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

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modeling new factors and introducing them into the algorithm over time to alter how it decided
what trading recommendations to make. 329
In addition, according to Peter Brown, RenTec’s Co-CEO, RenTec’s investment strategy
was not confined to application of its algorithm; at times, RenTec employees also personally
intervened to suggest trading strategies. In a 2008 telephone call between Deutsche Bank and
RenTec, Dr. Brown was asked the question: “[H]ow would we react when some extraordinary
thing happened that can’t be so easily measured in market statistics?” 330 Dr. Brown answered:
“Well, the answer there is that we have a risk control department and we also have senior
management, all of whom are quite tuned into what is going on in a qualitative sense in
the market. . . . We then take that into account and it adjust the levels at which we run.
So, for example … now is a perfect example. [O]ur models are functioning very well in
this environment. Nonetheless, we are … running at reduced levels and the reason we
are running at reduced levels is precisely the reasons that you bring up. It’s … not clear –
we’re still in unchartered territory here. We don’t know exactly – is government
intervention going on. … [T]he models don’t see the government intervention but we do
and we are nervous that something could happen. … So we have actually intervened and
we do that from time to time when things like this happen.” 331
In interviews with the Subcommittee, RenTec representatives explained that the
algorithm executing its investment strategy was also managed by a separate “allocation
function,” that worked off of data manually entered by RenTec employees and could be updated
at any time by RenTec employees. 332 A RenTec email exchange provided an example of how
this function worked, indicating that, during the Greek crisis in 2011, RenTec used the allocation
function to alter the priorities of its accounts between Deutsche Bank and Barclays, directing
trades away from Barclays and towards Deutsche Bank to reduce counterparty risk, which then
altered the size of the respective option structures at the two bank by nearly $4 billion. 333
RenTec told the Subcommittee that the allocations between option accounts and its other prime
brokerage accounts, which use the same algorithm strategy, are also updated regularly and
manually by RenTec employees. 334
Together, these facts indicate that RenTec’s trading strategy relied on a complex,
computer-based algorithm that was undergoing constant modifications and upgrades and whose
results were further modified at times by trading suggestions and by manual allocation functions.
The end result was that RenTec’s trading strategy changed on a regular and ongoing basis.
329 Id.
330 Audio recording of 11/6/2008 telephone call among James Rowen, RenTec, and Satish Ramakrishnan, and
Deepak Agrawal of Deutsche Bank, DB-PSI 00122457.
331 Id.
332 Subcommittee interview of Peter Brown, RenTec (6/3/2014).
333 8/23/2011 email from Peter Brown to Daniel Koranyi of RenTec, “US portfolio shift – overrides?” RT-PSI-
00364418; Subcommittee interview of Peter Brown, RenTec (6/3/2014).
334 Subcommittee interview of Peter Brown, RenTec (6/3/2014).