Court Unseals Kirby McInerney Tax Whistleblower Case against Elite Headhunter Firm Egon Zehnder7/29/2021
Bloomberg Tax reported on a whistleblower case filed by Kirby McInerney LLP in an article by reporter Michael Bologna entitled “New York Said to Be Cheated of Millions in Tax by Headhunter.” The article can be found here.
The case is against premier executive placement firm Egon Zehnder International, Inc. and its Swiss parent company Egon Zehnder International AG. Egon Zehnder is headquartered in New York City and it has U.S. offices in California, Illinois, Georgia, Florida, Texas, Massachusetts, and Washington DC. It also has dozens of foreign affiliates around the world led by the Swiss parent company.
The complaint alleges that Egon Zehnder filed false tax returns and misled government tax auditors to conceal about $93 million in revenues that were earned and taxable in the United States and at the state and local level.
The tax scheme alleged in the complaint had two principle elements. In the larger one, Egon Zehnder is alleged to have evaded taxes using a two-sets-of-books scheme directed by the Swiss parent company. It recorded its real revenues in its “performance” books, which it used to operate its business. In its so-called “legal” books, which it gave to its outside tax preparer, it “off-shored” millions of dollars of revenue by giving the false appearance that the revenues belonged in other countries. In the smaller part of the alleged scheme, Egon Zehnder is claimed to have evaded taxes by deducting expenses that did not belong to it, but belonged instead to its foreign affiliates. It thus “on-shored” those costs for tax purposes. The complaint alleges that Egon Zehnder did not share its real revenue and cost numbers with its outside tax preparer.
A copy of the complaint can be found here.
“The core scheme we allege was simple,” said Kirby McInerney LLP partner Randall Fox, who represents the whistleblower. “We allege that Egon Zehnder, at the direction of its Swiss parent company, manipulated its revenues and costs purposefully to underpay its corporate taxes. The decade-long scheme alleged would not have been uncovered had it not been for the whistleblower coming forward.” Fox added “we look forward to proving the claims in court.”
The suit was filed under the New York False Claims Act, which encourages the revelation of big-ticket, knowing tax violations committed against New York State and New York local governments. The law imposes treble damages and penalties on liable companies, and rewards whistleblowers with up to 30% of the amounts recovered. Most other states, including states where Egon Zehnder has offices, have not permitted whistleblowers to bring tax-related suits on their behalf.
Kirby McInerney LLP represents whistleblower American Advisory Services LLC, and filed the suit in January 2017. The firm is continuing to pursue the case after an investigation by the New York Attorney General and a decision by that office not to intervene in the action, which allowed the whistleblower to continue the action on behalf of the State. The case was under seal until July 2021.
The whistleblower complaint relies primarily on Egon Zehnder’s own words and documents. The evidence described in the complaint includes several recorded conversations in which Egon Zehnder’s leaders were informed that the company was violating the tax laws. The complaint quotes one such conversation where Egon Zehnder’s U.S. leader recognized the issue of “our shifting of billings to the appropriate geography for tax reasons” and added that “I was aware of that before.” He was told by Egon Zehnder’s top U.S. financial employee in that conversation that “it’s planned, it’s not a mistake. You know, it’s fraud when it comes right down to it.” The complaint quotes a later recorded conversation where a senior financial employee at the Swiss parent company advised that the U.S.. company keep a “low profile” for the unreported revenues during an upcoming IRS tax audit. In yet another recorded conversation quoted in the complaint, a subsequent U.S. leader, when told IRS auditors might discover the unreported revenue in another audit, suggested they wait to see if the IRS finds the revenue and, if they do, to then pretend the company did not know it was wrong and to offer to work with the IRS to fix it going forward. As the complaint alleges, Egon Zehnder ignored the many warnings and continued to off-shore revenues and on-shore costs for years.