By John Solomon and Alec MacGillis
Washington Post Staff Writers
Monday, April 23, 2007
Two years ago, former senator John Edwards of North Carolina, gearing up for his second run at the Democratic presidential nomination, gave a speech decrying the "two different economies in this country: one for wealthy insiders and then one for everybody else."
Four months later, he began working for the kind of firm that to many Wall Street critics embodies the economy of wealthy insiders -- a hedge fund.
Edwards became a consultant for Fortress Investment Group, a New York-based firm known mainly for its hedge funds, just as the funds were gaining prominence in the financial world -- and in the public consciousness, where awe over their outsize returns has mixed with misgivings about a rarefied industry that is, on the whole, run by and for extremely wealthy people and operates largely in secrecy.
A midsize but growing player in the hedge fund industry with more than $30 billion in assets, Fortress was the first hedge fund manager to go public, thereby subjecting itself to far more scrutiny. But it was an unusual choice of employment for Edwards, who for years has decried offshore tax shelters as part of his broader campaign to reduce inequality. While Fortress was incorporated in Delaware, its hedge funds were incorporated in the Cayman Islands, enabling its partners and foreign investors to defer or avoid paying U.S. taxes.
Fortress announced Edwards's hiring as an adviser in a brief statement in October 2005. Neither Edwards -- who ended his consulting deal when he launched his presidential campaign in December -- nor the firm will say how much he earned or what he did.
But his ties to Fortress were suggested by the first round of campaign finance reports released last week. They showed that Edwards raised $167,460 in donations from Fortress employees for his 2008 presidential campaign, his largest source of support from a single company.
Nearly 100 Fortress employees or their family members donated to Edwards around the time of a fundraiser his campaign held at the firm in mid-March. Senior executives, individual fund managers, lawyers and a secretary gave the maximum $2,300 donation. Three administrative or executive assistants gave smaller amounts.
Edwards's connection to Fortress is only one sign of the emergence in national politics of the booming $1.4 trillion hedge fund industry. One of the fastest-growing and most controversial segments of the worldwide investment market, it has campaigned to fend off additional federal regulation and has become increasingly generous in campaign donations.
During the 2006 midterm elections, its executives and employees accounted for $6 million in campaign contributions, the first time its giving was tracked as a separate industry, according to the Center for Responsive Politics. The investment and securities industry as a whole accounted for $65 million in federal political contributions.
Sen. Hillary Rodham Clinton (D-N.Y.) and former New York mayor Rudolph W. Giuliani (R), for whom Wall Street is an especially key constituency, count hedge fund executives as donors and fundraisers for their presidential campaigns. Hedge fund executive Paul Singer is a key adviser and fundraiser for Giuliani, whose presidential campaign collected $159,000 from employees at Singer's firm, Elliott Associates. Clinton is getting fundraising help from Lisa Perry, whose husband, Richard, runs a $12 billion hedge fund, and the former first lady got $46,000 from employees of the private equity firm Farallon Capital Management.
Sen. Christopher J. Dodd, a Democratic presidential candidate from Connecticut, home to many hedge fund firms, received $175,400 from employees of the SAC Capital Advisors hedge fund during the first quarter -- his top source of support from a single company. As chairman of the Senate Banking Committee, Dodd has opposed additional regulation of hedge funds.
One of Sen. Barack Obama's biggest presidential fundraisers is a hedge fund manager -- Orin Kramer, general partner of Boston Provident Partners LP in New York and a longtime Democratic fundraiser. Along with Sens. Carl M. Levin (D-Mich.) and Norm Coleman (R-Minn.), Obama (D-Ill.) has proposed legislation to drastically reduce offshore tax havens that includes a provision to crack down on offshore hedge funds. The senators introduced the bill after an investigation last year documented how wealthy U.S. investors had used hedge funds to evade taxes.
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.