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

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among existing options at the end of a trading day, even though it was allowed under the terms
of the management agreement. 368
RenTec’s frequent usage of journaling exposed several features of the new MAPS
structure that may not have been immediately clear. First, it demonstrated that, although the new
MAPS structure purported to set up separate option subaccounts to separate the assets assigned
to each option, journaling allowed RenTec to continue to transfer assets among the options.
Second, exercising an option did not require RenTec to give up assets that it wanted to retain;
instead, RenTec could use journaling to transfer the assets it wanted to keep from the option
being exercised to a different option subaccount, thereby maintaining the underlying assets.
Third, each option subaccount was not operated on an independent basis, but was used by
RenTec to pursue trading strategies that reached across all of its options. Fourth, journaling
allowed RenTec to transfer assets out of a particular option subaccount and then exercise that
option to cash out only a percentage of what had been its overall portfolio, just as it had been
able to do through the old MAPS structure.
RenTec’s active journaling showed that the new MAPS structure did not stop the hedge
fund from switching assets among options. To the contrary, it provided additional evidence of
RenTec acting as if it were the owner of the option assets, as opposed to a passive option holder.
RenTec’s journaling again raised the issue of whether the basket options operated as true
options, when their reference assets could be and were so easily altered.
(d) Withdrawing Cash at Regular Intervals
After Deutsche Bank restructured the MAPS options in 2008, and began using European
style options that required option exercise on a specific date, RenTec set up the options it
purchased so that it could regularly withdraw cash throughout the year from the option accounts
and use that cash to support its business operations.
RenTec told the Subcommittee that it wanted to cash out its earnings from its basket
option holdings on a regular basis in order to protect its gains from a significant market
downturn. 369 RenTec also indicated that it wanted to regularly access the option earnings to
cover employee salaries and bonuses, and to make distributions to shareholders in order to keep
the Medallion funds at a specified size. 370 Peter Brown, RenTec’s Co-CEO, told the
Subcommittee that RenTec explicitly designed its 2008 option purchases to facilitate cash flow
from the basket option structures on at least a semiannual basis to run its business operations,
including paying salaries. 371
368 Subcommittee interview of Peter Brown, RenTec (6/4/2014). See also 12/15/2008 “Master Investment Advisory
Agreement: Execution Copy,” signed by Deutsche Bank London and RenTec, DB-PSI 00000001-047, at 001-002
(explaining that the advisor had discretion to conduct trades for all subaccounts without consulting the client).
369 Subcommittee interview of Peter Brown, RenTec (6/3/2014).
370 Subcommittee interviews of Peter Brown, RenTec (6/3/2014), James Rowen, RenTec (5/20/2014), and Mark
Silber, RenTec (6/10/2014). But RenTec’s outside legal counsel to the Subcommittee stated that the cash
withdrawals were not used for employee salaries or bonuses, but only for returns to investors. Subcommittee
briefing by RenTec outside legal counsel (6/16/2014).
371 Subcommittee interview of Peter Brown, RenTec (6/3/2014).