Controversial Options Saved RenTech $6B: Senate Report

Jul 22 2014 | 2:28pm ET

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.


In Depth

Exotic Assets: Investing In Rare Violins

Jan 17 2017 | 4:43pm ET

By definition, alternative investments include exotic assets far beyond your typical...

Lifestyle

'Tis the Season: Wall Street Holiday Parties Back In Fashion

Dec 22 2016 | 9:23pm ET

Spending on Wall Street holiday parties has largely returned to pre-2008 levels...

Guest Contributor

The Trump Administration: What It Could Mean for Carried Interest

Jan 19 2017 | 5:25pm ET

The arrival of the Trump administration brings the potential for a repeal of the...

 

From the current issue of

Versum Materials (VSM), with a market capitalization of $2.7 billion, enables chipmakers to achieve higher performance at lower cost with enhanced reliability. Versum is a leading global provider of electronic materials for the integrated circuit and flat-panel display markets.