At $ 7 Billion, There Should Be Some Prosecutions

Executives at hedge fund Renaissance Technologies will pay $7 billion to settle allegations of tax evasion.

I understand that the IRS wants the money, but with tax fraud on this scale, these people should be criminally prosecuted, and I would say this even if the Neander-Reactionary Robert Mercer were not one of the people on the hook for this:

Current and former executives of hedge fund Renaissance Technologies LLC will personally pay as much as $7 billion in back taxes, interest and penalties to settle a long-running dispute with the Internal Revenue Service, the firm said, a tax settlement that may be the largest in history.

James Simons —the quantitative-investing pioneer who started Renaissance before retiring as the firm’s chairman on Jan. 1—will make an additional “settlement payment” of $670 million, according to the firm. Mr. Simons will also pay back taxes related to his gains.

The dispute relates to moves the firm’s key Medallion fund took between 2005 and 2015 to convert short-term trading gains into long-term profits. It has been closely followed in the worlds of finance and politics because of the enormous amounts involved and because Renaissance’s leaders are among the largest political donors in the U.S.

A former math professor and code breaker, Mr. Simons built Renaissance into one of the most successful investment firms in history by identifying short-term patterns in the market that others missed. But those short-term trades also mean higher taxes.

Mr. Simons has been a long-term supporter of Democratic candidates—while Robert Mercer, another Renaissance executive, has backed Republican causes, including former President Donald Trump.

………

Medallion, which manages about $15 billion, invests the money only of employees and select friends and family members. As such, the settlement doesn’t involve funds that Renaissance manages for outside investors.

So the tax fraud was ALMOST HALF of the total amount of the fund.

This is not an accident.

………

Medallion generally holds investments for short periods, even seconds. In 2005, the fund’s executives began relying on so-called basket options, which are financial instruments created by banks whose values are pegged to the performance of a specific basket of stocks. Instead of buying thousands of stocks, Medallion purchased an option representing the returns of those same shares. The firm directed the banks how to trade those underlying shares.

These instruments were created solely to dodge taxes. In a sane tax system, this would be seen as evidence of fraud.

The story buries the big picture until the last 2 paragraphs though:

………

The settlement is an example of what the IRS could do if it had more enforcement staff and more resources to pursue complex cases, said Steve Rosenthal, a senior fellow at the Tax Policy Center who testified at the Senate hearing.

“The IRS is so resource-constrained that they often can’t pursue difficult matters. But here they hung tight and they were vindicated,” he said. “In this realm of sophisticated transactions, complicated transactions in which there is a patina of legal argument, it’s hard for the IRS to effectively pursue, to tackle an issue and bring it to the ground.”

More resources for the IRS, and changes in the law making it clear that tax avoidance cannot be the primary purpose of a financial instrument, would be very good things to do.

Throwing some of these folks in jail and seizing their assets would be a better thing to do.