imposing sums

Why Apollo’s Palace Coup Against Leon Black and Further Disclosures on Jeffrey Epstein Are Not Reassuring” (Smith). Of course, left out of the discussion, is the fact that (((Black))) was helping to fund almost entirely funding the (((Maxwell-Mossad))) blackmail operation fronted by (((Epstein))), and the ‘tax advice’ is a rather bad smoke screen. Also: “Leon Black Steps Down As Apollo CEO After Review Finds He Paid Jeffrey Epstein $158M” (Durden). – Xymphora

Why Apollo’s Palace Coup Against Leon Black and Further Disclosures on Jeffrey Epstein Are Not Reassuring
Yves Smith, Naked Capitalism, Jan 26 2021

Private equity giant Apollo has been in damage control mode ever since the New York Times broke the story in October that the firm’s co founder and CEO Leon Black had paid at least $50m and perhaps as much as $75m in fees to convicted serial child rapist Jeffrey Epstein, long after Epstein had become a pariah. Some public pension funds, the first being the Pennsylvania Public School Employees’ Retirement System, said they would not be making new commitments until Apollo had explained itself. We understand other funds gave similar messages to Apollo privately. In other words, Apollo had to either offer a plausible rationale for what Black had been up to, or get him out of the picture. Apollo then launched the usual whitewash, um, internal investigation, even though Black was apparently not convinced of its necessity. The firm announced the findings and its actions on Monday. Even though the intent of these exercises is to put the matter to bed, anyone with an operating brain cell will not be satisfied. The fact that the monies Black paid to Epstein were more than twice as large as the previous high estimate is eye-catching: according to the NYT, $158m in fees, plus $30m in loans, only $10m of which had been repaid. (2) The denouement, that Black is leaving his CEO post sometime before his birthday in July, but will remain chairman, reportedly came after what the Grey Lady depicted as a “brief power struggle over the weekend.” Black will also donate $200m from his family’s funds to women’s programs. The shock value of the magnitude of the payments to Black may succeed in diverting press and investor eyes from the real scandal here: what was Black paying for? And was Apollo implicated? Bear with me, because the supposedly reassuring excerpts from the report by law firm Dechert actually suggest that Apollo was involved too. Recall that the time frame of the fee payments is from shortly after Epstein was convicted, in 2008, through 2016, when Black and Epstein fell out over a fee dispute; Black’s last payment was to Epstein in 2017. (1) This is how Dechert attempted to justify the transfers from Black to Epstein. From the WSJ:

Mr Black “believed, and witnesses generally agreed, that Epstein provided advice that conferred more than $1b and as much as $2b or more” in tax savings, the report states. It also supports Mr Black’s contention that he paid Epstein a fee he believed was roughly equivalent to 5% of the value that the late financier generated on an after-tax basis.

We’ll deal with the second howler first, that someone like Black would pay for mere advice on a percentage of results basis. As Black knows well, the people who get rich to very rich attach themselves to capital and get paid a percentage for performance, such as brokerage or asset management fees. Black, who buys legal services from the very best firms in the US in bulk, would know he could hire the most cunning tax lawyers in the US for a fraction of what he paid Epstein. He could even have financed a firm with the very best minds in the industry for this kind of dough. And in earlier accounts, Black also asserted that all of Epstein’s advice was vetted by independent experts. So it seems reasonable to think that Black was not paying just for advice but some kind of execution too, as in moving funds and engaging in sham transactions to recharacterize the economic substance or apparent ownership of funds. So it’s hard to see Dechert with a straight face parroting Black’s defense that he was paying 5% of the economic value of what is presented as mere tax advice as if that were a reasonable compensation arrangement. (3) But let’s go back to the first eyepopper: tax savings of $1b to over $2b. Let’s be charitable and use Black’s maximum applicable tax rate: a marginal tax rate of about 50% for Federal, New York state and New York city income taxes. That means the amount of Leon Black personal income subject to Epstein’s wizardry, again charitably assuming he managed to find a way to bring Black’s taxes from 50% to zero, would be double the savings, or $2b to $4b. Mere tax deferral isn’t worth much in a near zero interest rate environment, so we’ll rule out those sort of approaches.

And if you assume merely that Epstein managed to turn what would have been ordinary income/short term capital gains into long-term capital gains, again that does not seem to be so insanely rarified that other tax structuring gurus more savory than Epstein wouldn’t be able to come up with similar magic at much lower fees and reputational risk. And that level of tax savings would amount to less than half than if Epstein found some sneaky way to make the taxes disappear entirely. (4) So that means you would need to assume an even greater amount of Black personal pre-tax income was subjected to Epstein’s tax legerdemain, on the order now of $4b to $8b, over eight years. Let’s go one step further. It is highly unlikely that much of the income was from Apollo, the public company, or the Apollo fund level. Any of the income reported in a 10-K is going to be hard to play with much. And Black and his fellow partners would already have America’s best and brightest tax minds doing their best to assure that as much of the money they get from Apollo, save their salaries, is subject to long-term capital gains treatment. So where did the at least $250m a year, and perhaps over $1b a year that Black was using Epstein to shield from the taxes come from? Probably from Apollo portfolio companies.

If that’s correct, and we are highly confident that this is correct at least in part if not substantially, Apollo limited partners should be mighty unhappy. We have examples of this sort of thing happening again and again (see the example of KKR Capstone here and a Blackstone affiliate here). Despite the SEC evangelizing about this problem of hidden grifting at investor expense for a bit in 2014 and 2015, nothing fundamental has changed about private equity disclosure about how much in fees and costs they are extracting from portfolio companies, and accordingly, no reason to think that those charges have moderated. If anything, they could have gotten worse given that even more investors are desperately throwing money at private equity. So if at least some of the Black monies that Epstein was protecting from the tax man came from Apollo portfolio companies, something must have been done to change their character from a tax perspective for there to be tax savings: designating a new payee, sending the monies to a different account and/or changing the claimed purpose of the fee or expense. The latter would have required changes in invoicing or even the legal agreements with the portfolio companies. The larger point is that nothing like that could have happened without the knowledge and participation of at least some manager or executives at Apollo portfolio companies, as well as the bean-counters at Apollo and the Apollo employees sitting on the pertinent portfolio company boards. We freely admit that we don’t have proof that anything like these sort of portfolio company level machinations took place. But again, do the math. You just can’t get to this level of tax savings without at least some, and potentially a lot, of the income at issue coming from portfolio companies or other investment fund assets.


(1) It’s reasonable to assume that Black stopped or cut way back on his use of Epstein as of the fee row, in 2016; the 2017 payment was likely a settlement.

(2) Oddly the WSJ is reporting only $148m in fees and no loans, but the NYT also has detail on the internal jousting and thus seems to have the better grasp of facts.

(3) The earlier NYT account also had details that showed that Black had made an effort to conceal these payments, which again calls into question “Oh, these were just fees for legitimate services.” For instance:

Some of the payments from Mr Black are described in an internal report by Deutsche Bank, which served as Mr Epstein’s primary banker from 2013 into 2019 … Portions of the report reviewed by The NYT describe a payment of $22.5m in 2017 by a company called BV70 LLC, which the bank said owned Mr Black’s yacht, to Plan D, the company that managed Mr Epstein’s Gulfstream jet. When an employee in Deutsche Bank’s anti-financial-crime division inquired about the payment, she was told by another bank employee that it was a fee for consulting services provided by Southern Trust Company, one of the dozens of entities Mr Epstein operated in the Virgin Islands. There was no explanation for why the payment went to Plan D. The Deutsche Bank report also shows that BV70 made a $10m donation in 2015 to a charitable foundation started by Mr Epstein, Gratitude America, which made several million dollars in grants while Mr Epstein was casting himself as a philanthropist. BV70 also planned to make another payment of $10m to Mr Epstein for advisory work, according to the report, although it was unclear if that payment was ever made. And in 2014, Mr Epstein received several million dollars in fees from Narrows Holdings, a company that Mr Black, the chairman of the Museum of Modern Art, has used to purchase much of his billion-dollar art collection, according to two of the people with knowledge of the transactions. The details of the services Mr Epstein provided in exchange for those fees are also unclear.

Note we do not buy the notion that Black was procuring sexual services. He could have set up his own brothels in Thailand and Eastern Europe and flown there himself for less money and less risk. From what we have heard, no one in private equity thinks so either, and they have active imaginations. They are convinced that the size of payments alone is prima facie evidence that Black was paying for tax avoidance. And they note that Epstein’s Caribbean island was a very close boat ride to the tax haven, the British Virgin Islands.

(4) This result is not utterly unprecedented. Recall that Apple had a tax deal with Ireland that achieved the result that a decent chuck of Apple income was attributable to no tax domicile and therefore not taxable. As we explained in 2013, cribbing from tax expert Lee Sheppard:

The consumer products company has an Irish holding company at the apex of its foreign operations. This company is in Ireland and has no employees or operations. But it is the group finance company. And the money is not in Ireland, but in New York banks and managed by employees in Nevada. So the funds are in the US even though they are domiciled abroad. This company has no residence from a tax perspective and pays taxes nowhere.

It seems like the entity names involved in these transactions point to the British Virgin Islands. There’s Black’s entity that paid Epstein “BV70 LLC,” where “BV” is the first two letters of the common abbreviation “BVI” for “British Virgin Islands.” Then there is “Narrows Holdings,” where the body of water that separates the US Virgin Islands from the British Virgin Islands is called “the Narrows.” This is the very small body of water (just a few miles) Epstein would have had to traverse in a boat if part of what he was doing was flying suitcases of cash on his private plane to his US residence private island (no customs inspection necessary), then putting the suitcases on a small boat to carry over to a BVI beach, where the money could then be walked into secret accounts at BVI banks. – Fraud Guy, comments to above)

Leon Black Steps Down As Apollo CEO After Review Finds He Paid Jeffrey Epstein $158M
Tyler Durden, Zero Hedge, Jan 26 2021

Leon Black will step down as CEO of Apollo Global Management, the giant private equity company he founded in 1990 and built into a $433b financial powerhouse that has become a big lender to corporate America. The announcement came as Apollo revealed the conclusion of a review by law firm Dechert into Black’s relationship with the late paedophile Jeffrey Epstein, which reportedly “cleared” Black and Apollo of any “involvement in criminal activities” with Epstein. Black said in a statement:

I have advised the Apollo board that I will retire as CEO on or before my 70th birthday in July and remain as chairman.

Over the past year and a half, Apollo CEO and founder Leon Black had been caught in a web of allegations that he was “too close” to suicided and disgraced pedophile Jeffrey Epstein after it emerged Black had paid Epstein $158 million after he was released from jail. And while Black published a letter in which he admitted that “it was a terrilble mistake” to associated with Epstein and “like many people I respected, I decided to give Epstein a second chance,” Black said last October, it wasn’t nearly enough as some asset managers froze their new capital allocations to Apollo. It eventually prompted Apollo to hire Dechert to conduct an “independent review” of Black’s dealings with Epstein to clear Black’s, and Apollo’s, name. Well, today after the close, Apollo said the Conflicts Committee completed its independent review of Black’s previous professional relationship with Jeffrey Epstein and publicly released the report which found no evidence that Mr Black was involved in the criminal activities of the late Epstein, who was indicted in 2019 on federal sex-trafficking charges involving underage girls. Among the key findings of the Dechert report:

  • Apollo never retained Epstein for any services and Epstein never invested in any Apollo-managed funds
  • Dechert found no evidence that Black was involved in any way with Epstein’s criminal activities at any time

Black “believed, and witnesses generally agreed, that Epstein provided advice that conferred more than $1b and as much as $2b or more” in tax savings, the report states. Needless to say, this is ridiculous for a person who was already surrounded by the biggest tax experts on earth who also happened to be Black’s employees. The report supports Black’s contention that he paid Epstein a fee he believed was roughly equivalent to 5% of the value that late financier generated on an after-tax basis, according to the WSJ. It describes the two men’s relationship deteriorating beginning in 2016 after a fee dispute, even though Black’s last payment to Epstein was made in Apr 2017. Black also asked employees of his family office; attorneys at law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP; and other outside accountants, lawyers and tax professionals to vet and challenge Epstein’s advice when it was given. The report concludes:

In short, there is no question that Epstein performed substantive work for Black and that Black genuinely believed that Epstein was extremely smart, capable, and saved him substantial amounts of money.

And yet, while superficially all that is great, everything about this announcement stinks. Like for example, why was Black ousted as a result of an “attempted boardroom coup” with the NYT writing that Black “engaged in a brief power struggle this weekend over control of the firm, a rift that opened up after an inquiry revealed that one founder, Apollo’s chief executive and chairman, Leon Black, had paid $150m to the convicted sex offender Jeffrey Epstein.” Needless to say, the so-called “acquittal” doesn’t explain why Black is set to retire as CEO effective on or before Jul 31, but retain the Chairman title, and is to be replaced with Marc Rowan, a man who last July Apollo said would take a step back from his day-to-day responsibilities and embark on a “semi-sabbatical.” Additionally, as the WSJ also reports, Black paid Epstein “a total of $148m, plus a $10m donation to his charity, far more than was previously known.” As the NYT adds, according to the review, which was ordered by the firm’s board in October after The NYT detailed at least $75m in payments, Black had paid Epstein significantly more. the NYT adds:

The sum effectively bankrolled the disgraced financier’s lifestyle in the years after his 2008 guilty plea to a Florida prostitution charge involving a teenage girl.

Meanwhile, according to the WSJ:

Dechert found the fees that the billionaire had paid Epstein were for legitimate advice on trust- and estate-tax planning that proved to be of significant value to Mr Black and his family.

One also wonders what were the “unrelated personal matters” that were invoked by Epstein in his emails to Black while seeking payment. This “acquittal” is, in a word, bullshit. In a letter to Apollo’s fund investors, Black wrote that he would cede the role of CEO to co-founder Marc Rowan on or before his 70th birthday on Jul 31 while retaining the role of chairman. In the letter, a copy of which was viewed by the Journal, Black detailed other governance changes he is recommending to the board, including the appointment of more independent directors and the elimination of Apollo’s dual-class share structure. Black also pledged to donate $200m of his family’s money to women’s initiatives. Black also recommended other governance changes, including adopting a “one share, one vote” structure and eliminating the supervoting shares held by the firm’s founders. He also proposed augmenting the board so that the majority of directors are independent. In his letter, Mr Black added:

It is important to emphasize that both Apollo and I condemn Mr Epstein’s reprehensible conduct in the strongest possible terms, and, as I have previously stated, I deeply regret having had any involvement with Mr Epstein. I am keenly aware that Apollo must continue to innovate and improve its corporate governance processes and focus on creating an enduring world-class financial institution with a best-in-class governance structure.

Apollo’s board voted to add two new independent directors: Pamela Joyner, founder of marketing firm Avid Partners LLC, and Siddhartha Mukherjee, a scientist, oncologist and Pulitzer Prize-winning author, in addition to Apollo Co-Presidents Scott Kleinman and Jim Zelter. Black told investors that the board plans to add at least two more independent directors. And while the stock was clearly satisfied with the report clearing both Apollo and Epstein of “any involvement in criminal activities at any time,” one can’t help but wonder what prompted Black’s departure from the PE giant that he founded.Sadly, as with so many other things involving Epstein and his circle of pedophiles, we will never know. Adding to the puzzle, as the WSJ notes:

The ascension of Mr Rowan, 58 years old, as the firm’s new CEO, is in some ways unexpected. Apollo said in July that he would take a step back from his day-to-day responsibilities and embark on a “semi-Sabbatical.” To some insiders, that seemed to pave the way for co-founder Josh Harris, who has for years overseen the firm’s day-to-day operations and has spent the past few years trying to institutionalize and revamp what some had described as a cutthroat culture, to take the top executive spot.

One wonders is Harris wasn’t also taking advantage of Epstein’s fantastic tax-evasion “skills.” Harris will remain a member of Apollo’s board and executive committee and will “continue to focus on expanding our global search for investor returns,” Black told investors.

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