Records reveal offshore moves of ultrawealthy including Little Rock's Warren Stephens

Posted: November 8, 2017 at 4:30 a.m.

Warren Stephens

James Simons, a mathematician and hedge fund operator from Boston now approaching 80, is a big Democratic donor. Warren Stephens, 60, inherited the family investment bank in Little Rock and became a booster of conservative Republicans.

Simons and Stephens are both billionaires who have used the services of offshore finance, the trusts and shell companies that the world's wealthiest people use to park their money beyond the reach of tax collectors and out of the public eye.

Simons was the main beneficiary of a private trust, never previously described, that was one of the largest in the world. In response to recent questions about the trust, Simons said that he had transferred his share to a Bermuda-registered charitable foundation.

Stephens used an opaque holding company to own an approximately 40 percent stake in a loan business accused by the federal Consumer Financial Protection Bureau of cheating working-class and poor Americans. While earning millions from the investment, Stephens helped finance a political fight against the bureau, never mentioning his personal connection.

In a statement Tuesday, a spokesman said Stephens, as a passive investor, had no knowledge of the operation of the loan business.

The details of the two men's wealth come from the files of Appleby, founded in Bermuda more than a century ago and considered one of the world's top offshore law firms. A collection of 6.8 million Appleby documents, obtained by the German newspaper Süddeutsche Zeitung and shared with media organizations through the International Consortium of Investigative Journalists, offers an inside look at the firm's services and customers.

Appleby operates in a rarefied universe of UHNWI's -- the industry's abbreviation for ultra-high-net-worth individuals. Some of Appleby's customers are also PEP's -- politically exposed persons -- for whom avoiding unwanted attention is a crucial goal.

"The Right People. The Right Places," reads the slogan on Appleby's stationery.

What offshore services offer to a diverse international elite is secrecy and discretion, along with the opportunity to minimize or defer taxes. Appleby appears to be more scrupulous than another offshore firm, Panama-based Mossack Fonseca, about shunning overtly corrupt and criminal clients, based on a comparison of the Appleby files with the leaked Panama Papers, which drew global coverage last year.

Appleby board minutes contain lists of "declined business," including government officials suspected of corruption and millionaires linked to organized crime.

Still, some dubious clients slip through. A PowerPoint slide used by Appleby's head of compliance discusses terrorist financing and refers to funds that were "definitely tainted."

"Some of the crap we accept is amazing totally amazing," say notes to a slide about sizing up potential customers.

Even with some potential customers turned away, business has rarely been better. The ranks of the superrich are growing fast, fueled by legitimate fortunes in finance, trade and technology -- as well as drugs, embezzlement and bribery. And the offshore finance industry has grown alongside its customers' accounts.

BIG NAMES, HIDDEN FORTUNES

Appleby had 31,000 U.S. clients, the most common nationality by far. The firm's files include a who's who of the nation's wealthiest citizens: prominent Democrat George Soros, the financier and philanthropist, and Penny Pritzker, commerce secretary in the Obama administration; and high-profile Republican supporters of President Donald Trump, including Sheldon Adelson, the casino magnate, and Carl Icahn, the private equity investor.

Queen Elizabeth II, according to Appleby documents, invested through a Cayman Islands fund in a company that owned a share of a British rent-to-own company widely criticized for financing the sale of household items at interest rates as high as 99.9 percent. The leaked files reveal performer Madonna's shares in a medical supplies firm, Irish rocker Bono's investment in a Lithuanian shopping center and Microsoft co-founder Paul Allen's yacht and submarines.

Around the globe, the documents disclose the holdings of rulers and politicians. The list includes three former prime ministers of Canada, the queen dowager of Jordan and at least five members of the Qatari ruling family.

Founded in 1898 by a British officer, Maj. Reginald Appleby -- an avowed opponent of taxation -- Appleby now has offices in nearly all the world's tax havens: Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Hong Kong, the Isle of Man, Jersey, Mauritius, the Seychelles and Shanghai.

Such locations offer low or zero tax rates.

In a statement, Appleby said the firm had done nothing wrong. "We are an offshore law firm who advises clients on legitimate and lawful ways to conduct their business," the statement said. "We do not tolerate illegal behaviour."

MINIMIZING TAXES

Simons, the hedge fund billionaire, was a young math professor in 1974 when a Colombian friend established a trust in Bermuda on his behalf using a gift of $100,000 to him, his parents and his descendants. U.S. tax authorities would consider the Lord Jim Trust, as it was named, a foreign entity, limiting the visibility of the IRS into its holdings and its ability to tax its funds until it made distributions to the Simons family. (Appleby did not create the trust but later provided legal advice.)

In 1982, Simons founded Renaissance Technologies, a New York-based hedge fund whose trading algorithms soon generated rates of return that became legendary on Wall Street. Over the next three decades, Renaissance became one of the most lucrative hedge funds on the planet, making Simons a billionaire many times over.

Simons, in response to questions, said that when he and his family received distributions from the Bermuda trust, they were reported to the IRS. But Simons said he and his relatives took out only limited amounts, mainly in the early years of the trust, whose main investments were Renaissance funds that enjoyed spectacular returns.

As Renaissance's investments grew, so did its footprint in American life. Simons became one of the country's top political donors. During the last election cycle, he was the sixth-largest contributor to political candidates and causes, giving more than $26 million, nearly all to Democrats, including $11 million to Priorities USA Action, a political action committee supporting Hillary Clinton.

Simons' business partner and Renaissance's departing co-chief executive, Robert Mercer, rose to the highest ranks of Republican donors and became an influential backer of Trump's presidential campaign, contributing more than $3 million. A major funder of Breitbart News, Mercer influenced critical decisions of Trump's candidacy, such as the hiring of Steve Bannon, then Breitbart's executive chairman, as the campaign's chief executive. Mercer has also been an Appleby client.

In 2014, a Senate committee accused Renaissance and another hedge fund of using a complex accounting maneuver to improperly avoid taxes. Renaissance is still fighting the resulting tax bill, estimated at $6.8 billion.

As the tax dispute has proceeded, Simons is now estimated to be the 25th-richest person in the United States, with a net worth estimated at $18.5 billion, according to the Forbes list of richest Americans. But such rankings, important yardsticks in the study of global development and inequality, often rely on incomplete public data.

FINES AND RESTITUTIONS

In late 2011, representatives of Stephens and his business partner, James Carnes, asked Appleby to incorporate two offshore companies as part of a plan to help American Indian tribes set up lending operations, a common business tactic because such ventures can claim tribal immunity against outside legal challenges.

The new venture's parent company, Hayfield Investment Partners, was incorporated in Delaware -- considered a tax haven like a half-dozen other U.S. states, underscoring that secrecy and tax advantages are not limited to palm-dotted tropical islands. Hayfield already had a separate subsidiary called Integrity Advance, an online payday loan company whose lending practices were coming into the cross hairs of regulators across the United States.

Documents in Appleby's files show that Stephens and his funds owned 40 percent of Hayfield, which received additional investments from executives of Stephens Inc., the family investment bank, and acquaintances such as golf star Phil Mickelson, who contributed $12,000.

It did not take long for Integrity Advance to generate complaints from borrowers and regulators. People short of cash who took out small loans would later see large withdrawals from their bank accounts for interest and services fees that often far exceeded the amount they originally borrowed.

By November 2012, Integrity Advance had received cease-and-desist letters from state regulators in Connecticut, Kentucky, Illinois, Mississippi and South Carolina. In May 2013, a Minnesota district court ordered the company to pay nearly $8 million in civil penalties and victim restitution, saying that the firm had targeted financially vulnerable citizens with interest rates as high as 1,369 percent.

One borrower, Nils Paul Warren, a broadcast audio technician for NASCAR in Orlando, complained to Florida regulators that he'd had to shell out more than $1,300 to repay a short-term $500 online loan he got from Integrity Advance in 2009 -- a sum far greater than what he had expected.

"I think the bulk of their clientele are people who are a paycheck away from being homeless," Warren said in an interview.

As complaints mounted, Stephens and Carnes sold part of Integrity Advance to a pawnshop-style loan company, Ezcorp. Eventually the Consumer Financial Protection Bureau accused Integrity Advance of "false and deceptive" tactics, and last year, an administrative law judge recommended to the head of the Consumer Financial Protection Bureau that the company and Carnes, its chief executive, pay more than $51 million in fines and restitution to borrowers. Integrity Advance and Carnes are appealing the ruling.

The Tuesday statement from a spokesman for Stephens said, in its entirety: "Warren Stephens was a passive investor in Hayfield Investment Partners from mid-2008 until all of its assets were sold in late 2012 when it ceased all of its lending activities. Warren Stephens never had any involvement in, or knowledge of, the details of Hayfield's day-to-day activities.

"Neither Warren Stephens, nor any of his employees, had any role in retaining Appleby's services, nor were they involved in any discussions with Appleby. No business was ever conducted by any entity set up with the assistance of Appleby.

"No allegations of misconduct by Mr. Stephens were ever made by the [Consumer Financial Protection Bureau], or any other regulatory body regarding this matter. Furthermore, Mr. Stephens' contributions to the Club for Growth had nothing to do with the [Consumer Financial Protection Bureau] and were made several years after Hayfield ceased its lending operations."

In June 2013, Stephens told The Wall Street Journal that the Consumer Financial Protection Bureau bore some blame for lagging business growth. "The stories we hear about that are pretty scary," the billionaire said.

During last year's campaign, Stephens contributed $3 million to Club for Growth, a conservative political action committee that has pushed Congress to strip the Consumer Financial Protection Bureau's enforcement powers.

Along with helping bankroll such Washington battles, Stephens has recently used his investment bank, Stephens Inc., to produce an online video series called This Is Capitalism to improve millennials' opinion of free-market economics.

In his introduction, Stephens wrote that he hoped the series would counter the notion that the free market is "a system that enriches a few at the expense of the many."

Information for this article was contributed by Stephen Steed of the Arkansas Democrat-Gazette.

James Simons

A Section on 11/08/2017