NBC financial reporter Gretchen Morgenson first reported 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 Youngkin received about $8.5 million out of a $344 million salary designed for a small group of top executives in 2019 and 2020 when he was co-CEO.
The executives “have unjustly enriched themselves at the expense and detriment of Carlyle and its shareholders,” according to the suit. The trust fund is a shareholder of Carlyle, investing the retirement accounts of city 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 the financial markets to provide for their pensions. The kind of impunity with which Carlyle’s control group has acted is shocking and unacceptable.
Youngkin left Carlyle in September 2020 to run for governor of Virginia. His role as a multi-millionaire private equity chief executive has been both a political asset and a liability, as Republicans praise his business success while Democrats have criticized his company’s practice of buying and selling companies and sometimes cut employees to maximize profits.
Inside gubernatorial candidate Glenn Youngkin’s long career at the Carlyle Group
On Thursday, spokeswoman Macaulay Porter defended Youngkin’s role in the financial storyline targeted by the lawsuit. “While Mr. Youngkin was a member of Carlyle’s management, Carlyle’s Board of Directors and an Independent Special Committee engaged independent experts and advisors to review and approve a transaction that provided significant benefits to the company and its shareholders. “Porter said via text message.
She declined to comment further, saying the matter was in active litigation.
Youngkin is among 15 current and former executives named as defendants in the lawsuit, along with Carlyle. He is not alleging the activity was illegal, but is seeking unspecified damages, including requiring the executives to repay their winnings.
A Carlyle spokesperson issued a written statement in response to questions about the lawsuit, “Carlyle was the first U.S. private equity firm to convert to a best-in-class, one-vote governance model, creating better alignment with public shareholders who now have a greater vote and greater voice.
Democrats focused on the suit to portray Youngkin as out of touch with everyday 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 doesn’t. While his party was cutting teachers’ salaries, it was lining its pockets at the expense of civil servants.
A spokesperson for Scott said the reference to teachers’ salaries was based on the fact that former Gov. Ralph Northam (D) presented a budget that included 10% increases for teachers, while the signed budget by Youngkin included 8% raises and 2% bonuses over the next two years. This budget was a compromise between a Republican-controlled House and a Democratic-controlled Senate.
Of the. Marcus B. Simon (D-Fairfax) tweeted that the tactics described by the lawsuit amount to “slime stuff”.
According to the lawsuit, the private equity giant used a complicated financial technique to secure a big salary for top executives and avoid paying taxes instead of passing on benefits to investors, such as the pension fund.
Carlyle was privately owned until 2012 when it staged an initial public offering of shares. Several longtime executives—including Youngkin and founders David Rubenstein, William Conway, and Daniel D’Aniello—had private stock that could be converted to public stock. Generally, according to the lawsuit, the conversion of shares is done in a taxable manner. Tax payments can be used by the business to offset its tax debts.
In a maneuver called a tax debt agreement, executives who convert their shares from private to public can be compensated for the value of the tax asset they create for the company. According to the lawsuit, an executive could generally get 85% of the value of the tax asset, and the remaining 15% would go to the company and its shareholders.
But the Pittsburgh pension fund alleges Carlyle executives converted their shares in a way that avoided some $1 billion in taxes, creating no tax benefit for the company. Then the executives turned around and still agreed to compensation for the tax claim agreement, even though, according to the lawsuit, it had no value. Youngkin’s share of the $344 million payout was approximately $8.5 million; the lawsuit says the three founders saw significantly more — more than $66 million each for Conway and D’Aniello and more than $70 million for Rubenstein.
Kewsong Lee, who served as Youngkin’s co-CEO but left the company this week, arrived in 2013, a year after the company went public. He is named in the lawsuit as having facilitated the other executives’ payday.
Youngkin has already come under tax scrutiny. The area around his home in Great Falls is under a conservation easement, which greatly reduces the amount of taxes he pays on the property. Youngkin’s campaign last year released a summary of his last five years of income taxes, showing income over that period of about $127 million.
Because much of his income was derived from capital gains on investments, which are taxed at a lower rate than wage income, Youngkin’s effective tax rate fluctuated over the period between a high of 31.7% and a low of 15.4%, according to the summary provided by his campaign. The Washington Post could not independently verify the numbers.