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Tuesday, July 22, 2014

Senate Report Criticizes Hedge Funds' Use of Basket Options Tax Strategy

Senate LogoSenate Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, Abuse of Structured Financial Products: Misusing Basket Options to Avoid Taxes and Leverage Limits (97 pages):

For the last decade, the U.S. Senate Permanent Subcommittee on Investigations has presented case histories showing how financial institutions, law firms, accountants, and others have designed and implemented complex financial structures to take advantage of and, at times, abuse or violate U.S. tax statutes, securities regulations, and accounting rules. This investigation offers yet another detailed case study of how two financial institutions – Deutsche Bank AG and Barclays Bank PLC – developed structured financial products called MAPS and COLT, two types of basket options, and sold them to one or more hedge funds, including Renaissance Technologies LLC and George Weiss Associates, that used them to avoid federal taxes and leverage limits on buying securities with borrowed funds. While that type of option product was identified as abusive in a public memorandum by the IRS 2010, taxes have yet to be collected on many of the basket option transactions and its use to circumvent federal leverage limits has yet to be analyzed or halted. 

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