This article was reported in partnership with The Investigative Fund at The Nation Institute, with support from The Puffin Foundation.
Marc Leder, a wealthy investor, played host to Mitt Romney last May at a private fundraiser at his $4 million home in Boca Raton. Little did Leder know at the time, however, that someone would videotape the event and later leak it to the world, revealing the GOP standard-bearer in the act of caustically dismissing 47 percent of the country as too “dependent upon government” even to consider voting for him this year.
Leder attempted to duck the ensuing storm of media attention, telling Fortune that he had simply “hosted a fundraiser for an old friend.” But Leder’s ties to the candidate run deeper than campaign contributions or an old friendship. As an investor, he is part of a network of links to the Romney family business empire that will acquire enormous relevance if the GOP nominee manages to ascend to the White House.
In 2008, soon after Romney ended his first bid for the presidency, his eldest son Tagg and his chief fundraiser, Spencer Zwick, formed Solamere Capital, a private equity firm named after the exclusive community in Utah where Romney owned a vacation ski lodge.
What Tagg lacked in experience in the world of high finance, he made up for with a vast network of political connections forged through his father, who seeded the firm with $10 million and was the featured speaker at its first investor conference in January of 2010. Romney also reportedly gave strategic advice to the company, which secured prominent campaign donors as some of its first investors.
Unlike most private equity firms dedicated to analyzing and buying companies, Solamere specializes in something else: billing itself as a “fund of funds” with “unparalleled networks,” it provides investors with “unique access” to an elite set of other private equity firms and hedge funds. Sun Capital Partners, the fund founded by Leder, is one of at least thirteen Romney-linked firms in Solamere’s network, according to a prospectus circulated among potential investors and uncovered by The Boston Globe last year. Solamere also has an investment relationship with Bain Capital, the pioneering fund founded by Mitt Romney.
Solamere, a firm predicated on its founders’ relationship with Romney, presents a channel for powerful investors to influence the White House if he wins. Private equity executives looking to lobby a Romney administration may very well have a leg up if they are already doing business with the firm that the president created for his son.
Requests for comment from a Solamere representative for this article were not answered.
The looming conflicts range from general matters that affect all private equity firms—such as tax changes or the new rules mandated by the Dodd-Frank financial reform bill—to more specific concerns relating to businesses owned or controlled by Solamere’s partner firms. Many of these businesses, in fact, depend on government contracts; indeed, some have been accused of fleecing taxpayers (which is ironic given that many private equity titans claim to support Romney for his unabashed belief in small government and free enterprise). A Romney administration could directly affect the profitability of these companies—and, by extension, potentially the success of Tagg’s venture.
“It’s absolutely a conflict of interest,” says Adam Smith, the communications director for the group Public Campaign, which works on issues concerning money in politics. “Romney can’t un-know that his son’s investment company could benefit financially from his policies. And the other investors—many of whom are likely Romney campaign donors—will have extra access and influence in a Romney administration.”
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Take Leder, Romney’s Boca Raton host, whose Sun Capital firm bought a stake in the Scooter Store last year. The company, known for its ubiquitous television ads promising seemingly free motorized wheelchairs for Medicare beneficiaries, has struggled as the Centers for Medicare and Medicaid Services, the federal agency that governs the programs, implements rules to curb rampant billing fraud. As a CMS report noted last year, 80 percent of the claims for scooters and power wheelchairs did not meet Medicare requirements, meaning that $492 million a year is being improperly spent.
In 2007, the Scooter Store gave up $13 million in Medicare payments and paid $4 million to settle with the Justice Department over allegations that it had overbilled for its electric wheelchairs. The company, which has been bleeding money over the years as regulators moved to curb waste, still faces challenges that could make or break its business model—challenges that could be mitigated by pressure from the executive branch.
A Romney administration, for example, would have a role in the fate of a recently launched pilot program ensuring that patients see a doctor face to face to determine if a Medicare scooter is medically necessary—a program that has reportedly already reduced billings to the Scooter Store. Another challenge for the company is Section 3136 of the Obama administration’s Affordable Care Act. If Romney wins and repeals significant portions of the ACA, would he retain this provision, which compels Medicare to have a competitive bidding process for motorized wheelchairs?
Leder, who has donated nearly $300,000 to Romney and other Republicans in this campaign and another $225,000 to a pro-Romney Super PAC, didn’t respond to a request for comment. Disclosures, however, suggest that pressuring the government is the only way his investment in the Scooter Store can turn a profit.
Since Leder’s firm invested in the Scooter Store, the company has spent nearly $900,000 on lobbyists to push back on these two latest challenges to its motorized-scooter empire. Lobbyists not only try to influence legislation; they are also paid to gather information. Tips about government regulatory decisions can be as good as gold to investors who can act before the information is public knowledge. But what if the company had the ultimate lobbyists: the president’s oldest son, brother and personal fundraiser?
The Birth of Solamere
Shortly after his father conceded the Republican nomination to John McCain in 2008, Tagg Romney and Spencer Zwick went to dinner at a San Diego resort with John R. Miller, the CEO of National Beef Packing Company. The pair had a proposition for Miller: that he should invest in their new business venture.
Miller, who has served as a top fundraiser in both of Mitt Romney’s presidential campaigns, signed on and even became an operating partner at Solamere. The scene, recounted earlier this year by The New York Times, is one of the precious few details made public about Solamere’s investment portfolio and client list, both of which are kept secret.
What is known has been drawn largely from a trail of documents filed by the investment group. Records indicate the firm was incorporated at the same Boston office where Romney’s campaign headquarters had been located, and later shared an office address with Romney’s PAC.
Zwick first worked for Romney during the Winter Olympics in Salt Lake City. A student at Brigham Young University at the time, he has been at Romney’s side ever since, serving on his campaigns, working as an aide and leading his fundraising efforts since 2007. He has been referred to as Romney’s “sixth son.” And by all accounts, he’s one of the most trusted advisers in Romney’s circle. “When you’re talking to him, you know he’s got the ear of the candidate,” one Romney donor remarked to the press.
Two weeks after Romney’s concession speech in February 2008, Solamere Capital registered with the State of Massachusetts. Zwick and Tagg joined with Eric Scheuermann, a former Jupiter Partners executive, as the three managing partners of the firm.
Scheuermann was the only one with prior experience in private equity; Zwick had none, and Tagg’s previous experience ranged from working at the Monitor Group, an international consulting firm, to sports marketing jobs with Reebok and the Los Angeles Dodgers.
However, success for the firm seemed preordained. A press release the following year hinted at the type of assistance Solamere was enjoying from the Romney network. It announced that Lee Scott, the former Walmart CEO, was joining the firm as an operating partner. Eric Fehrnstrom, Romney’s longtime press aide, was listed as the contact name on the release. The former Walmart chief’s entry came after G. Scott Romney, Mitt’s brother, signed up as an adviser with the firm. So did Matt Blunt, the former Republican governor of Missouri.
Solamere surpassed its $200 million fundraising goal with help from an elite set of “high net worth” individuals, many of whom are close Romney allies. Meg Whitman, the former eBay executive, current Hewlett-Packard CEO and Republican gubernatorial nominee in California two years ago, invested with Solamere (and her son scored a job at the firm). Two Romney donors, L. Scott Frantz, an investor and Connecticut state senator, and Mark Chapin Johnson, the CEO of a medical supply company, were also among the sixty-four investors to entrust Solamere with their money.
As a managing partner of Solamere, Tagg stands to make millions of dollars. The three managing partners will receive $16.8 million in management fees over the first six years, as well as “performance-based incentive” pay, according to a filing with the Securities and Exchange Commission.
Little is known about the exact investment decisions at the firm. A tax return filed by Mitt and Ann Romney, made public in September, showed that Solamere has used an array of Cayman Islands entities to reduce its investors’ tax liability on its income. Rebecca Wilkins, a tax expert with Citizens for Tax Justice, says that Solamere likely uses “blocker corporations” to help its tax-exempt investors avoid paying the unrelated business income tax.
It seems that Tagg has taken after his father, whose former firm Bain Capital also uses these offshore structures. Most of the offshore entities do not have to file a tax return in the US or anywhere else in the world, making them an ideal shelter for Solamere’s investors, says Wilkins. “To me, the most egregious part of this is that they’re facilitating tax evasion.”
A complaint filed in August with the US Office of Government Ethics argues that Mitt Romney’s investment portfolio violates the Ethics in Government Act because so much of his money rests in opaque funds, like private equity firms and limited partnerships. The law states that presidential officeholders must disclose their investments and their investments’ underlying assets worth more than $1,000. The law, however, carries an exemption for qualified blind trusts.
In June, the Romney campaign announced that if he’s elected, the candidate would move his assets into a federally qualified blind trust, and would also likely sell off any assets that “are not fully compliant with federal disclosure and other rules applicable to the office of the presidency.” But if Romney wins, there’s almost no chance that the underlying assets of his son’s firm, Solamere, will be revealed. Solamere could have assets involved in healthcare, energy, telecommunications or any number of other industries, but the public will be left in the dark.
“There are no legal constraints that could be imposed on family members and close friends and associates to prevent them from cashing in on a Romney administration,” explains Craig Holman, a lobby watchdog for Public Citizen.
What is known is that Solamere’s private equity partners are eager to influence the federal government. Three of the firms listed in the Solamere prospectus—Sun Capital Partners, TPG Capital and TA Associates—are currently financing a lobbying campaign under a trade group called the Private Equity Growth Capital Council (PEGCC), which is seeking to influence a number of tax and regulatory decisions.
The PEGCC has spent nearly $5.8 million on federal lobbying over the past three years, and untold millions this year on a public relations campaign in swing states to improve the image of private equity—a strategy seen as designed to benefit Romney’s campaign. One of the primary concerns of the PEGCC and many private equity firms is that the carried interest loophole, which allows wealthy investment managers to be taxed at only the 15 percent capital gains rate, may be closed. The group has also fired off at least a dozen letters and held meetings with regulators to complain about the Dodd-Frank financial reform bill’s mandates, ranging from new registration requirements to limits on commodity speculation.
On the campaign trail, Romney has made it clear that he wants to “repeal Dodd-Frank,” while recognizing “that some revisions make sense.” This approach, which American Banker magazine calls “muddled,” provides an opportunity for the finance industry to roll back at least some of the requirements it views as most onerous.
Other Solamere investment partners own businesses that face imminent regulatory action. SCF Partners, another private equity fund partnered with Solamere, specializes in energy and equipment investments, especially those involved in the fracking industry. Rockwater Energy Solutions, an SCF company, provides support for managing the trillions of tons of chemical fluids pumped into hydraulic natural gas wells. Another SCF firm, IPS Canada, provides a technology used for perforating horizontal wells during the fracking process. SCF’s president, L.E. Simmons, chaired the energy “policy roundtable” for donors to the Romney campaign back in February, and several partners in the firm have donated generously to Romney.
Romney has also called Obama’s Environmental Protection Agency “out of control,” and his energy plan pledges to vastly expand domestic fracking by moving control of federal lands to the states. Having a pipeline of information from Romney’s EPA could result in a wellspring of profits for SCF.
Meanwhile, HIG Capital—one of the largest Solamere partners, with nearly $10 billion of equity capital—owns a number of other firms that are closely monitoring the federal government. One area where private equity firms have made lucrative investments is the new industry of dental management companies that bill Medicaid. In November 2011, Senators Chuck Grassley of Iowa and Max Baucus of Montana opened an investigation in response to allegations that these corporate-controlled dentists have abused children. As PBS’s Frontline reported, several private equity–owned dental management firms have illegally coerced dentists to perform unnecessary and expensive procedures on low-income children, because Medicaid will reimburse such work. The scandal has provoked a flurry of congressional activity, as well as legislative reforms at the state level. In North Carolina, for example, the legislature debated a highly contentious bill that sought to curtail the ownership of dentists’ offices by private equity firms.
HIG Capital, betting that it could beat the controversy, purchased the dental management firm InterDent for an undisclosed sum in August of this year. InterDent hasn’t been named in the current fraud investigation, but the company has been implicated in other ethics problems in the past. In 2008, InterDent signed a corporate integrity agreement after it was caught overbilling the government at some of its offices in California. This year, the company provided $50,000 for an effort to lobby legislators against the dental management reform bill in North Carolina.
For its part, TA Associates—the Romney-connected private equity firm also involved in the PEGCC—has a stake in Monarch Dental, another prominent dental management company that may face scrutiny in the coming months as legislators re-evaluate the ownership rules regarding dentists’ offices.
The Medicaid reimbursements for the dental management companies offer a revealing look at the underlying business model being pursued by the Romney-supporting private equity firms: big government, when harnessed to industry-friendly regulators, can mean big profits. Many of these private equity–owned companies rely on federal and state contracts, from HIG Capital’s Hart Intercivic, a voting machine company, to EnviroFoam Technologies, a biological and chemical decontamination firm that does business with the US military and is owned by Peterson Partners, a private equity firm listed in the Solamere prospectus.
It’s already clear how the Solamere nexus of influence would work to advance such companies under a Romney administration. Romney has voiced his support, for example, for expanding federal aid to proprietary colleges, which have been cited for waste, fraud and abuse, not to mention rising levels of student debt—and the for-profit college he has singled out for praise on several occasions is directly linked to Solamere.
Asked about the rising cost of colleges at a town hall event in New Hampshire in December 2011, Romney said that students should take a look at for-profit colleges like Full Sail University, a career college for the entertainment and production industry. Weeks later, in an interview with the Ames Tribune, Romney hailed the “advent of for-profit institutions of higher learning” for providing competition with public and private universities. He again volunteered Full Sail University as a good example of how students can “hold down the cost of their education.”
What Romney neglected to mention is that Full Sail University—in fact the third most expensive college in the United States—is owned by TA Associates. Indeed, TA Associates has viewed the for-profit college industry—a $40 billion market where 85 percent of the funds are supplied by taxpayers—as an excellent opportunity for growth. The firm has invested in other for-profit colleges, including the Rocky Mountain School of Design, the Los Angeles Film School and Vatterott Educational Centers Inc. Like most profit-driven colleges, which account for only 10 percent of all students but about half of all loan defaults, TA Associates’ schools do not boast a stellar track record. Leaked documents for Vatterott show that recruiters were instructed to use “pain” when targeting students—who, the recruiters are told, decide on college “based more on emotion than logic.” Within three years of dropping out or graduating, 26.6 percent of Vatterott students default on their loans.
Romney would have the ultimate power, through his Education Department, to decide if the current loopholes in federal lending policy continue to benefit for-profit colleges regardless of their track record. The Romney campaign’s education policy outline already makes clear that he would roll back the few regulations requiring for-profit colleges to demonstrate that a percentage of their students are able to find jobs after graduation as a basis for receiving aid.
He would also have the power to rescind President Obama’s recent executive order limiting for-profit college recruitment at military bases. Summit Partners, a Solamere private equity fund, owns Trident University, a for-profit college that targets veterans. “The fact that Mitt Romney praised an overpriced, underperforming college that is owned by his son’s investment partners, and whose owners have contributed a quarter-million dollars to his campaign and Super PAC, shows how he embodies the corrupting influence of money on politics,” asserts David Halperin, a college affordability advocate and attorney who has covered the for-profit industry for years. “It shows how his administration could, as a matter of course, allow special interests—the interests of his rich friends—to skew important policy decisions and harm the public interest.”
Of Insiders and Handouts
A Solamere brochure reviewed by The Nation makes clear that Tagg Romney and his fellow managing partners routinely attend investor meetings and hold regular discussions with their partner firms. Major investment decisions must be made with the unanimous consent of all three managing partners, meaning that Tagg and Zwick have been doing their private equity work throughout the election year.
But Tagg hasn’t shied away from the campaign as a result; rather, he has become a key surrogate, stumping for Romney across the country. Behind the scenes, he has advised his father on messaging and even his pick for running mate. ”I lobby—I’m in the peanut gallery,” Tagg said, joking about his role in the campaign’s inner circle in a chat with radio host Hugh Hewitt.
The intersection of these two worlds came into view for curious reporters at a Romney fundraising retreat in Park City, Utah, in late June. The scores of wealthy donors who attended were picked up by golf cart and ferried around the Chateaux at Silver Lake resort. They were also welcomed with personalized notes from Zwick thanking them for joining the Romney campaign.
In an adjacent building, Solamere Capital held its own gathering—an investor conference. “It was not a coincidence that the Solamere conference took place in the same city just before the retreat began,” said one fundraiser who requested anonymity, speaking to Huffington Post reporter Peter Stone.
American Crossroads, the Republican Super PAC that has needled Obama in its advertising for supposedly allowing “donors and insiders [to] line up for handouts,” sent its chief officers, including Karl Rove, to both confabs. Under federal law, Super PACs cannot coordinate with candidate committees.
Rove spoke to investors at the Solamere conference, which was also attended by several Romney fundraisers, in an event that doubled as a pitch for those interested in his own Super PAC. Rove could talk Super PAC strategy to those Romney fundraisers because Solamere hosted it—a technicality that allowed him to bypass the campaign finance laws preventing him from working directly with the Romney campaign.
Unlike his colleagues on the Romney political team, Zwick could appear at both the campaign retreat and the Solamere events next door, thanks to his role as a Solamere partner.
Romney spokeswoman Gail Gitcho has suggested that there is a firewall between Solamere and the campaign. But if Zwick’s effortless transition between the Solamere conference and the campaign retreat in Park City is any guide, that firewall might just be as thick as the air that separated the two buildings.
Lee Fang’s blog  has been following the money in this election. His latest dispatch: “Loophole Allows Saudi Arabian Businesses to Spend Freely in Our Election ”