Edwards has close ties to rich folks' tax havens

WASHINGTON -- Two years ago, former senator John Edwards of North Carolina, gearing up for his second run at the Democratic presidential nomination, gave a speech decrying the "two different economies in this country: one for wealthy insiders and then one for everybody else."

Four months later, he began working for the kind of firm that to many Wall Street critics embodies the economy of wealthy insiders -- a hedge fund.

Edwards became a consultant for Fortress Investment Group, a New York-based firm known mainly for its hedge funds, just as the funds were gaining prominence in the financial world -- and in the public consciousness, where awe over their outsize returns has mixed with misgivings about a rarefied industry that is, on the whole, run by and for extremely wealthy people and operates largely in secrecy.

A midsize but growing player in the hedge fund industry with more than $30 billion in assets, Fortress was the first hedge fund manager to go public, thereby subjecting itself to far more scrutiny. But it was an unusual choice of employment for Edwards, who for years has decried offshore tax shelters as part of his broader campaign to reduce inequality. Although Fortress was incorporated in Delaware, its hedge funds were incorporated in the Cayman Islands, enabling its partners and foreign investors to defer or avoid paying U.S. taxes.

Fortress announced Edwards' hiring as an adviser in a brief statement in October 2005. Neither Edwards -- who ended his consulting deal when he launched his presidential campaign in December -- nor the firm will say how much he earned or what he did.

But his ties to Fortress were suggested by the first round of campaign finance reports released last week, which showed Edwards raised $167,460 in donations from Fortress employees for his 2008 presidential campaign, making it his largest source of support from a single company.

Edwards' connection to Fortress is only one sign of the booming $1.4 trillion hedge fund industry's emergence in national politics. During the 2006 election, its executives and employees accounted for $6 million in campaign contributions, the first time its giving was tracked as a separate industry, according to the Center for Responsive Politics.

Sen. Hillary Rodham Clinton, D-N.Y., and former New York Mayor Rudy Giuliani, a Republican, for whom Wall Street is an especially key constituency, count hedge fund executives as donors and fundraisers for their presidential campaigns. One of Sen. Barack Obama's biggest presidential fundraisers is a hedge fund manager -- Orin Kramer, general partner of Boston Provident Partners LP in New York and a longtime Democratic fundraiser.

A tougher set of rules

Kate Bedingfield, a spokeswoman for the Edwards campaign, said Fortress recently ended its practice of letting managing partners defer their U.S. income taxes by reinvesting profits in the offshore funds. The firm made that change when it went public late last year around the time Edwards ended his consulting arrangement.

"John Edwards believes offshore tax shelters are wrong," Bedingfield said last week. "As president he will end them. By voluntarily going public, Fortress has ended the practice of using offshore tax shelters for deferred compensation and has committed itself to a whole set of transparency and disclosure obligations that no other hedge fund has committed itself to before."

By selling shares to the public, Fortress had to comply with rules requiring more disclosure in its operations. In its initial filing with the Securities and Exchange Commission last November, the company said it had $30 billion in holdings and that all of its hedge funds and many of its private equity funds were created offshore.

During the 2004 vice presidential debates with Dick Cheney, Edwards called for the end to all offshore tax havens as he cited the offshore vehicles Cheney's former company, Halliburton Co., used for tax savings.

"They ought to be closed. They ought to be closed for anybody. They ought to be closed whether they're personal, and they ought to be closed whether they apply to a corporation," Edwards said at the time.

After he and his running mate, Sen. John Kerry, were defeated in 2004, Edwards returned to North Carolina, started a think tank on poverty at UNC-Chapel Hill, and began work at Fortress. He announced in December that he would again be a candidate for president.