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/EXCLUSIVE/FINANCE: How One Fund’s Profits Ended Up in the Caymans

NEW YORK, Feb 5 2009 (IPS) - President Barack Obama said he would crack down on firms that use offshore centres to evade taxes. He could begin with a New York subsidiary of one of the world’s largest private banks, which used a Cayman Islands company to shift its profits.

Why would a New York fund manager run operations through an office in the Caymans? “This type of structure is for optimising taxes,” explained Max Obrist, a Cayman Islands official of the global Julius Baer Group (Zurich).

He told IPS that “generating” the income where a company was actually based, “you would pay much more taxes”. Obrist was describing a company shifting claimed earnings to tax havens to evade home taxes. He allegedly helped Julius Baer Investment Management (JBIM) New York do just that.

Obrist is a director of Baer Select Management (BSM), a Cayman Islands company. According to a whistleblower who used to work with him in the Caymans, BSM is a fake firm created by Julius Baer to sign agreements with JBIM and other subsidiaries so they could evade taxes.

The whistleblower, Rudolf Elmer, 53, a German, was chief operating officer of Julius Baer Bank & Trust Company (JBBT), Caymans, at 212,000 dollars a year and served on the BSM board from 1999 to November 2002. JBIM paid fees to BSM to “manage” its investments. Elmer told IPS that JBIM moved to BSM profits it should have reported to the U.S. Internal Revenue Service.

JBIM is now called Artio Global Investors. It manages 72 billion dollars in assets. It has some 900 institutional clients, including corporations, pension funds, endowments and foundations and major financial institutions as well as more than 700,000 mutual fund shareholders.

Its chief executive and chief investment officer Richard Pell and head of international equity Rudolph-Riad Younes were paid 120 million dollars during the first nine months of 2007, leaving the company with income of 48.6 million dollars.

Artio is a subsidiary of Julius Baer Group, Switzerland’s largest private banking group with over 300 billion dollars in assets invested on behalf of institutions and very wealthy individuals. Julius Baer’s reported profits in 2007 were more than 1.1 billion dollars. It has 30 offices in world financial centres, from New York and London to Dubai and Tokyo. BSM is a Julius Baer subsidiary.

Elmer said, “There was a strategic plan adopted in 1996 to utilise Baer Select Management, JBIM New York and JBIM London to benefit from the offshore system.” He said that JBIM assigned management functions to BSM in order to award it a performance fee. He provided backup documentation to IPS, including financial spreadsheets.

He said that Obrist in the name of BSM ratified a few decisions, but really worked for JBBT. He said that control was exercised and decisions taken by JBIM New York or Julius Baer Investment Funds Services Ltd, Zürich, which were part of Bank Julius Baer & Co, Zürich.

According to Elmer, JBIM made a proposal to Julius Baer Investment Management, Zürich, to launch a fund, and Zürich approved. JBIM did the paperwork and other organisational tasks with the help of JB Zürich and Caymans lawyers.

The offering memorandum said that Baer Select Management was appointed investment manager, Elmer said, and BSM appointed JBIM investment advisor.

JBIM was generally listed as a fund “advisor”, though some public documents said that JBIM managed funds. Elizabeth Nesvold, founder of the New York investment-banking boutique Silver Lane Advisors LLC, noted that though investment managers make most of their money from performance fees, most of the JBIM’s revenue was claimed from advisory fees.

A call to the Grand Caymans phone number for BSM was picked up by a receptionist for Julius Baer Bank and Trust Co Ltd (JBBT). “Is this the number for Baer Select Management?” she was asked. “Yes,” she replied, and passed the call to Max Obrist. He identified himself as BSM’s director. He had a few other jobs. The Jan. 13, 2000 minutes of the JBBT management committee said, “Direct Money Market dealing has started. Max Obrist has assumed responsibility for this activity.”

He was also listed as a director of Directorate Inc., British Virgin Islands, the corporate director of some Julius Baer funds.

Describing BSM’s tasks, Obrist explained, “We have to follow stocks, monitor their investment policies, we monitor the risk reports we receive from the investment advisor and check if there are performance fee calculations involved if they are executed properly, all monitoring duties. We are in contact with the external auditors and the regulatory authorities and Cayman Islands monitoring authority.”

He said BSM’s fee was “a percentage of profits, and it depends on what type of duties we have to do here from Cayman.”

Why was BSM needed? He replied, “That’s an interesting question. I don’t always know when they start something. They decided on a much higher level. I wasn’t involved. We were told: ‘You act as investment manager for these new funds’.” But he didn’t manage, he “monitored”.

Fees paid to BSM resulted in lower company profits and taxes for JBIM. Fund managers generally take profits of 1 or 2 percent of assets plus 10 to 20 percent of investment gains. As the funds had high values, that involved substantial amounts. According to Elmer, BSM, acting through a board whose members worked for JBBT, transferred profits via several offshore companies to Julius Baer Holding Ltd, Zürich.

Obrist denied that BSM is a shell company. He said, “We are physically here in the Cayman Islands, not just a post office box like some companies trying to save taxes without doing anything physically.”

He insisted, “BSM is to give service from an offshore place and at the same time we can within Julius Baer optimise taxes, yes. But we are physically here. We do our job as investment manager. If Baer Select would be here just as a post office box company and generate the millions in Cayman as income instead of in the U.S. or the U.K. or Switzerland, then that would not be a very smart thing.”

Obrist said BSM stopped working for JBIM New York four or five years ago after it closed some hedge funds. However, JBIM/Artio would still be potentially liable for unpaid taxes, as the U.S. has no statute of limitations for tax fraud.

Artio CEO Richard Pell did not reply to numerous phone messages and emails describing this story and requesting an interview. Martin Somogyi, spokesperson for Julius Baer, Zurich, emailed that the company always adhered to applicable regulations and was regularly audited, but that it would not agree to an interview. (Its global auditor is KPMG.)

Julius Baer Americas Inc. (now Artio Global Investors) which owns JBIM/Artio, in February 2008 filed with the SEC that it would go public with an initial public offering (IPO) to sell up to 1 billion dollars of common stock on the New York Stock Exchange. The offering would be handled by Goldman, Sachs and Merrill Lynch. The IPO has been postponed.

Lucy Komisar is an investigative journalist who writes about the offshore bank and corporate secrecy system. Her articles are posted at

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