Renaissance Technologies used a complex options strategy to dodge more than $6 billion in taxes, a U.S. Senate panel said yesterday in advance of a hearing—featuring three RenTech executives—today.
The giant quantitative firm was among more than a dozen hedge funds to use basket options created by Barclays and Deutsche Bank to pay the lower long-term capital gains rate on high-frequency trading profits, the report said. Renaissance alone saved more than $6 billion.
“These banks and hedge funds involved in this case used dubious structured financial products in a giant game of ‘let’s pretend,’ costing the Treasury billions and bypassing safeguards that protect the economy from excessive bank lending for stock speculation,” Sen. Carl Levin (D-Mich.), who heads the Senate Permanent Subcommittee on Investigations, said.
RenTech and George Weiss Associates were the most aggressive users of the strategy from 1998 until last year, but others—including the former SAC Capital Advisors—utilized them as well.
“It meant enormous profit for both the banks and the hedge funds,” Levin said. “Ordinary Americans had to shoulder a tax burden of billions of dollars, a burden that was shrugged off by those hedge funds.”
“Americans are tired of seeing Wall Street firms playing by a set of rules other than those applying to ordinary citizens,” Sen. John McCain (R-Ariz.), the subcommittee’s ranking Republican, added.
RenTech co-CEO Peter Brown and representatives of Barclays and Deutsche Bank will testify today. The hedge fund has insisted that the strategy is appropriate under current tax law.
The report said that banks built options linked to assets that the hedge funds controlled. RenTech and others would then exercise those options after a year and pay the long-term capital gains rate, even though the options covered as many as 39 million trades, some just a few seconds long.
The Internal Revenue Service has been investigating the practice for six years, earning Levin’s ire. “To say that they have not moved swiftly is an understatement.”
The matter may be moot shortly anyway: Deutsche Bank stopped selling basket options in 2010 and Barclays in 2013, although RenTech is grandfathered in with the latter and still using three such options.