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

39
C. Development of MAPS and COLT
Deutsche Bank and Barclays developed their basket option structures in different ways
and at different times. Although the Barclays structure was developed later and in response to
the Deutsche Bank structure, it is discussed first due to greater simplicity.
(1) Barclays’ COLT Structure
Barclays developed the COLT basket option structure in 2002, at the request of RenTec,
and it was used solely by that hedge fund over the next decade. The COLT structure was
designed and administered by the bank’s Structured Capital Markets (SCM) group until 2013,
when Barclays disbanded that group for involvement with overly aggressive tax strategies. 226
Under the COLT structure, Barclays created a Cayman Island Special Purpose Entity
(SPE) named Palomino Ltd. 227 Palomino was a shell corporation controlled by Barclays; it had
no full time employees or physical offices of its own. 228 Its directors and officers were Barclays
employees who worked for other Barclays entities. 229 Each basket option account was opened in
the name of Palomino, which was the nominal owner of all of the account assets. The accounts
were opened as prime brokerage accounts with Barclays Capital Inc. in the United States and by
Barclays Capital Securities Limited in the United Kingdom. 230
In connection with each COLT option, Palomino hired RenTec to be its investment
advisor under an Investment Management Agreement that gave RenTec the exclusive right and
the “full” discretion without the need to consult with Barclays to execute transactions directly
into the Palomino prime brokerage accounts in the United States and United Kingdom, subject to
general guidelines specified in the agreement. 231 While RenTec representatives told the
Subcommittee that they merely recommended or suggested trades to Palomino, 232 given the
company’s shell status, the extraordinary number of daily trade executions, and the provisions in
the option contracts, the facts indicate that all transactions in the accounts were actually fully
controlled by RenTec.
226 See 2/12/2013 “Barclays Strategic Review,” Barclays Press Release, http://www.newsroom.barclays.com/Pressreleases/Barclays-Strategic-Review-9db.aspx
(announcing closure of SCM group); “Barclays to Close 'Tax
Avoidance' Unit,” BBC, (2/10/2013), http://www.bbc.com/news/business-21397844.
227 5/28/2002 “Confidential: Project COLT,” Barclays new product proposal, product sponsors: Jonathan Zenios,
Jerry Smith, Martin Malloy, and Mark D’Andrea, BARCLAYS-PSI-212544-557, at 548.
228 Subcommittee interview of Sadat Mannan, Barclays (5/15/2014).
229 Id.
230 5/28/2002 “Confidential: Project COLT,” Barclays new product proposal, product sponsors: Jonathan Zenios,
Jerry Smith, Martin Malloy, and Mark D’Andrea, BARCLAYS-PSI-212544-557, at 545-546.
231 See, e.g., 12/6/2006 “Amended and Restated Investment Management Agreement,” signed by Barclays and
RenTec, RT-PSI-00134963. The Investment Management Agreement contained certain limits and guidelines on
what could be selected for the account. For example, RenTec could invest only in stocks from a limited set of
countries, and no single position could constitute more than 1.5% of the outstanding shares of a company or more
than 55% of the total equity in the account. Otherwise, RenTec had complete discretion to identify assets to be
acquired for the portfolio. If an order placed by RenTec was not executed, or subsequently undone without orders
from RenTec, the assets were still considered part of the reference account for purposes of considering the gain or
the loss to Badger. Id. at 964.
232 Subcommittee interviews of Peter Brown, RenTec (6/3/2014) and Jonathan Mayers, RenTec (5/28/2014).