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9/2/2016 RenaissanceAvoidedMoreThan$6BillionTax,ReportSaysBloomberg

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

http://www.bloomberg.com/news/articles/20140721/renaissanceavoidedmorethan6billiontaxreportsays 2/6
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
Media
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
The
Media AUDIO

http://www.bloomberg.com/news/articles/20140721/renaissanceavoidedmorethan6billiontaxreportsays 4/6
9/2/2016 RenaissanceAvoidedMoreThan$6BillionTax,ReportSaysBloomberg

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