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Hedge-Fund Ties Help Edwards Campaign
Unlike mutual funds, which are narrowly defined in their investing strategies, hedge funds can seek large gains through a broad array of investments -- everything from buying stocks and bonds to dealing in commodities, currencies and emerging-market debt. They are bound by far fewer disclosure rules than mutual funds and enjoy much looser constraints when it comes to trading techniques such as short selling (a method of profiting from a declining stock) and borrowing money to seek higher returns.
Because they are much less regulated and carry more risk, they are open only to accredited investors -- pension and endowment funds, and individuals with more than $1 million in assets or incomes of more than $200,000.
Hedge funds that incorporate themselves offshore -- as Fortress did in the Caymans -- are attractive tax havens for wealthy investors. Certain U.S.-based pensions and endowments, as well as all foreigners who invest in such funds, are exempt from having to pay U.S. taxes on their capital gains. Offshore hedge funds allow such investors to take advantage of U.S. investments and expertise without having to pay taxes, and the firms get huge infusions of foreign capital that otherwise wouldn't be invested in U.S. markets because of the tax consequences.
In addition, the U.S.-based managing partners of such hedge funds can defer paying taxes on their own compensation if they reinvest that money in the offshore funds.
Fortress spokeswoman Lilly Donohue declined to comment on the employee contributions to Edwards or Edwards's employment. Kate Bedingfield, a spokeswoman for the Edwards campaign, also declined to address the Fortress donations.
When Fortress hired Edwards as an adviser in 2005, his spokeswoman said he was joining to provide "support in developing investment opportunities worldwide and strategic advice on global issues." Among other things, Edwards met with German Chancellor Angela Merkel on the company's behalf in May 2006, around the time Germany was seeking more U.S. investments while also proposing tighter regulation of hedge funds, according to published reports.
Bedingfield said Fortress recently ended its practice of letting managing partners defer their U.S. income taxes by reinvesting profits in the offshore funds. The firm made that change when it went public late last year around the time Edwards ended his consulting arrangement.
"John Edwards believes offshore tax shelters are wrong," Bedingfield said last week. "As president, he will end them. By voluntarily going public, Fortress has ended the practice of using offshore tax shelters for deferred compensation and has committed itself to a whole set of transparency and disclosure obligations that no other hedge fund has committed itself to before."
By selling shares to the public, Fortress had to comply with rules requiring more disclosure in its operations. In its initial filing with the Securities and Exchange Commission in November, the company said that it had $30 billion in holdings and that all of its hedge funds and many of its private equity funds were created offshore. "Our liquid hedge funds, our offshore hybrid hedge funds and many of our private equity funds are incorporated or formed under the laws of the Cayman Islands," the company filing said.
As a presidential candidate in 2004 and later as the Democratic Party's vice presidential nominee, Edwards emphasized his background as the son of a millworker and his experience as a trial lawyer in North Carolina who had won large financial settlements for working-class clients. From the money he made as a lawyer, he had assets of $14 million to $45 million, according to his 2003 Senate disclosure report.
Edwards has accused the Bush administration of aiding companies in evading taxes through offshore entities. "These guys are making it tougher for working dads to get $400 from an earned income tax credit, while they're letting corporations shield $40 billion in offshore tax havens," he said in a June 5, 2003, speech.
And during the 2004 vice presidential debates with Dick Cheney, Edwards called for an end to offshore tax havens -- whether for corporations or wealthy investors -- as he cited the offshore vehicles Cheney's former company, Halliburton Co., used for tax savings.
"They ought to be closed. They ought to be closed for anybody. They ought to be closed whether they're personal, and they ought to be closed whether they apply to a corporation," Edwards said at the time.
After he and his running mate, Sen. John F. Kerry (D-Mass.), were defeated in 2004, Edwards returned to North Carolina, started a think tank on poverty at the University of North Carolina and began work at Fortress. He announced in December that he would again be a candidate for president, wearing jeans and a work shirt at a news conference held in a New Orleans neighborhood devastated by Hurricane Katrina.
More than any other 2008 presidential candidate, Edwards has made poverty an issue and sought support from organized labor. But his image has suffered because of publicity surrounding the family compound he is building on 102 acres in North Carolina. By the time the compound is completed, it is expected to be assessed at $6 million. And his finance reports disclosed that his campaign had paid for two $400 haircuts.
Steve Jarding, a former top strategist for Edwards, said he would have advised the candidate to avoid the business and fundraising relationship with the hedge fund because it flies in the face of his political persona as a champion for the poor and an advocate for making the wealthy pay their share of taxes.
"It raises the question, 'Is John Edwards the guy he says he is?' -- and that is not a debate John wants to have when he is trying to raise money and to move into that top tier of candidates," Jarding said.
Database editor Sarah Cohen contributed to this report.