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

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Barclays’ SEC filing also included a table, excerpted below, with information in relation to
such entities as required by the Companies Act 2006 Section 410(2)(b):
Country of Registration
Name
Percentage of ordinary share
or Incorporation
capital held %
Cayman Islands Palomino Limited 100
Barclays, with its auditor’s support, removed Palomino from its balance sheet, because
the accounts and assets held in Palomino’s name benefited RenTec, not the bank. In the
documents sent to its auditor and disclosed in its annual reports and SEC filings, Barclays plainly
stated that RenTec controlled the COLT accounts and bore “substantially all significant risks and
rewards” arising from the account activities. 320 Barclay’s statements offer yet more proof that
RenTec, rather than the banks, controlled and bore the risks and rewards associated with the
option trading accounts.
(iii) Functioning as Prime Brokerage Trading Accounts
For all practical purposes, the COLT and MAPS accounts functioned like prime
brokerage accounts actively traded by RenTec, rather than as proprietary accounts used by the
banks to hedge the options. 321 Both of the banks recognized this fact and in internal
communications frequently characterized the option accounts as “prime brokerage” accounts.
Opening the COLT and MAPS accounts in the name of the banks and styling them as carrying
out option agreements, rather than prime brokerage accounts intended to transact trading, were
actions taken to achieve objectives related to lower taxes, increased leverage, and loss protection.
Barclays, in its initial approval documentation for the COLT basket option structure in
2002, described COLT as providing:
“an after tax benefit to these investors [RenTec] through the conversion of their
return from the fund from short term capital gains (taxed at 39.6%) to long term
capital gains (taxed at 20%). This would be achieved by substituting the Fund’s
direct execution of its trading strategy with the cash settled call option over a
Barclays proprietary account whose performance substantially replicates the
Fund’s trading strategy.” 322
320 6/24/2009 Barclays memorandum from SCM to PwC, “Palomino Limited (‘Palomino’),” BARCLAYS-PSI-
139757-766, at 763-764.
321 As indicated earlier, a “prime brokerage account” is a trading account at a large financial institution which
provides the account holder with a bundled set of services, including execution of trades, settlement, financing, and
custody services, that the account holder uses to trade with multiple brokerage houses while maintaining cash and
assets in the master account. See, e.g., “Financial Glossary: Prime Broker,” prepared by NASDAQ,
http://www.nasdaq.com/investing/glossary/p/prime-broker; Wikipedia definition of “prime brokerage,”
http://en.wikipedia.org/wiki/Prime_brokerage.
322 8/22/2002 Barclays memorandum from Jonathan Zenios et al. to Iain Abrahams et al., “SCM Approvals paper –
Project COLT,” BARCLAYS-PSI-212590-598, at 590.