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

60
This statement shows that Barclays acknowledged the tax objective of COLT and considered the
“Barclays proprietary account” – which was a prime brokerage account opened in the name of a
shell corporation, Palomino – to be a substitute for RenTec’s own trading account. 323
A 2003 Barclays memorandum approving a second COLT option with RenTec again
described the option account as a prime brokerage account, while also making the point that the
risks presented by the option account were “akin to the risks taken in a normal collateralised
Prime Brokerage relationship”:
“The Second Renaissance Transaction would utilize the existing prime brokerage trading
accounts held with both BCSL and BCI (collectively referred to as the ‘PB Account’). …
Palomino [the shell company used by Barclays in COLT] will not have any credit risk or
market risk in the transaction, due to the fact that … its PB Account is hedged by the
Synthetic Call Option and Prime Brokerage effectively has taken the downside risk. The
risk borne by Prime Brokerage is akin to the risks taken in a normal collateralised Prime
Brokerage relationship, where the risks generally are confined to catastrophic losses
occurring over a short period of time.” 324
Barclays view of the option account as a prime brokerage account is further evidenced in
a Barclays evaluation of the COLT structure in 2010:
“The options reference the value of these PB [Prime Brokerage] accounts, which
is equivalent to them referencing the assets directly, and therefore there is no
leakage between the value of the assets … and the value of the options. Thus, the
net effect is that Barclays is extending senior financing to RenTec.” 325
At Deutsche Bank, a 2009 email described the MAPS structure in similar terms, as a
“PB” or Prime Brokerage facility used to carry out the trading strategy directed by RenTec:
“The Renaissance MAPS trade is a synthetic, non-recourse PB-inspired facility. We
[Deutsche Bank] carry the equity longs and shorts, as directed by Renaissance, on our BS
[balance sheet] and pass the performance of [the] portfolio to Renaissance via swap.” 326
In fact, the so-called “option” accounts provided RenTec with more benefits than normal
prime brokerage accounts. Prime brokerage accounts are subject to federal margin rules that
limit the financing that can be provided by a broker-dealer to a client through the account for the
purchase of securities, allowing no more than a 2:1 leverage ratio. The MAPs and COLT option
323 Id. See also 9/13/2002 letter from Financial Services Authority to Barclays, “Project COLT,” BARCLAYS-PSI-
005235 (“Credit and operational controls around this [COLT] transaction are equivalent to those that are in place for
a standard prime brokerage transaction.”).
324 4/4/2003 Barclays memorandum from SCM to SCM Approvals Committee, “SCM Approvals paper – Project
COLT (Renaissance II),” BARCLAYS-PSI-213947-953, at 949.
325 5/19/2010 email from Edward Sherwood to Brett Beldner of Barclays, “COLT XIX – Draft SCM Approvals
Notification,” BARCLAYS-PSI-010082. “Senior financing” refers to very secure financing, senior debt that has a
position of priority relative to other lenders in the event of bankruptcy. See, e.g., 12 C.F.R. § 327 app. C. (“Senior
debt includes any portion of total debt that has a priority claim on any of the borrower’s assets. A priority claim is a
claim that entitles the holder to priority of payment over other debt holders in bankruptcy.”)
326 8/25/2009 email from William Broeksmit to Anshu Jain of Deutsche Bank, “RenTech MAPS,” DB-PSI
00006983-084, at 083.