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Capitol View®
Catharine Richert

PoliGraph: Key facts missing in Franken’s latest ad

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poligraph-misleading

Bermuda’s warm beaches have become part of a chilly political battle between Sen. Al Franken and his Republican opponent Mike McFadden.

Franken’s latest ad says McFadden’s company is incorporated in Bermuda to avoid U.S. taxes, a tactic that’s meant to emphasize McFadden’s wealth and connections to corporate America.

“Meet investment banker, Mike McFadden. He’s running for Senate in Minnesota. But McFadden’s business is based right here in Bermuda. That’s right: McFadden’s company uses a special tax loophole to list its headquarters offshore and to avoid paying millions of taxes in America.”

The truth of this statement hinges on how you define “McFadden’s business.”

The evidence

Back in 2005, Lazard Limited, an international asset management firm, went public and moved its headquarters to Bermuda. By doing so, the company avoids paying U.S. corporate taxes. For instance, the move lowered the company’s overall tax rate by about 12.7 percent according to documents filed with the Securities and Exchange Commission.

This is a tax strategy many American companies employ because the U.S. has one of the highest corporate tax rates in the world.

Two years later, Lazard bought Minneapolis-based private investment banking firm Goldsmith Agio Helms, and that’s when McFadden came into the picture. He was Goldsmith’s co-CEO at the time and stayed on as co-CEO of the newly formed Lazard Middle Market. When he decided to run for office, McFadden took a leave of absence from the firm.

Lazard Middle Market operates independently but is a wholly-owned subsidiary of Lazard Limited. That means that Lazard Limited’s success is affected by the success of Lazard Middle Market. For instance, in 2012, Lazard Limited reported a net revenue increase of $83 million “primarily driven by the strong performance of Lazard Middle Market,” according to a recent Securities and Exchange Commission filing.

McFadden has profited personally from Lazard Limited as well. According to his most recent financial statements, McFadden has between $1.5 million and $3 million in Lazard Limited stock.

On its face, Franken’s ad is correct: McFadden was a high-level executive for the subsidiary of a company that is based in Bermuda, a well-known tax haven for corporations.

But Franken’s ad also leaves out a few facts that deserve scrutiny.

Lazard Middle Market is incorporated in Delaware, a state that has shareholder-friendly regulations and a tax loophole that allows companies headquartered there to reduce taxes in states where they actually operate. As a result, McFadden’s campaign can legitimately argue that McFadden’s company is based in the United States and pays taxes here.

And the ad also glosses over the fact that Lazard Limited was incorporated in Bermuda before McFadden joined the company.

Franken has ties to Lazard as well. According to the Associated Press, Franken is invested in the company through a mutual fund.

The verdict

This is a difficult ad to pick apart.

In one sense, it is accurate. McFadden was the chief executive at a subsidiary of a firm with headquarters  in Bermuda. If Lazard Limited is considered McFadden’s business – and it’s a reasonable argument to make given McFadden’s recent status in one of the company’s subsidiaries – the ad is essentially correct. McFadden personally profits from Lazard Limited, and until now, hasn't run away from his association with the company.

But the spot also leaves out some important information. To start, it may lead viewers to believe that McFadden made the decision to move his company to Bermuda, which is not the case. And it may lead viewers to think that the subsidiary that McFadden headed dodged taxes. In fact, it’s incorporated in Delaware, which means it is subject to U.S. taxes.

Because the ad leaves out those key facts, it leans toward misleading, although it is clear the parent company of McFadden’s subsidiary did cut its tax bill by moving to Bermuda.

Correction: An earlier version of this story said Lazard Middle Market pays corporate taxes. Because of the way the company is structured, taxes are paid through individual tax filings.