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

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incurred, more funds are injected, and the involvement of market risk in setting these
parameters.” 308
PWC confirmed in writing to Barclays that the restrictions placed on Palomino ensured
that Palomino existed only for the benefit of RenTec, citing in particular the restriction on the
activities of Palomino resulting from the June 2009 amendments to the Palomino Articles of
Association. 309 Among other matters, those amendments specified that only RenTec could serve
as the trading manager for a Palomino account and that Palomino could hold prime brokerage
accounts only through members of the Barclays group. 310 In addition, Palomino’s owner,
BBPLC, entered into the side letter with RenTec, promising not to further amend the Palomino
Articles of Association without obtaining RenTec’s prior approval, further demonstrating
RenTec’s control over Palomino. 311
On June 24, 2009, Barclays sent a memorandum to PWC proposing to remove Palomino
from the bank’s balance sheet. 312 In that memorandum, to support the proposed deconsolidation,
Barclays made the following statements regarding RenTec’s control of Palomino, Palomino’s
COLT accounts, and the assets in those accounts:
• “Although BBPLC owns 100% of the ordinary shares of Palomino, RenTec
has the power to govern the financial and operations decisions for its benefit
due to decisions it makes over Palomino’s activities under the IMA
[Investment Management Agreement] ….
• Palomino was created solely to enable RenTec … to benefit … from its longshort
statistical arbitrage strategy in an efficient manner (we understand that
RenTec also obtains an additional tax benefit under the transactions as its
profits on the Badger Options will generally be subject to tax at the long term
capital gains rate of 15% rather than the ordinary income tax rate of 35%).
• The trading activities of Palomino in relation to the PB [Prime Brokerage]
Accounts are managed solely by RenTec as the Trading Managers such that
RenTec can obtain the majority of the benefits from Palomino’s activities. ...
• [T]he PB [Prime Brokerage] Accounts are controlled by RenTec.
308 5/29/2009 email from Rob Konowalchuk, PWC, to Louise McSweeney, Barclays l, “Palamino to PwC 20/5/09,”
BARCLAYS-PSI-328074-077, at 074-075.
309 See April-May 2009 email exchange among Abhinav Shah and Louise McSweeney of Barclays, Rob
Konowalchuk, PWC, and others, “Palamino to PwC 20/5/09,” BARCLAYS-PSI-328074-077, at 074.
310 6/24/2009 Barclays memorandum from “SCM” to “PwC,” “Palomino Limited (‘Palomino’),” BARCLAYS-PSI-
139757-766, at 762; 6/30/2009 “Amended and Restated Memorandum and Articles of Association of Palomino
Limited (Adopted Pursuant to Special Resolution Dated 26 June 2009),” RT-PSI-00234974-998; 6/26/2009 letter
from Mark Silber, RenTec, to Martin Malloy, Barclays, “Palomino Limited,” signed by Mark Silber on behalf of
both RenTec and Badger Holdings, RT-PSI-00236651-655.
311 6/24/2009 Barclays memorandum from “SCM” to “PwC,” “Palomino Limited (‘Palomino’),” BARCLAYS-PSI-
139757-766, at 762; 6/26/2009 letter from Mark Silber, RenTec, to Martin Malloy, Barclays, “Palomino Limited,”
signed by Mark Silber on behalf of both RenTec and Badger Holdings, RT-PSI-00236651-655.
312 6/24/2009 Barclays l memorandum from “SCM” to “PwC,” “Palomino Limited (‘Palomino’),” BARCLAYS-
PSI-139757-766.