Introducing "Safe Harbor: The Quellos Fraud"
A multi-part investigation by Tax Alpha Insider
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In 2001, Haim Saban sold his company to Disney for $5.3 billion.1 He’d started out composing cartoon soundtracks (Inspector Gadget, He-Man) before Power Rangers made him a mogul.2 By the time of the sale, he co-owned the company with News Corp., and his gain came to roughly $1.5 billion.3
That payday generated a tax bill of more than $300 million.4 Saban’s attorney, a Harvard-trained tax lawyer in Beverly Hills named Matt Krane,5 told him he knew people who could help.6
In the mid-nineties, Jeff Greenstein, an investment manager in Seattle, had co-founded an investment firm named Quellos.7 Starbucks founder Howard Schultz’s venture capital firm, Maveron, was a backer.8 At the time, pension funds and endowments were pouring money into alternatives, and Quellos rode the boom.9 At its peak, the firm managed $25 billion in assets from the top floor of Two Union Square, a 56-story glass tower in downtown Seattle.10 It was the seventh-largest fund of its kind in the world.11
Over the next several years, five wealthy clients came to Quellos with a version of the same problem Saban had.12 One was the heir to the Johnson & Johnson fortune and owner of the New York Jets.13
The pitch was simple: tax-loss harvesting. Sell an asset at a loss to offset a gain, and the current tax bill shrinks. The trouble was that none of these clients had losses to sell.14 But Quellos had a solution called POINT that routed stock sales through shell companies in the Isle of Man and bank accounts in Austria.15
To make it hold up, they needed the most prestigious law firm in America. Cravath, Swaine & Moore, the firm that had defended IBM from antitrust breakup and helped create NBC,16 reviewed Quellos’s tax strategy and wrote opinion letters blessing it over and over.17
There was just one problem. Every last one of the losses was completely made up.
Safe Harbor Part 1 lands next Sunday.
Fox Family Worldwide sale to Disney for $5.3B (including ~$2.3B assumed debt): Senate hearing report, Aug 1, 2006 (https://www.govinfo.gov/content/pkg/CHRG-109shrg33415/html/CHRG-109shrg33415.htm); Saban Capital Group press release (https://www.saban.com/News-Corp-and-Haim-Saban-Reach-Agreement-to-Sell-Fox-Family-Worldwide-to-Disney-for-5-3-Billion/). Saban and News Corp. were co-owners; Allen & Company held 1%.
Saban and Shuki Levy composed soundtracks for Inspector Gadget, He-Man, She-Ra, and other shows in the 1980s. Founded Saban Entertainment in 1988. Power Rangers (adapted from the Japanese Super Sentai series) debuted in 1993 and became a breakout hit. Television Academy Foundation interview (https://www.televisionacademy.com/features/emmy-magazine/articles/haim-saban-power-rangers-foundation-interview); CNBC (https://www.cnbc.com/2018/10/11/how-haim-saban-went-from-rags-to-riches.html)
Saban owned 49.5% of Fox Family Worldwide; gain of ~$1.5B from sale (News Corp. received ~$1.7B): Saban Capital Group press release; Haaretz (https://www.haaretz.com/1.5343995); Senate hearing testimony, Aug 1, 2006
~$1.5B in capital gains, ~$300M in taxes: Senate hearing testimony, Aug 1, 2006 (https://www.govinfo.gov/content/pkg/CHRG-109shrg33415/html/CHRG-109shrg33415.htm)
Matt Krane: Harvard Law, Beverly Hills tax attorney: DOJ Krane sentencing release, Jun 2011 (https://www.justice.gov/archive/usao/waw/press/2011/jun/krane.html); ABA Journal
Krane connected Saban to Quellos: DOJ Krane sentencing release (https://www.justice.gov/archive/usao/waw/press/2011/jun/krane.html)
Jeff Greenstein co-founded Quellos (originally named Quadra) in 1994 with Bryan White; he previously ran the Greenstein Rosenthal hedge fund (1989-1993). Renamed to Quellos in 2000: YIS Capital founder bio (https://yiscapital.com/jeff-greenstein/); Crunchbase (https://www.crunchbase.com/person/jeff-greenstein); Seattle Times (https://www.seattletimes.com/business/hedge-fund-firm-could-feel-fallout-from-kpmg-investigation/)
Maveron (Starbucks founder Howard Schultz’s VC firm) backed Quellos, the company (equity investment in the management firm, not a fund allocation): Seattle Times (https://www.seattletimes.com/business/hedge-fund-firm-could-feel-fallout-from-kpmg-investigation/): “Quellos Group... has Maveron as one of its backers”; The Hill (https://thehill.com/homenews/campaign/428744-schultz-invested-in-for-profit-college-tax-shelter/); Quellos listed among Maveron portfolio exits
Fund-of-funds industry growth in the late 1990s was driven by institutional demand for hedge fund exposure via managed platforms: Hedgeweek (https://www.hedgeweek.com/blackrock-acquire-usd17bn-fund-funds-business-quellos-group/); Bryan White’s track record in manager selection cited in BlackRock acquisition press release (https://www.sec.gov/Archives/edgar/data/1364742/000119312507142301/dex991.htm)
$25B AUM, Two Union Square (56 stories, 797 ft, second-tallest in Seattle), Quellos on top floor: Seattle Times (https://www.seattletimes.com/business/hedge-fund-firm-could-feel-fallout-from-kpmg-investigation/); skyscrapercenter.com (https://www.skyscrapercenter.com/building/two-union-square/1176); Structurae (https://structurae.net/en/structures/two-union-square)
7th-largest fund-of-hedge-funds: Seattle Times (https://www.seattletimes.com/business/hedge-fund-firm-could-feel-fallout-from-kpmg-investigation/); corroborated by Senate report
Five clients, $86M in fees: DOJ indictment press release, Jun 2009 (https://www.justice.gov/archive/usao/waw/press/2009/jun/quellos.html)
Woody Johnson was Jets owner, J&J heir: Senate hearing testimony, Aug 1, 2006 (https://www.govinfo.gov/content/pkg/CHRG-109shrg33415/html/CHRG-109shrg33415.htm)
These clients had massive capital gains (Saban: ~$1.5B; Johnson: comparable) and no corresponding losses to harvest: Senate hearing report, 2006; DOJ indictment, Jun 2009
Isle of Man shell companies (Jackstones Ltd and Barnville Ltd): Senate hearing exhibits, 2006 (https://www.govinfo.gov/content/pkg/CHRG-109shrg33415/html/CHRG-109shrg33415.htm). Austria bank account ($36M, blocked by Section 38 bank secrecy): DOJ Krane sentencing release (https://www.justice.gov/archive/usao/waw/press/2011/jun/krane.html)
Cravath defended IBM from antitrust breakup (postwar), helped create NBC (1926): Wikipedia (https://en.wikipedia.org/wiki/Cravath,_Swaine_%26_Moore); New-York Historical Society exhibition (https://www.nyhistory.org/exhibitions/two-centuries-law-cravath-swaine-moore)
Cravath wrote four opinion letters on the Quellos arrangement for $125,000: Senate hearing report, 2006 (https://www.govinfo.gov/content/pkg/CHRG-109shrg33415/html/CHRG-109shrg33415.htm). Steinberg testified he “relied completely on Quellos” for factual accuracy: Senate hearing testimony