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

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• RenTec is effectively entitled … to 100% of the benefits from Palomino’s
trading activates less any prime brokerage fees paid to BCI and BCSL in
respect of the PB Accounts.
• Conclusion: Following the proposed amendments to the Articles and the entry
into the Side Letter, RenTec controls the major activities of Palomino and is
exposed to substantially all significant risks and rewards arising from the
activities carried out through the PB Accounts, being the only permitted
activities of Palomino.” 313
These statements, made by Barclays to its independent auditor to obtain approval for a
significant accounting action, are strong evidence of the control RenTec exerted over Palomino
and the option accounts. 314
Although RenTec signed the side letter with Barclays and agreed to the amendments of
the Palomino Articles of Association, a RenTec executive told the Subcommittee that RenTec
did not fully understand the nature of what Barclays was doing and was not aware of the
representations that Barclays had made to its auditor. 315 When informed of RenTec’s assertions,
Barclays outside legal counsel told the Subcommittee that RenTec was fully engaged in the
bank’s effort to remove Palomino from its balance sheet and knew the side letter was part of that
effort. In a letter to the Subcommittee, Barclays outside legal counsel wrote in part:
• “[D]uring this deconsolidation process, Barclays was also engaged with Renaissance
and its counsel.
• In the second quarter of 2009, Barclays had a series of telephone calls and e-mail and
letter exchanges, and also exchanged drafts of documents, with Renaissance and their
counsel that dealt with amendments to the Articles of Association and the drafting of
a side letter.
• Mark Silber of Renaissance signed the Side Letter, and at least Jim Rowen and
Renaissance outside Counsel Ed Cohen of Winston & Strawn were participants in
these exchanges.
• … Barclays believes it made clear during these communications that its objective was
to change the accounting treatment of Palomino, and Barclays believed that
Renaissance understood that an accounting deconsolidation would be the logical
result of these changes.
• … [Barclays understood] that RenTec confirmed to Barclays that it did not intend to
consolidate Palomino under the applicable accounting standards.
• In connection with these discussions, Renaissance requested that Barclays confirm
that its prior representations regarding the transaction were still true and correct,
313 Id. at 763-764.
314 Barclays told the Subcommittee that it distinguished its accounting deconsolidation from regulatory
deconsolidation, and that it continued to report to the Financial Services Authority (FSA), its U.K. financial
regulator, that Palomino was consolidated for regulatory purposes under an FSA requirement to consolidate any
entity in which it owned more than 20% of the shares, even if it did not control that entity. See 5/18/2011 email
from Marty Malloy to John Feraca of Barclays, “Palomino deconsolidates from Barclays Group,” BARCLAYS-PSI-
036091.
315 Subcommittee interview of Mark Silber, RenTec (6/10/2014).