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发帖数: 2454 | 1 http://www.bloomberg.com/news/2014-07-21/renaissance-avoided-mo
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A Renaissance Technologies LLC hedge fund’s investors probably avoided more
than $6 billion in U.S. income taxes over 14 years through transactions
with Barclays Plc (BARC) and Deutsche Bank AG (DBK), a Senate committee said.
The hedge fund used contracts with the banks to establish the “fiction”
that it wasn’t the owner of thousands of stocks traded each day, said
Senator Carl Levin, a Michigan Democrat and chairman of the Permanent
Subcommittee on Investigations. The maneuver sought to transform profits
from rapid trading into long-term capital gains taxed at a lower rate, he
said.
“It meant enormous profit for both the banks and the hedge funds,” Levin
told reporters yesterday in Washington. “Ordinary Americans had to shoulder
a tax burden of billions of dollars, a burden that was shrugged off by
those hedge funds.”
The panel urged the Internal Revenue Service to collect taxes from the fund
’s investors at the higher rate that Americans pay on wages and salaries.
It said Congress should remove legal obstacles to audits of hedge funds and
other large partnerships, whose returns the committee said are rarely
questioned.
Executives Testifying
Executives from Renaissance, founded by billionaire mathematicianJames
Simons, are set to testify at a hearing today in Washington about the
transactions, as are representatives of Barclays and Deutsche Bank. The
report was issued by Levin and Senator John McCain of Arizona, the
subcommittee’s top Republican.
“Americans are tired of seeing Wall Street firms playing by a set of rules
other than those applying to ordinary citizens,” McCain said at the hearing.
In a statement today, Renaissance said it “is comfortable that its tax
treatment of the options is correct under current law” and that it expects
to prevail in a dispute with the IRS over the matter. It said its decision
to use a product known as basket options wasn’t driven by the tax benefits.
Deutsche Bank in 2010 stopped selling versions of the basket option that had
tax-saving features, after the IRS publicly challenged the practice.
Barclays stopped in 2013, although Renaissance is still using three options
from the bank that were provided before the policy change, the subcommittee
said.
Apple, Caterpillar
Levin’s subcommittee doesn’t have authority to impose penalties, and it
often examines business practices with an eye toward recommending changes in
law. Recent hearings have focused on tax-avoidance maneuvers by Apple Inc.
and Caterpillar Inc.
Renaissance, based in East Setauket, New York, compiled one of the best
records in investing history by using advanced mathematics and computer
algorithms to identify mispriced securities. Its Medallion fund, open almost
exclusively to Renaissance employees, returned more than 35 percent
annualized over more than two decades.
The fund manager has created fortunes for its top executives, who are also
among Medallion’s biggest investors. Simons’s fortune is estimated at
about $15.5 billion, according to the Bloomberg Billionaires Index. He’s a
prominent political donor, contributing more than $9 million to Democratic
causes in the 2012 election cycle.
The panel’s report focuses on basket options, which a hedge fund would buy
from a bank. The value of the option would fluctuate based on the
performance of a basket of underlying securities, and the hedge fund manager
could buy and sell the stocks in the basket.
Brokerage Account
Economically, the trades were similar to a hedge fund holding the securities
in a brokerage account, the subcommittee said.
Because the bank was designated as the legal owner of the underlying stocks,
the hedge fund didn’t need to recognize a short-term gain when it sold a
security. Instead, it would claim a long-term gain when it exercised the
option, typically after more than a year.
Under current law, profits from short-term capital gains are taxed at
marginal federal rates of as much as 44.4 percent, compared with a 23.8
percent top rate for long-term gains. For some earlier years, the rates were
35 percent and 15 percent.
Illustrating how rapidly the contents of the “baskets” were shuffled, one
option reviewed by the committee had more than 129 million underlying trades
in a single year, the subcommittee said. Many of Renaissance’s stock
investments lasted mere minutes or seconds, it said.
Trade ‘Suggestions’
The hedge funds that used the options sought to portray their involvement in
the trading of the underlying portfolio as mere “suggestions” or “
recommendations,” the subcommittee said. The panel said in Renaissance’s
case, the trades were ordered by the firm’s computers and automatically
executed by its banks, a process that took milliseconds.
The panel said Deutsche Bank and Barclays together sold 199 basket options
since 1999, including 127 that had the potential to generate long-term
capital gains. The options produced $1.1 billion of revenue for the two
banks, according to the report.
The 60 options with tenures of more than a year sold by the two banks to
Renaissance’s Medallion Fund generated profits of about $34.2 billion,
according to the report. Based on the difference between the short-term and
long-term rates, the panel estimated the tax saved on those profits at $6.8
billion.
George Weiss
In addition to Renaissance, about a dozen other hedge funds are known to
have used basket options sold by Deutsche Bank, according to the report.
Among the biggest users was George Weiss Associates, run by the Hartford,
Connecticut, philanthropist George A. Weiss, the report said.
In a statement, George Weiss Associates said its basket options, which it
stopped using in 2010, were lawful and were used to increase the amount it
could borrow. It said it cooperated with the subcommittee’s investigation.
Another user of Deutsche Bank basket options was SAC Capital Advisors LP,
the hedge fund run by billionaire Steven A. Cohen, the report said. Once one
of the country’s top hedge funds, SAC stopped managing money for outside
investors and changed its name to Point72 Asset Management LP this year
after pleading guilty to securities fraud in an unrelated matter.
In a statement, Point72 said it didn’t report income earned from its basket
options as long-term capital gains.
Renaissance’s use of basket options originated in an effort in the late
1990s to obtain more borrowed money to bet on stocks than it could get
through regular brokerage arrangements, the firm said in a statement today.
Risk Limited
The options also were attractive because they limited the risk of loss to
the amount paid for each option, Renaissance said.
“No other investment structure of which we are aware provides both high
leverage and loss protection,” Renaissance said.
IRS action on the Renaissance matter is “long overdue,” Levin said
yesterday. “To say they haven’t moved swiftly is an understatement.”
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