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Hedge Fund’s Insiders Agree to Pay as Much as $7 Billion to I.R.S.


A yearslong dispute between a pioneering hedge fund and the Internal Revenue Service ended Thursday with an enormous bill for taxes and penalties: as much as $7 billion.

James Simons, a mathematician whose algorithmic approach has been adopted by many other investment funds, and some of his former colleagues at Renaissance Technologies have settled a decade-long dispute with the government over the tax treatment of some of their investments, the firm said in letter to investors.

The settlement, which involves 10 years’ worth of trades made by the hedge fund, could be worth as much as $7 billion, according to a person with knowledge of the agreement. It is one of the largest federal tax disputes in history.

The deal ends a standoff that led to a congressional investigation and involved two politically connected financiers: Mr. Simons, a longtime patron of Democratic candidates with an estimated net worth of $25 billion, and Robert Mercer, a former Renaissance executive whose advocacy for conservative causes included helping to found Cambridge Analytica. After Donald J. Trump won the 2016 presidential election, the now-defunct political consulting firm became embroiled in a scandal for harvesting Facebook data without users’ consent to assist his campaign.

While Mr. Simons, 83, who stepped down as chairman of the $55 billion firm last year, supported Hillary Clinton in that race, Mr. Mercer, 75, has donated tens of millions of dollars to Republican candidates and political action committees. He also reportedly invested $10 million in Breitbart News, and was a key supporter of Stephen K. Bannon, who was Breitbart’s chairman before becoming Mr. Trump’s chief strategist.

The billions in payments to the I.R.S. will be made by current and former investors in a small group of Renaissance funds, but principally its Medallion fund. Those investors include seven people who were members of the firm’s board between 2005 and 2015, as well as their spouses. Mr. Simons will make a payment of $670 million on top of his obligation as part of that group, according to the letter.

“Renaissance’s board ultimately concluded that the interests of our investors from the relevant period would be best served by agreeing to this resolution with the I.R.S., rather than risking a worse outcome, including harsher terms and penalties, that could result from litigation,” Peter Brown, the firm’s chief executive, wrote.

Renaissance is best known for pioneering a data-intensive form of stock trading called quantitative strategy, which has been adopted by many other hedge funds and trading platforms on Wall Street. The settlement centers on the firm’s Medallion fund, which manages about $15 billion, mostly for employees and former employees of the firm and their family members.

Mr. Simons founded the firm in 1982. Once the head of the math department at Stony Brook University on Long Island, he was a code-breaker for the U.S. military during the Vietnam War. He stepped down from the firm’s day-to-day operations in 2010, handing the reins to Mr. Mercer and Mr. Brown as co-chief executives.

Mr. Simons was one of Mrs. Clinton’s biggest supporters during the 2016 presidential elections; in the last election cycle, he gave millions to a super PAC focused on winning a Democratic majority in the Senate.

Mr. Mercer — whose annual pay as co-C.E.O. of Renaissance was estimated at between $125 million and $135 million by the financial media — is his political opposite. A former IBM programmer, Mr. Mercer and his daughter Rebekah were significant financial supporters of Mr. Trump during his 2016 campaign.

In 2018, The New York Times reported that contractors and employees of Cambridge Analytica, eager to sell psychological profiles of American voters to political campaigns, acquired the private Facebook data of tens of millions of users — the largest known leak in the company’s history. Facebook eventually said as many as 87 million users — mostly in the United States — had their data harvested by the firm.

Mr. Mercer’s decision to resign as co-chief of Renaissance shortly after Mr. Trump won the presidency came about in part because of his involvement in bankrolling Cambridge Analytica. Some of the hedge fund’s investors had voiced concerns about Mr. Mercer’s political activities.

The firm’s letter on Thursday said that aside from the board members and their spouses, other investors will be required to pay additional tax and interest owed, but no penalties. Renaissance’s outside clients, who include wealthy individuals, pensions and other investors, are not expected to be affected by the settlement.

The tax dispute involved Medallion’s fast-paced options trading…



Read More: Hedge Fund’s Insiders Agree to Pay as Much as $7 Billion to I.R.S.

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