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

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as their hedge fund clients – they have abandoned their longstanding efforts to facilitate their
clients’ claims that the option earnings should be classified as long-term capital gains.
(a) Barclays’ Restructuring
Despite learning of the IRS GLAM in November 2010, Barclays continued issuing basket
options to RenTec for another two years. Barclays internal communications justified its actions
by noting that RenTec had provided the bank with a tax indemnity agreement and the bank had
already participated in so many COLT transactions that its reputational risk would not be
affected by participating in additional transactions.
Learning of the GLAM. The IRS GLAM was issued on November 12, 2010. That
same day, Graham Wade, an SCM employee, sent an email to his colleagues, including Jonathan
Zenios and Nizam Siddiq, notifying them of the GLAM and describing it as a “detailed write up”
of the COLT basket options product. He reported that he planned to discuss the GLAM with
RenTec and other bank personnel, and suggested that the GLAM did not affect the bank:
“This [the GLAM] is a detailed write up of Colt concluding it doesn't work.
We can discuss on MDs [managing directors’] call but I intend to reach out to
RenTec and Ed Cohen this morning to make sure they are aware. We will also
confirm it does not impact Barclays. The only issue for Barclays I could see is
some deemed wht [withholding] agent issue as the memo concludes that
RenTec are the legal owner of the stocks.
To me this would signal that IRS is inevitably going to litigate Colt.” 435
At that point, Barclays recognized that the IRS had concluded that its basket
option structure “doesn’t work.” Yet, that realization did not dissuade Barclays from
continuing with the transaction. Over the next two years, Barclays entered into
another nine basket option transactions with RenTec. 436
Approving Additional COLT Options. One of those COLT transactions was presented
to the Barclays SCM Approvals Committee in October 2012, which decided to approve it.
Meeting attendees included Gerard LaRocca, Barclays’ Chief Administrative Officer (CAO) and
the most senior bank executive in the United States, as well as executives Graham Wade, Nizam
Siddiq, and Marty Malloy, among others.
According to a memorandum summarizing the meeting, some of the key points made
during the discussion that led to approval of the new COLT option were as follows:
• “The tax risk is assumed by the Client.
• The New Option Transaction does not meaningfully increase Barclays’ reputation
risk in relation to the Option Transactions, because writing a new option (or
435 11/12/2010 email from Graham Wade to Nizam Sidiq and Jonathan Zenios of Barclays, “Privileged Colt,”
BARCLAYS-PSI-748506.
436 See undated spreadsheet, “History of COLT Options,” BARCLAYS-PSI-748604.