact the third most expensive college in the United States–is owned by TA Associates. Indeed, TA Associates has viewed the for-profit college industry–a $40 billion maker where 85 percent of the funds are supplied by taxpayers–as an excellent opportunity for growth. …Like most profit driven colleges, which account for only 10 percent of all students but about half of all loan defaults, TA Associates’ schools do not boast a stellar track record.
‘The fact that Romney praised an overpriced, underperforming college that is owned by his son’s investment partners, and whose owners have contributed a quarter-million dollars to his campaign and Super PAC, shows how he embodies the corrupting influence of money on politics,’ asserts David Halperin …. ‘It shows how his administration could, as a matter of course, allow special interests–the interests of his rich friends–to skew important policy decisions and harm the public interest.’ Id (emphases added).
The article goes on to discuss how closely Solarmere and its investors are intertwined with the Romney campaign. Tagg is a part of Romney’s inner circle. Solamere holds an investor conference that happens to coincide with a neighboring fundraising event for the campaign. American Crossroads, Karl Rove’s Super PAC engine of radical GOP ideas, attends both. The Super PAC can’t coordinate with campaigns, but the fundraising is hosted by Solamere so that makes it okay, technically.
This excerpt thus amply illustrates the way class warfare really works: a closely knit group of oligarchs with business ties through their private equity empires and a shared corporatist perspective on society can use insider access to the channels of government power to make government work for them and prevent its working for ordinary folk.
First, money speaks loudly, so legislation tends to get passed that favors the elite or gets blocked when it disfavors their special interests. Ending the carried interest loophole can’t make it through Congress, even though there is a wealth of commentary condemning it as an inappropriate subsidy for an industry that is often destructive to the economy. Hampering the EPA’s ability to safeguard wildnerness lands or healthy air and water is easily accomplished. Insider information, influential networks among oligarchs, and intimate acquaintanceship among executives in government and corporate executives ensures the smooth flow and fit of wishlists and accomplishments.
Second, with their focus steadfastly on their own rentier profits from their vulture businesses, oligarchs refuse to support measures that are important for the commonweal, and urge the passage of measures that have harsh impact on ordinary workers. Offshoring is praised as a “creative destruction” even though compensating creative innovation seldom offsets the costs of worker loss, community disintegration, and economic decline. Unions are viewed as hostile opponents (because the more money that goes to workers in respect of their real work acomplished, the less can be skimmed off the top by vulture capitalists), and hence much of big corporate money is targeted to eliminate collective bargaining rights that protect workers.
Note that this is always just one of many blows from private equity’s leveraged buyout methods, since the use of excess leveraging for quick profits to the private equity managers builds up debt that sucks out cashflow and either provides justification for reduced wages to workers from a barely stable industry or provides justification for a bankruptcy process through which the company’s pension obligations to its retired workers can more easily be scrapped (even though it could have met them if it had only treated them as important as its payouts to overpaid managers).
cross posted with ataxingmatter