Clinton's Burkle Ties Include Funds in Cayman Islands

Clinton's Burkle Ties Include Funds in Cayman Islands

By Timothy J. Burger and Ryan J. Donmoyer
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Dec. 17 (Bloomberg) -- Former President Bill Clinton's decision to
reconsider a business relationship with California billionaire Ron
Burkle reflects concern those financial dealings may embarrass his
wife's presidential candidacy.

Securities and Exchange Commission documents and financial- disclosure
forms filed by Hillary Clinton show that Bill Clinton, 61, has a
financial stake in three investment entities registered in the Cayman
Islands by Burkle's Yucaipa Cos. LLC.

In 2004, Hillary Clinton, a New York senator, said she wanted to close
the ``loopholes' ' for ``people who create a mailbox, or a drop, or
send one person to sit on the beach in some island paradise and claim
that it is their offshore headquarters. ''

The former president's possible decision to move away from Burkle ``is
all tied up with the laws of appearance and the politics of
perception,' ' said Linda Fowler, professor of government at Dartmouth
College in Hanover, New Hampshire. ``The world being what it is,
people are attracted to the spouse of somebody with political power.
The level of potential conflict is just that much higher with a former
president and a senator who would be president.''

Moreover, added Fowler, ``with this particular couple, somehow, the
whole story doesn't come out except in dribs and drabs.''

Bloomberg News last month submitted a list of questions to the Clinton
campaign regarding the former president's involvement in the three
Caymans-based funds. The campaign didn't respond to the queries until
Dec. 13, after the New York Times reported that Clinton plans to
dissolve his five-year partnership with Burkle, a longtime friend and
important fund-raiser for both Clintons.

`An Appropriate Transition'

Jay Carson, a Clinton spokesman, said that while the former president
hasn't ``severed ties'' with Yucaipa, he ``is taking steps to ensure''
that ``there will be an appropriate transition for those
relationships' ' if his wife receives the 2008 Democratic presidential
nomination.

Carson, in an e-mail, said the funds are designed for foreign
investors. ``All three of these entities (which are related) are
organized in the Cayman Islands so that each investor or partner pays
the taxes they would owe in their home country,'' he said. ``For U.S.
citizens like Bill Clinton, that means he pays U.S. taxes on his
income from this fund, which he does.''

Disclosures

The disclosures that Hillary Clinton, 60, is required to make as a
lawmaker and candidate show that her husband has holdings in three
Burkle-controlled funds -- YGOF GP Ltd., Yucaipa Global Holdings and
Yucaipa Global Partnership Fund LP -- all listed at Yucaipa's Los
Angeles address. An October filing with the SEC by Burkle, Yucaipa's
lead partner, names YGOF as a Cayman Islands corporation and the
latter two as Cayman Islands partnerships.

The amounts disclosed by Hillary Clinton are minimal, though a person
familiar with the matter confirmed a report last year in The New York
Times that Bill Clinton stands to make tens of millions of dollars
with little risk if the Yucaipa funds he is involved in profit beyond
a certain level.

Forbes Magazine listed Burkle, 55, as the 91st richest American this
year, with a net worth of $3.5 billion.

`More Attractive'

Paul Roth, an attorney with Schulte Roth & Zabel LLP in New York, said
companies that organize outside the U.S. often do so because ``it's
more attractive'' to foreign investors, who can ``make sure they're
not subject to U.S. taxation.'' Foreign registration may also make it
easier for U.S. tax-exempt entities such as pension funds to invest
``in certain strategies,' ' he said.

These tax benefits -- which are legal and common practice for many
investment firms, particularly hedge funds -- have drawn attention
from lawmakers and candidates.

In a Dec. 13 debate, Hillary Clinton's chief rival for the Democratic
nomination, Senator Barack Obama of Illinois, said that as president
he would crack down on corporate loopholes and tax savings,
particularly those involving offshore transactions.

``There's a building in the Cayman Islands that houses, supposedly,
12,000 U.S.-based corporations, '' Obama said. ``That's either the
biggest building in the world or the biggest tax scam in the world.
And I think we know which one it is.''

Not Deferred

Roth said U.S. law makes it difficult for Americans to avoid taxes on
payments from offshore, though some hedge-fund managers use such
entities to defer U.S. taxes on their compensation. A measure passed
last week by the House would ban this practice. Obama, 46, was a
Senate co-sponsor of the provision when it was introduced in February.

Carson said Bill Clinton's payments from Yucaipa aren't deferred and
the former president pays tax on that income in the year in which it
is earned.

Steven Howard, a partner at Thacher Proffitt & Wood LLP in New York
who advises investment firms, said private-equity firms such as
Yucaipa often compensate advisers with a stake in the company rather
than salary. ``In Clinton's case, he may be allocated equity instead
of significant cash for services rendered,'' Howard said.

Carson didn't respond to questions about whether Bill Clinton receives
this form of compensation. Howard said equity allocations are taxed at
the 15 percent capital-gains rate instead of as ordinary income, which
is taxed at rates as high as 35 percent. He said the same benefit
applies to so-called carried interest, a profit-sharing arrangement
used by fund managers that Hillary Clinton and other Democrats have
criticized and vow to curb.

Difficult to Assess

The realized value of Clinton's holdings in Yucaipa hasn't been
disclosed and such stakes are typically difficult to assess until they
are disbursed. Funds such as Yucaipa are privately held and aren't
normally required to disclose details to regulators.

Hillary Clinton's Senate financial-disclosur e records only say that
Bill Clinton's Yucaipa assets were valued at less than $2,002 in 2006,
while he received between $1,202 and $3,500 in interest that year. In
the 18 months between January 2006 and June 2007, the value of the
assets grew to between $1,001 and $15,000, and Bill Clinton received
between $6,002 and $17,500 in interest, according to financial records
filed in connection with the senator's presidential candidacy.

Bill Clinton has also received ``over $1,000'' a year in ``guaranteed
payments to partner'' from Yucaipa Global Holdings and a predecessor
fund. The government forms don't require lawmakers to specify an exact
amount for spouses.

Campaign Questions

Bloomberg's questions to the campaign involved the nature and amounts
of his compensation from Yucaipa, why the holdings were listed as Los
Angeles-based rather than Cayman Islands entities, and when Hillary
Clinton became aware that the funds were offshore. Carson didn't
address those questions. Yucaipa spokesman Frank Quintero referred all
questions about the former president's role to the Clintons' spokespeople.

Bill Clinton's ties to Yucaipa have sparked controversy over the past
year, including a September report in the Wall Street Journal that
detailed how one of the former president's aides had helped arrange a
partnership with Burkle that dissolved amid litigation over
allegations of misused funds.

Fortress

The former president isn't the only person in the campaign with links
to funds in the Cayman Islands. Former North Carolina Senator John
Edwards, who is also seeking the Democratic nomination, was a senior
adviser to Fortress Investment Group Inc., a New York-based
private-equity and hedge-fund manager, and reported at least one
asset, the Investments Fund III (Fund D) LP, that was incorporated in
the Cayman Islands in 2004.

Edwards, who was the first candidate to criticize tax preferences for
the private-equity industry, also pays taxes as if the money was
earned in the U.S., spokesman Eric Schultz told the Washington Post in
May. Schultz said Edwards, 54, ``believes offshore tax shelters are
wrong'' and ``will end them'' if elected. The Edwards campaign didn't
immediately respond to a request for comment today.

Separately, the Los Angeles Times reported today that former
Massachusetts Governor Mitt Romney, a Republican candidate, used shell
companies in at least two offshore havens while running Bain Capital
LLC, the Boston-based private-equity firm. Romney spokesman Kevin
Madden told the Times there was nothing improper about the
registration of funds in Bermuda and the Cayman Islands and that
Romney didn't defer or avoid paying U.S. taxes. Madden didn't
immediately respond to calls seeking comment today.

When he left the White House in 2000, Bill Clinton reported assets of
more than $1 million and legal fees of more than $2.4 million. In his
wife's most recent disclosure, Hillary Clinton reported that the
couple now has a net worth estimated at between $17.4 million and
$53.7 million.

Both now claim to be uneasy about their place among the richest
Americans. This ``new experience,' ' Hillary Clinton said during a
debate Oct. 30, isn't ``one that makes us very comfortable. ''