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Virginia Politics
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LAWSUIT ACCUSES YOUNGKIN OF TAX AVOIDANCE, DRAWS POLITICAL FIRE

By Gregory S. Schneider
August 11, 2022 at 6:49 p.m. EDT

Virginia Gov. Glenn Youngkin (R), shown at a public event in Richmond in July,
is accused in a lawsuit of avoiding taxes at the expense of workers who invested
in his former company, the Carlyle Group. (Steve Helber/AP)
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RICHMOND — Gov. Glenn Youngkin (R) is among several current and former
executives of the private equity firm Carlyle Group being accused by a municipal
pension fund of taking millions in personal profits in a way that deprived
income to shareholders and shielded the executives from paying any taxes on the
windfall.



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NBC financial reporter Gretchen Morgenson first posted a story about the lawsuit
Thursday morning after it was filed Aug. 3 in Delaware by the Pittsburgh
Comprehensive Municipal Pension Trust Fund. The 136-page suit alleges that
Youngkin received about $8.5 million of a $344 million payday engineered for a
small group of top executives in 2019 and 2020, when he served as co-CEO.

The executives “were unjustly enriched at the expense of and to the detriment of
Carlyle and its stockholders,” according to the suit. The trust fund is a
Carlyle shareholder, investing retirement accounts for municipal employees such
as firefighters and police officers.

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“Many are first responders putting their lives on the line every day,” the suit
said. “They depend on the integrity of the financial markets to provide for
their retirements. The kind of impunity that Carlyle’s Control Group acted with
is shocking and unacceptable.”

Youngkin stepped down from Carlyle in September 2020 to run for governor of
Virginia. His role as a multimillionaire private equity chief executive has been
both a political asset and a liability, as Republicans laud his business success
while Democrats have criticized his firm’s practice of buying and selling
companies and sometimes cutting employees to maximize profit.

Inside gubernatorial contender Glenn Youngkin's long career at Carlyle Group

On Thursday, spokeswoman Macaulay Porter defended Youngkin’s role in the
financial scenario targeted by the lawsuit. “When Mr. Youngkin was a member of
Carlyle’s leadership, the Carlyle board and an independent special committee
retained independent experts and advisers to consider and approve a transaction
that had significant benefits for the company and its shareholders,” Porter said
via text message.

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She declined to comment further, saying the matter is under active litigation.

Youngkin is among 15 current and former executives named as defendants in the
suit, along with Carlyle. It does not allege that the activity was illegal, but
seeks to recover unspecified damages, including making the executives reimburse
their gains.

A spokesman for Carlyle issued a written statement in response to questions
about the suit, “Carlyle was the first U.S. private equity firm to convert to a
one share one vote, best-in-class governance model creating better alignment
with public shareholders who now have a greater vote and voice.”

Democrats zeroed in on the suit to paint Youngkin as out of touch with ordinary
people. Calling it a “stunning development,” House Minority Leader Del. Don L.
Scott Jr. (D-Portsmouth) tweeted that “most workers play by the rules and pay
their taxes. Apparently Youngkin does not. While his party was slashing teacher
pay, he was lining his pockets at the expense of public servants.”

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A spokesman for Scott said the reference to teacher pay was based on the fact
that former governor Ralph Northam (D) introduced a budget that included 10
percent raises for teachers, while the budget signed by Youngkin included 8
percent raises and 2 percent bonuses over the next two years. That budget was a
compromise between a Republican-controlled House and Democratic-controlled
Senate.

Del. Marcus B. Simon (D-Fairfax) tweeted that the tactics outlined by the
lawsuit amount to “slimy stuff.”

According to the suit, the private equity giant used a complicated financial
technique to get a big payday for top executives and avoid paying taxes instead
of passing benefits along to investors, such as the pension fund.

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Carlyle was privately owned until 2012, when it held an initial public offering
of stock. Several longtime executives — including Youngkin and founders David
Rubenstein, William Conway and Daniel D’Aniello — had private shares that could
be converted to public shares. Typically, according to the suit, converting the
shares is done in a way that’s subjected to taxation. The tax payments can be
used by the company to offset its tax liabilities.

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In a maneuver called a tax receivable agreement, the executives who convert
their shares from private to public can be compensated for the value of the tax
asset that they create for the company. According to the suit, an executive
might typically get 85 percent of the value of the tax asset, and the remaining
15 percent would revert to the company and its shareholders.

But the Pittsburgh pension fund alleges that Carlyle’s executives converted
their shares in a way that avoided some $1 billion in taxes, which created no
tax benefit for the company. Then the executives turned around and took
compensation for the tax receivable agreement anyway, even though — according to
the suit — it had no value. Youngkin’s portion of the $344 million payout was
about $8.5 million; the suit says the three founders saw far more — more than
$66 million each for Conway and D’Aniello and more than $70 million for
Rubenstein.

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Kewsong Lee, who served as co-CEO with Youngkin but stepped down from the
company this week, arrived in 2013, a year after the company went public. He is
named in the suit as having facilitated the payday for the other executives.

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Youngkin has faced scrutiny before over taxes. The acreage around his home in
Great Falls is under a conservation easement, drastically reducing the amount of
taxes he pays on the property. Last year Youngkin’s campaign released a summary
of his past five years of income taxes, showing income over that period of some
$127 million.

Because much of his income was in capital gains on investments, which is taxed
at a lower rate than salaried income, Youngkin’s effective tax rate fluctuated
over the period between a high of 31.7 percent and a low of 15.4 percent,
according to the summary provided by his campaign. The Washington Post could not
independently verify the figures.

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