Hedge Fund Crony Gretchen Morgenson Sells Her Soul Again!

[Parsad]

Here's another hack job article by Gretchen Morgenson on Fairfax and the IRS ruling regarding their past purchase of Odyssey Re shares from Bank of America.  Fairfax's transaction was reported to the IRS by one of the hedge funds shorting it, who may end up with a "whistleblower" reward if the IRS decides to reopen the case and levy any fines. 

 

http://www.nytimes.com/2012/11/25/business/years-later-the-irs-questions-a-tax-deal.html?partner=yahoofinance&_r=0

 

So these assholes collude and naked short the stock, using unethical conduct and non-public information, and then report Fairfax to the IRS to possibly receive a reward.  I love how U.S. securities regulators work!  Fairfax sues their biggest target, who has bred a culture of deception, illegal trading and ill-gotten gains, yet they win the lawsuit against them and one of their minions can possible receive "whistleblower" payments.  Geez!  Cheers!

[racemize]

I've read this report a few times--is there any written information from Fairfax or its side on this issue?

[berkshiremystery]

Many Moons Later, the I.R.S. Questions a Tax Deal

By GRETCHEN MORGENSON

 

I only find the NY Times headline very peculiar. "Many Moons later,..."

 

 

[LC]

Many Moons Later, the I.R.S. Questions a Tax Deal

By GRETCHEN MORGENSON

 

I only find the NY Times headline very peculiar. "Many Moons later,..."

 

It's a NY Times article...the author is more concerned with criticizing the government rather than potentially uncovering illegal financial transactions.

[Guest rimm_never_sleeps]

I don't really get what is wrong with this. if FFX did nothing wrong they will win the case with the IRS, no?

[el_chieh]

Anyone that still has copy of the original Wilens note; care to post it?

 

 

 

 

[StubbleJumper]

So in conclusion, if FFH materially misrepresented the lending agreement during its discussions with the IRS, then this whole thing could be re-opened.  Since it was audited on two occasions, one would hope that the auditors would have asked to see the actual agreement with BAC, so there was really nothing for FFH to have misrepresented.

 

Yawn, time to go back to thinking about the future, not the past.

 

 

SJ

[wknecht]

So in conclusion, if FFH materially misrepresented the lending agreement during its discussions with the IRS, then this whole thing could be re-opened.  Since it was audited on two occasions, one would hope that the auditors would have asked to see the actual agreement with BAC, so there was really nothing for FFH to have misrepresented.

 

Yawn, time to go back to thinking about the future, not the past.

 

 

SJ

 

I'm not so sure. Based on her last article (http://www.nytimes.com/2012/03/11/business/fairfax-financials-400-million-tax-break-revisited.html?pagewanted=all), the E&Y tax opinion was based on representations made by Fairfax (i.e., they did not independently look at the ownership question). Here's the quote from that article: "Ernst & Young’s clean tax opinion, Mr. Kleinbard wrote, was based solely on representations made by Fairfax. The auditor did not independently analyze whether the insurer obtained share ownership. He cited confidential deposition testimony from an Ernst & Young executive who had worked on the opinion. Ernst & Young declined comment." I'm not quite as familiar, was the second opinion you referred to from PWC as part of their regular audits?

[StubbleJumper]

So in conclusion, if FFH materially misrepresented the lending agreement during its discussions with the IRS, then this whole thing could be re-opened.  Since it was audited on two occasions, one would hope that the auditors would have asked to see the actual agreement with BAC, so there was really nothing for FFH to have misrepresented.

 

Yawn, time to go back to thinking about the future, not the past.

 

 

SJ

 

I'm not so sure. Based on her last article (http://www.nytimes.com/2012/03/11/business/fairfax-financials-400-million-tax-break-revisited.html?pagewanted=all), the E&Y tax opinion was based on representations made by Fairfax (i.e., they did not independently look at the ownership question). Here's the quote from that article: "Ernst & Young’s clean tax opinion, Mr. Kleinbard wrote, was based solely on representations made by Fairfax. The auditor did not independently analyze whether the insurer obtained share ownership. He cited confidential deposition testimony from an Ernst & Young executive who had worked on the opinion. Ernst & Young declined comment." I'm not quite as familiar, was the second opinion you referred to from PWC as part of their regular audits?

 

 

From the NYT article:

 

 

When asked for comment on the opinion, Paul C. Rivett, vice president of operations at Fairfax, made this statement: “The I.R.S. guidance advisory was not issued to, doesn’t mention and has no effect on Fairfax. Two separate I.R.S. audits correctly concluded Fairfax owned these shares; moreover, Fairfax has a binding closing agreement memorializing that correct conclusion, and any statement to the contrary is entirely without basis.”

[wknecht]

So in conclusion, if FFH materially misrepresented the lending agreement during its discussions with the IRS, then this whole thing could be re-opened.  Since it was audited on two occasions, one would hope that the auditors would have asked to see the actual agreement with BAC, so there was really nothing for FFH to have misrepresented.

 

Yawn, time to go back to thinking about the future, not the past.

 

 

SJ

 

I'm not so sure. Based on her last article (http://www.nytimes.com/2012/03/11/business/fairfax-financials-400-million-tax-break-revisited.html?pagewanted=all), the E&Y tax opinion was based on representations made by Fairfax (i.e., they did not independently look at the ownership question). Here's the quote from that article: "Ernst & Young’s clean tax opinion, Mr. Kleinbard wrote, was based solely on representations made by Fairfax. The auditor did not independently analyze whether the insurer obtained share ownership. He cited confidential deposition testimony from an Ernst & Young executive who had worked on the opinion. Ernst & Young declined comment." I'm not quite as familiar, was the second opinion you referred to from PWC as part of their regular audits?

 

 

From the NYT article:

 

 

When asked for comment on the opinion, Paul C. Rivett, vice president of operations at Fairfax, made this statement: “The I.R.S. guidance advisory was not issued to, doesn’t mention and has no effect on Fairfax. Two separate I.R.S. audits correctly concluded Fairfax owned these shares; moreover, Fairfax has a binding closing agreement memorializing that correct conclusion, and any statement to the contrary is entirely without basis.”

 

Ah, right, that's clear thanks.

[cwericb]

It seems that whenever Ms Morgenson runs out of copy she rehashes this same old story. She wrote nearly the same thing back in March and I believe prior to that as well. No doubt she gets paid by the word so she writes an article, then a few months later rephrases it and gets it published it again. Used to do the same with essays in university. It gets a bit tiresome. I'd give her a B in creativity and and F in originality. 

[Alekbaylee]

I'd give her a B in creativity and and F in originality.

 

LOL!

Seriously though, why is Fairfax/Prem so hated in the US business press (or a part of it) is beyond my understanding.

It's as if someone has set the pack on a beast!

[Parsad]

I'd give her a B in creativity and and F in originality.

 

LOL!

Seriously though, why is Fairfax/Prem so hated in the US business press (or a part of it) is beyond my understanding.

It's as if someone has set the pack on a beast!

 

No, it's only a certain subsection of the industry.  The ones that cow-tow to their hedge fund cronies, or want to eventually be proven right on something they wrote about 7 years ago, since most journalists are shitty businesspeople and investors...think Fabrice Taylor running Frank magazine into the ground in 9 months!  He should have probably tried running a hot-dog cart first!  ;D  Cheers!

[Viking]

Kind of reminds me of the good old days when these sorts of articles would result in FFH falling 20% or 30% or 40% or more. I do miss the volatility as it was an easy way to make money.

 

I am happy to take advantage of another dip under BV.

[Vinayd]

Yes it does indeed Viking!  Thanks for posting this article, Parsad.  I was able to take advantage as well and get lots more shares at $358!

[rijk]

i got curious about the irs memorandum, so i started searching for the document, thinking that i would never be able to find it, guess what.... here it is:

http://www.irs.gov/pub/irs-utl/am2012007.pdf

 

these are the original transaction documents:

http://www.sec.gov/Archives/edgar/data/915191/000090956703000322/0000909567-03-000322-index.htm

 

looks to me like there is a decent probability that this is the same transaction.......

 

regards

rijk

[racemize]

i got curious about the irs memorandum, so i started searching for the document, thinking that i would never be able to find it, guess what.... here it is:

http://www.irs.gov/pub/irs-utl/am2012007.pdf

 

these are the original transaction documents:

http://www.sec.gov/Archives/edgar/data/915191/000090956703000322/0000909567-03-000322-index.htm

 

looks to me like there is a decent probability that this is the same transaction.......

 

regards

rijk

 

Thanks.  It seems like at this point there's two options:

 

1) They did have ownership but were very close to the line, hence this paper (presumably the case given the previous audits); or

2) They are about to get the case opened again.

 

Sounds like they were quite desperate at the time.  I have a bias for FFH since I own a lot of it, but other than blasting her character, I haven't seen any indication of factual mistakes in the article.

[rijk]

the memo indicates that there was no sufficient ownership/basis for tax consolidation

"We find that based upon the analysis of the relevant factors outlined above, the benefits and burdens of stock ownership did not pass to Parent, and Parent was not the tax owner of the Company stock."

 

makes you think about this statement:

Mr. Bowe, who represents Fairfax, said that “only defendants and their paid experts, like Mr. Kleinbard, argue Fairfax did not have an economic interest in these shares.”

 

regards

rijk

 

 

[racemize]

the memo indicates that there was no sufficient ownership/basis for tax consolidation

"We find that based upon the analysis of the relevant factors outlined above, the benefits and burdens of stock ownership did not pass to Parent, and Parent was not the tax owner of the Company stock."

 

makes you think about this statement:

Mr. Bowe, who represents Fairfax, said that “only defendants and their paid experts, like Mr. Kleinbard, argue Fairfax did not have an economic interest in these shares.”

 

regards

rijk

 

Well, we don't really know that the memo is exactly the same, so the conclusion does not necessarily apply. There could be some subtleties that are in favor of ownership for fairfax.

[wknecht]

the memo indicates that there was no sufficient ownership/basis for tax consolidation

"We find that based upon the analysis of the relevant factors outlined above, the benefits and burdens of stock ownership did not pass to Parent, and Parent was not the tax owner of the Company stock."

 

makes you think about this statement:

Mr. Bowe, who represents Fairfax, said that “only defendants and their paid experts, like Mr. Kleinbard, argue Fairfax did not have an economic interest in these shares.”

 

regards

rijk

 

Well, we don't really know that the memo is exactly the same, so the conclusion does not necessarily apply. There could be some subtles that are in favor of ownership for fairfax.

 

Also, I guess "economic interest" is just part of the consideration of the "benefits and burdens of stock ownership" for tax purposes, and the relative weights of these various considerations is somewhat subjective.

 

In the context of a transfer of stock, courts have found the following factors particularly relevant in determining tax ownership: (1) which party has the opportunity to share in gain from an appreciation in value of the stock and bears the risk of loss from a decline in value of the same; (2) which party has legal title to, and the ability to dispose of, the stock; (3) which party has the right to vote the stock; and (4) which party has possession of the stock.  See Anschutz v. Commissioner, 135 T.C. 78, 105 (2010), aff’d, 664 F.3d 313 (10th Cir. 2011).  Courts have also focused upon the right to receive dividends.  See Calloway, 135 T.C. at 34-35; Pacific Coast Music Jobbers, Inc. v. Commissioner, 55 T.C. 866, 876 (1971), aff’d, 457 F.2d 1165, 1171 (5th Cir. 1972).

 

In any case, given the audits, I guess this hinges on whether there was "fraud, malfeasance or misrepresentation of a material fact" and the statute of limitations. It's curious this wasn't mentioned in Fairfax's quarterly report given the memo was from June, but it wasn't directed to Fairfax so possibly they didn't know about it (or they thought it unimportant).

[A_Hamilton]

i got curious about the irs memorandum, so i started searching for the document, thinking that i would never be able to find it, guess what.... here it is:

http://www.irs.gov/pub/irs-utl/am2012007.pdf

 

these are the original transaction documents:

http://www.sec.gov/Archives/edgar/data/915191/000090956703000322/0000909567-03-000322-index.htm

 

looks to me like there is a decent probability that this is the same transaction.......

 

regards

rijk

 

Thanks.  It seems like at this point there's two options:

 

1) They did have ownership but were very close to the line, hence this paper (presumably the case given the previous audits); or

2) They are about to get the case opened again.

 

Sounds like they were quite desperate at the time.  I have a bias for FFH since I own a lot of it, but other than blasting her character, I haven't seen any indication of factual mistakes in the article.

 

I'm not positive, but I believe there is a third option. Suppose FFH was in the wrong with this transaction, and, after the fact due to the whistleblower and normal IRS audits the IRS went to the company about this issue. FFH along with PWC and BofA described the transaction in detail to the IRS (honestly disclosing all information and providing their opinion of the transaction), the IRS agents handling the matter listened to FFH and wrongly allowed FFH to tie out those 2003-2006 tax years through closing agreements. The IRS now (in 2012) issues guidance to IRS agents so that no one tries one of these transactions ever again. IRS doesn't go back to FFH to try to reopen those tax years, as FFH was completely honest about what happened/disclosed everything, the IRS just made a horrible call. Any thoughts on this?

 

Separately, I hope (and believe) this is/was an isolated incident for the company and was a hail mary to save the company when its capital position was significantly weaker.

[StubbleJumper]

i got curious about the irs memorandum, so i started searching for the document, thinking that i would never be able to find it, guess what.... here it is:

http://www.irs.gov/pub/irs-utl/am2012007.pdf

 

these are the original transaction documents:

http://www.sec.gov/Archives/edgar/data/915191/000090956703000322/0000909567-03-000322-index.htm

 

looks to me like there is a decent probability that this is the same transaction.......

 

regards

rijk

 

Thanks.  It seems like at this point there's two options:

 

1) They did have ownership but were very close to the line, hence this paper (presumably the case given the previous audits); or

2) They are about to get the case opened again.

 

Sounds like they were quite desperate at the time.  I have a bias for FFH since I own a lot of it, but other than blasting her character, I haven't seen any indication of factual mistakes in the article.

 

I'm not positive, but I believe there is a third option. Suppose FFH was in the wrong with this transaction, and, after the fact due to the whistleblower and normal IRS audits the IRS went to the company about this issue. FFH along with PWC and BofA described the transaction in detail to the IRS (honestly disclosing all information and providing their opinion of the transaction), the IRS agents handling the matter listened to FFH and wrongly allowed FFH to tie out those 2003-2006 tax years through closing agreements. The IRS now (in 2012) issues guidance to IRS agents so that no one tries one of these transactions ever again. IRS doesn't go back to FFH to try to reopen those tax years, as FFH was completely honest about what happened/disclosed everything, the IRS just made a horrible call. Any thoughts on this?

 

I think you're bang-on.  If an IRS auditor had any concerns about the transaction, he could have asked to see the actual lending agreement between FFH and BAC (it's probably only 4 or 5 pages of legalese).  I would be shocked if FFH failed to furnish that document in response to an IRS request.  At that point, it was the responsibility of the IRS at the time to decide whether that particular lending agreement met the requirements for ownership. 

 

Separately, I hope (and believe) this is/was an isolated incident for the company and was a hail mary to save the company when its capital position was significantly weaker.

 

Why do you hope it was an isolated incident?  As a shareholder, I want FFH to use all legal means to minimize their tax obligations.  As long as they are transparent with the IRS and Revenue Canada, I have no qualms about them using every possible trick in the book.  It's up to the IRS and CCRA to interpret the tax code and decide whether to allow any particular avoidance measure.

 

 

SJ