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RenaissanceAvoidedMoreThan$6
BillionTax,ReportSays
ZacharyR.Mider
July22,20149:27AMCDT
RenaissanceTechnologiesLLCusedcontractswiththebanksto
establishthefictionthatitwasnttheownerofthousandsofstocks
tradedeachday,saidSenatorCarlLevin,aMichiganDemocratand
chairmanofthePermanentSubcommitteeonInvestigations.
Photographer:AndrewHarrer/Bloomberg
ARenaissanceTechnologiesLLChedgefundsinvestorsprobablyavoidedmorethan$6billionin
U.S.incometaxesover14yearsthroughtransactionswithBarclaysPlcandDeutscheBankAG,a
Senatecommitteesaid.
Thehedgefundusedcontractswiththebankstoestablishthefictionthatitwasnttheownerof
thousandsofstockstradedeachday,saidSenatorCarlLevin,aMichiganDemocratandchairman
ofthePermanentSubcommitteeonInvestigations.Themaneuversoughttotransformprofitsfrom
rapidtradingintolongtermcapitalgainstaxedatalowerrate,hesaid.
Itmeantenormousprofitforboththebanksandthehedgefunds,Levintoldreportersyesterday
inWashington.OrdinaryAmericanshadtoshoulderataxburdenofbillionsofdollars,aburden
thatwasshruggedoffbythosehedgefunds.
ThepanelurgedtheInternalRevenueServicetocollecttaxesfromthefundsinvestorsatthe
higherratethatAmericanspayonwagesandsalaries.ItsaidCongressshouldremovelegal
obstaclestoauditsofhedgefundsandotherlargepartnerships,whosereturnsthecommitteesaid
arerarelyquestioned.
ExecutivesTestifying
http://www.bloomberg.com/news/articles/20140721/renaissanceavoidedmorethan6billiontaxreportsays 1/6
9/2/2016 RenaissanceAvoidedMoreThan$6BillionTax,ReportSaysBloomberg
ExecutivesfromRenaissance,foundedbybillionairemathematicianJamesSimons,aresetto
testifyatahearingtodayinWashingtonaboutthetransactions,asarerepresentativesofBarclays
andDeutscheBank.ThereportwasissuedbyLevinandSenatorJohnMcCainofArizona,the
subcommitteestopRepublican.
AmericansaretiredofseeingWallStreetfirmsplayingbyasetofrulesotherthanthoseapplying
toordinarycitizens,McCainsaidatthehearing.
Inastatementtoday,Renaissancesaiditiscomfortablethatitstaxtreatmentoftheoptionsis
correctundercurrentlawandthatitexpectstoprevailinadisputewiththeIRSoverthematter.It
saiditsdecisiontouseaproductknownasbasketoptionswasntdrivenbythetaxbenefits.
DeutscheBankin2010stoppedsellingversionsofthebasketoptionthathadtaxsavingfeatures,
aftertheIRSpubliclychallengedthepractice.
Barclaysstoppedin2013,althoughRenaissanceisstillusingthreeoptionsfromthebankthatwere
providedbeforethepolicychange,thesubcommitteesaid.
Apple,Caterpillar
Levinssubcommitteedoesnthaveauthoritytoimposepenalties,anditoftenexaminesbusiness
practiceswithaneyetowardrecommendingchangesinlaw.Recenthearingshavefocusedontax
avoidancemaneuversbyAppleInc.andCaterpillarInc.
Renaissance,basedinEastSetauket,NewYork,compiledoneofthebestrecordsininvesting
historybyusingadvancedmathematicsandcomputeralgorithmstoidentifymispricedsecurities.
ItsMedallionfund,openalmostexclusivelytoRenaissanceemployees,returnedmorethan35
percentannualizedovermorethantwodecades.
Thefundmanagerhascreatedfortunesforitstopexecutives,whoarealsoamongMedallions
biggestinvestors.Simonssfortuneisestimatedatabout$15.5billion,accordingtotheBloomberg
BillionairesIndex.Hesaprominentpoliticaldonor,contributingmorethan$9millionto
Democraticcausesinthe2012electioncycle.
Thepanelsreportfocusesonbasketoptions,whichahedgefundwouldbuyfromabank.The
valueoftheoptionwouldfluctuatebasedontheperformanceofabasketofunderlyingsecurities,
andthehedgefundmanagercouldbuyandsellthestocksinthebasket.
BrokerageAccount
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9/2/2016 RenaissanceAvoidedMoreThan$6BillionTax,ReportSaysBloomberg
Economically,thetradesweresimilartoahedgefundholdingthesecuritiesinabrokerageaccount,
thesubcommitteesaid.
Becausethebankwasdesignatedasthelegalowneroftheunderlyingstocks,thehedgefunddidnt
needtorecognizeashorttermgainwhenitsoldasecurity.Instead,itwouldclaimalongtermgain
whenitexercisedtheoption,typicallyaftermorethanayear.
Undercurrentlaw,profitsfromshorttermcapitalgainsaretaxedatmarginalfederalratesofas
muchas44.4percent,comparedwitha23.8percenttoprateforlongtermgains.Forsomeearlier
years,therateswere35percentand15percent.
Illustratinghowrapidlythecontentsofthebasketswereshuffled,oneoptionreviewedbythe
committeehadmorethan129millionunderlyingtradesinasingleyear,thesubcommitteesaid.
ManyofRenaissancesstockinvestmentslastedmereminutesorseconds,itsaid.
TradeSuggestions
Thehedgefundsthatusedtheoptionssoughttoportraytheirinvolvementinthetradingofthe
underlyingportfolioasmeresuggestionsorrecommendations,thesubcommitteesaid.The
panelsaidinRenaissancescase,thetradeswereorderedbythefirmscomputersandautomatically
executedbyitsbanks,aprocessthattookmilliseconds.
ThepanelsaidDeutscheBankandBarclaystogethersold199basketoptionssince1999,including
127thathadthepotentialtogeneratelongtermcapitalgains.Theoptionsproduced$1.1billionof
LIVETV
revenueforthetwobanks,accordingtothereport.
The
AUDIO
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The60optionswithtenuresofmorethanayearsoldbythetwobankstoRenaissancesMedallion
Fundgeneratedprofitsofabout$34.2billion,accordingtothereport.Basedonthedifference
betweentheshorttermandlongtermrates,thepanelestimatedthetaxsavedonthoseprofitsat
$6.8billion.
GeorgeWeiss
InadditiontoRenaissance,aboutadozenotherhedgefundsareknowntohaveusedbasketoptions
soldbyDeutscheBank,accordingtothereport.AmongthebiggestuserswasGeorgeWeiss
Associates,runbytheHartford,Connecticut,philanthropistGeorgeA.Weiss,thereportsaid.
Inastatement,GeorgeWeissAssociatessaiditsbasketoptions,whichitstoppedusingin2010,
werelawfulandwereusedtoincreasetheamountitcouldborrow.Itsaiditcooperatedwiththe
subcommitteesinvestigation.
http://www.bloomberg.com/news/articles/20140721/renaissanceavoidedmorethan6billiontaxreportsays 3/6
9/2/2016 RenaissanceAvoidedMoreThan$6BillionTax,ReportSaysBloomberg
AnotheruserofDeutscheBankbasketoptionswasSACCapitalAdvisorsLP,thehedgefundrun
bybillionaireStevenA.Cohen,thereportsaid.Onceoneofthecountrystophedgefunds,SAC
stoppedmanagingmoneyforoutsideinvestorsandchangeditsnametoPoint72AssetManagement
LPthisyearafterpleadingguiltytosecuritiesfraudinanunrelatedmatter.
Inastatement,Point72saiditdidntreportincomeearnedfromitsbasketoptionsaslongterm
capitalgains.
Renaissancesuseofbasketoptionsoriginatedinaneffortinthelate1990stoobtainmore
borrowedmoneytobetonstocksthanitcouldgetthroughregularbrokeragearrangements,the
firmsaidinastatementtoday.
RiskLimited
Theoptionsalsowereattractivebecausetheylimitedtheriskoflosstotheamountpaidforeach
option,Renaissancesaid.
Nootherinvestmentstructureofwhichweareawareprovidesbothhighleverageandloss
protection,Renaissancesaid.
IRSactionontheRenaissancematterislongoverdue,Levinsaidyesterday.Tosaytheyhavent
movedswiftlyisanunderstatement.
LIVETV
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9/2/2016 RenaissanceAvoidedMoreThan$6BillionTax,ReportSaysBloomberg
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