NBC financial reporter Gretchen Morgenson first published a story on the lawsuit Thursday morning after it was filed Aug. 3 in Delaware by the Pittsburgh Comprehensive Municipal Pension Trust Fund. The 136-page lawsuit alleges that Youngkin received approximately $8.5 million of a $344 million payday designed for a small group of top executives in 2019 and 2020 when he served as co-CEO functioned.
Executives were “unfairly enriched at the expense and detriment of Carlyle and its shareholders,” the lawsuit states. The trust fund is a shareholder of Carlyle that creates retirement accounts for community employees such as firefighters and police officers.
“Many are first responders who put their lives on the line every day,” the suit said. “They depend on the integrity of financial markets to provide for their retirement. The level of impunity with which Carlyle’s control group acted is shocking and unacceptable.”
Youngkin resigned from Carlyle in September 2020 to run for governor of Virginia. His role as a multi-millionaire private equity chief has been both a political asset and a liability, as Republicans have praised his business success while Democrats have criticized his company’s practice of buying and selling businesses and sometimes shedding employees to make profits maximize.
Insight into the long career of governor candidate Glenn Youngkin at the Carlyle Group
On Thursday, spokeswoman Macaulay Porter defended Youngkin’s role in the financial scenario at which the lawsuit is aimed. “When Mr. Youngkin was a member of Carlyle’s leadership, the Carlyle board and an independent select committee retained independent experts and advisers to review and approve a transaction that had significant benefits for the company and its shareholders,” Porter said via text message .
She declined further comment, saying the matter is the subject of active litigation.
Youngkin is among 15 current and former executives, along with Carlyle, named as defendants in the lawsuit. It does not allege that the activity was illegal, but seeks unspecified damages, including demands that the executives refund their winnings.
A spokesman for Carlyle issued a written statement in response to questions about the lawsuit: “Carlyle was the first US private equity firm to transition to a best-in-class, one-share, one-vote governance model , which creates greater alignment with the public shareholders, who now do, a greater voice and voice.”
Democrats focused the lawsuit to portray Youngkin as cut off from ordinary people. Del. House Minority Leader Don L. Scott Jr. (D-Portsmouth), called it a “stunning development.” tweeted that “most workers play by the rules and pay their taxes. Apparently, Youngkin doesn’t. While his party cut teachers’ salaries, he lined his pockets at the expense of state employees.”
A Scott spokesman said the reference to teachers’ pay stems from the fact that former Gov. Ralph Northam (D) introduced a budget that included 10 percent pay rises for teachers, while the budget signed by Youngkin included 8 percent pay rises and 2 percent Bonuses about it contained next two years. This budget was a compromise between a Republican-controlled House of Representatives and a Democrat-controlled Senate.
Del. Marcus B. Simon (D-Fairfax) tweeted that the tactics outlined in the lawsuit amount to “slimy stuff.”
According to the lawsuit, the private equity giant used a complicated financial technique to achieve a big payday for top executives and avoid paying taxes, rather than passing on the benefits to investors like the pension fund.
Carlyle was privately held until 2012 when it held a stock public offering. Several longtime executives — including Youngkin and founders David Rubenstein, William Conway, and Daniel D’Aniello — had private shares convertible into public shares. Typically, according to the lawsuit, the conversion of shares is taxable. The tax payments can be used by the company to offset its tax liabilities.
In a maneuver known as a tax claim agreement, the executives who switched their shares from private to public can be compensated for the value of the tax credit they create for the company. According to the lawsuit, an executive could typically receive 85 percent of the value of the tax credit, and the remaining 15 percent would revert to the company and its shareholders.
But the Pittsburgh Pension Fund alleges that Carlyle executives swapped their shares in a way that evaded around $1 billion in taxes, giving the company no tax advantage. Then the boards turned around and still took compensation for the tax claim agreement, even though the lawsuit said it had no value. Youngkin’s share of the $344 million payout was approximately $8.5 million; The lawsuit says the three founders saw far more — more than $66 million each for Conway and D’Aniello and more than $70 million for Rubenstein.
Kewsong Lee, who served as co-CEO with Youngkin but stepped down from the company this week, came in 2013, a year after the company went public. He is named in the lawsuit as the one who facilitated payday for the other executives.
Youngkin has already come under scrutiny for taxes. The acreage surrounding his Great Falls home is a conservation area, which drastically reduces the amount of taxes he pays on the property. Last year, Youngkin’s campaign released a summary of his income taxes for the past five years, which showed revenue of approximately $127 million during that period.
Because much of his income came from capital gains on investments, which are taxed lower than salary 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 of his campaign. The Washington Post could not independently verify the numbers.