ABUSE OF STRUCTURED FINANCIAL PRODUCTS- Misusing Basket Options to Avoid Taxes and Leverage Limits MAJORITY AND MINORITY STAFF REPORT

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Financial Officer, Chief Compliance Officer, and Chief Legal Officer is Mark Silber. 156
current Chief Operating Officer is James Rowen.
The
RenTec is a closely held corporation. Presently, all of RenTec shareholders are current or
former employees of the firm. 157 In addition, currently, 70% of RenTec shares are held by the
five members of RenTec’s Executive Committee and their respective family trusts. 158
RenTec makes use of mathematical and statistical methods to create its investment
programs. 159 It generally employs an overall strategy referred to as statistical arbitrage (StatArb)
to identify market inefficiencies and take advantage of them. 160 In practice, this investment
strategy often involves engaging in a very high volume of trading in order to take advantage of
small differences in prices between related stocks. 161
In order to be able to constantly adjust its trading model and implement its strategy,
RenTec employs a large number of employees with doctorates and training in advanced
mathematics, physics, and computer science. 162 According to RenTec, over 90 members of
RenTec’s staff hold doctorates in mathematics and other scientific disciplines.
156 Subcommittee interview of Mark Silber, RenTec (6/10/2014).
157 Subcommittee interview of RenTec outside counsel (6/20/2014). RenTec was initially formed as an S-
Corporation owned directly by a number of employee stockholders and their related trusts. On June 30, 2007,
RenTec was reorganized and converted into a limited liability company called Renaissance Technologies
Corporation LLC (RTC). At that time stockholders of the S-Corporation received shares in a new entity known as
Renaissance Technology Holdings Corporation (RTHC). RTHC then acquired the same number of class A member
interests in RTC. In addition, another entity was created at that time called RCT II Holdings LLC (RCT II), which
became the sole holder of Class B interests in RTC. Class A and B interests are identical and have the same voting
and economic rights. RTC II was created to permit newer employees to hold an ownership interest in Renaissance
Technologies LLC. Current ownership of RTC is split, with 85.7% held by RTHC and the remaining 14.3% held by
RTC II. Id.
158 Id. The five members of the RenTec’s Executive Committee are James Simons, Mark Silber, Henry Laufer,
Peter Brown, and Robert Mercer. Id.
159 Subcommittee interview of Peter Brown, RenTec (6/3/2014).
160 StatArb analyzes historical relationships between related securities and trades when those relationships are
determined to be unbalanced. See 7/11/2008 “Statistical Arbitrage in the U.S. Equities Market,” prepared by Marco
Avellaneda and Jeong-Hyun Lee, at 1-2, http://math.nyu.edu/faculty/avellane/AvellanedaLeeStatArb071108.pdf.
161 See, e.g., “Schneiderman (and Einstein) Pressure High-Speed Trading,” Bloomberg, Michael P. Regan and Sam
Mamudi, (3/21/2014), http://www.bloomberg.com/news/2014-03-21/schneiderman-joins-einstein-in-pressuringhigh-frequency-trading.html.
162 “Renaissance suffers rare disappointment,” Financial Times, Sam Jones (2/17/2010),
http://www.ft.com/intl/cms/s/0/66970a64-1b2e-11df-953f-0014 4feab49a.html#axzz31FwLlNs5; 7/23/2013
“Quants: the math geniuses running Wall Street,” The Telegraph, Sarfraz Manzoor,
http://www.telegraph.co.uk/finance/10188335/Quants-the-maths-geniuses-running-Wall-Street.html. RenTec
alumni include several prominent mathematicians and statisticians who directly contributed to developing what is
known as the “Medallion Algorithm.” Mr. Ax worked on “model theory,” which is the study of classes of
mathematical structures and founded Axcom Trading Solutions, which was purchased by RenTec in the early 1990s.
See 1965 “Diophantine problems over local fields,” American Journal of Mathematics, vol. 87, James B. Ax and
Simon B. Kochen, 605-630; “Business and Finance Biography,” prepared by Elwyn Berlekamp,
http://math.berkeley.edu/~berlek/bus.html; “The Code Breaker,” Bloomberg,
http://www.bloomberg.com/apps/news?pid=nw&pname=mm_0108_story1.html. Elwyn Berlekamp is another
mathematician who worked for RenTec and was known for his work on coding theory and combinational game
theory, including the study of sequential games with perfect information. See “Faculty Publications-Elwyn R.
Berlekamp,” prepared by UC Berkeley College of Engineering,