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

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continuing with the Option Transactions should not meaningfully increase
Barclays’ reputation risk, insofar as any court litigation would relate to the entire
structure. Barclays’ role will be that of a witness (alongside Deutsche Bank) and,
provided Barclays fully cooperates with the process, there is no reason to expect
damaging accusations from the IRS or the court. In particular, Barclays could not
be considered to have sold a risky investment structure to an unsophisticated
investor that did not understand the risk.” 448
Essentially, the memorandum contended that since Barclays was already at risk, due to
previous basket option transactions, it would not “meaningfully increase” its reputational risk by
participating in additional transactions, so there was no reason to stop offering the COLT options
at that point in time. It also attempted to characterize Barclays’ role as a “witness,” even though
the bank had designed, sold, and administered multiple COLT options for a decade. The
memorandum also noted that Barclays had collected £322.7 million in revenue since the
inception of the tax product, which, in 2012, was equivalent to about $415 million. 449
The next month, in November 2012, the SCM Approvals Committee met to discuss
RenTec’s request to purchase yet another COLT option. 450 A memorandum summarizing the
meeting again referred to the IRS investigation into the COLT product: “In AM 2010-005, the
IRS concluded the call option does not function as an option and should not be treated as one for
US tax purposes.” Nevertheless, the memorandum again advocated approving the new option.
It noted that many Barclays committees had already expressed approval of the product:
“SCM has notified and received approval from the following in relation to proceeding
with the proposed transaction: Tax, Finance, Credit Risk, Market Risk, Regulatory,
Legal, Compliance, and Operations.” 451
The Barclays Tax Committee concurred. On November 23, two COLT options were
issued to RenTec. 452 That same day, an email from one of the SCM employees noted that if the
COLT structure were later found not to be in compliance with the U.S. tax code, the bank could
terminate any open option in 60 days and also had a tax indemnification from RenTec which
would protect the bank from the payment of any tax penalties. 453
These documents indicate that multiple departments within Barclays were notified of and
approved use of the COLT product, despite the IRS memorandum advising that those types of
options were being used to violate U.S. tax law. Barclays continued issuing the suspect options
even though the bank was then under public criticism for its involvement with abusive tax
shelters.
448 Id. at 116.
449 Id. at 114.
450 11/2012 memorandum from Maxim Kulikov and Rama Subramaniam to SCM US Approvals Committee,
"Project COLT XXVIII (Renaissance Technologies) – Approvals Notification,” BARCLAYS-PSI-017091-093, at
091.
451 Id. at 093.
452 11/23/2012 email from Noor Islam to Eugene Kim of Barclays, “Colt – Market Risk/Credit Risk,” BARCLAYS-
PSI-293251-255, at 251.
453 11/23/2012 email from James Saxton to Marty Malloy of Barclays, “Palomino options,” BARCLAYS-PSI-
322103.