There was a bombshell report in the New York Times this weekend revealing that New York Attorney General Eric Schneiderman has launched an investigation into whether or not financial firms, including Bain Capital, have "abused a tax strategy in order to slice hundreds of millions of dollars from their tax bills."

More specifically, what Schneiderman wants to know is whether or not private equity firms, hedge funds, and venture capital firms alike have been converting management fees into fund investments so they can be taxed at a lower rate (15% — the capital gains rate rather 35%).

When Gawker published hundreds of pages of Bain's internal financial documents online, it was revealed that "at least $1 billion in accumulated fees that otherwise would have been taxed as ordinary income for Bain executives had been converted into investments producing capital gains..." said the NYT report.

From the NYT:

Among the firms to receive subpoenas are Kohlberg Kravis Roberts & Company, TPG Capital, Sun Capital Partners, Apollo Global Management, Silver Lake Partners and Bain Capital, which was founded by Mitt Romney, the Republican nominee for president. Representatives for the firms declined to comment on the inquiry...

Schneiderman's office isn't talking either.

Either way, people have been talking about the issue itself for a while. Ever since Mitt Romney entered the Presidential race, the private equity especially has been under scrutiny. His campaign released a statement saying that he never benefitted from this practice, though it's perfectly legal.

The Private Equity Growth Capital Council, the industry's official lobby group, had this to say about the probe (h/t Politico's Ben White):

"Management fee waivers are legal, widely recognized, and often part of negotiated agreements between the alternative investment community and investors, including pension funds and endowments."

According to Politico's Ben White, a number of industry execs think that Schneiderman is just playing politics, and trying to make a splash during the Democratic National Convention. However, he also points out that if Schneiderman really wanted to do that, he wouldn't have made this investigation known on a Sunday over a holiday weekend — that's no kind of political theater.



