adminNew York. – Barclays Plc (BARC) and Deutsche Bank AG (DBK) face scrutiny over their sale of products to a hedge-fund firm that allowed it to skirt borrowing limits and avoid taxes, according to people with knowledge of the matter.
The US Senate Permanent Subcommittee on Investigations plans a hearing next week on what it calls abusive transactions by financial institutions, according to a notice from the panel.
The companies, which aren’t named in the notice, are Barclays, Deutsche Bank and hedge-fund manager Renaissance Technologies LLC, the people said. Representatives for each of the firms plan to testify at the July 22 hearing, the people said.
The investigation is another blow for Antony Jenkins, chief executive officer of London-based Barclays, as he seeks to restore the firm’s reputation after it became the first lender to be fined for rigging Libor. For Deutsche Bank, the hearing comes less than four years after the Frankfurt-based lender paid $554 million to avoid unrelated US criminal charges involving the sale of tax shelters.
Kerrie Cohen, a spokeswoman for Barclays, declined to comment, as did Renee Calabro of Deutsche Bank; Jonathan Gasthalter, who represents Renaissance; and Gordon Trowbridge, a Senate subcommittee spokesman. The people with knowledge of the matter spoke on condition of anonymity because they weren’t supposed to reveal information before the hearing.
Led by Carl Levin, a Michigan Democrat, the subcommittee often examines legal business practices with an eye toward policy reform and isn’t able to impose penalties.
Recent hearings have focused on tax-avoidance manoeuvres by Apple Inc. and Caterpillar Inc.
Next week’s hearing will focus on a series of transactions known as barrier options between the banks and Renaissance, the East Setauket, New York-based hedge-fund manager founded by billionaire James H. Simons, the people said.
The tax benefits allegedly generated by the options are the subject of a dispute between Renaissance and the Internal Revenue Service, the people said. Bloomberg News reported on the transactions last year.
Taxes aside, the transactions enabled Renaissance’s Medallion fund to borrow as much as $17 for every dollar of its own, more than it would be allowed to in a traditional margin-lending relationship, the people said.
Federal Reserve rules prohibit stockbrokers from lending more than $1 for every dollar of client money. Hedge funds are typically able to borrow as much as $5 or $6 for each of their own dollars through specialised arrangements with banks.
In one version of the barrier-option transaction described in a public 2010 IRS memorandum, Barclays bought a pool of securities and paid Renaissance a nominal fee to manage them. At the same time, Barclays sold a two-year option to the hedge fund that transferred any gains or losses from the pool to Medallion, minus financing costs.
The memorandum doesn’t name the hedge fund or the bank, whose identities were confirmed by the people with knowledge of the matter.
Because Barclays, not Medallion, was the legal owner of the assets, the option transformed the hedge-fund investors’ short-term trading profits into long-term capital gains, which are taxed at a lower rate.
The IRS, which says the option arrangement is a ruse and that Medallion was the real owner of the underlying assets, wants Medallion investors to pay the higher rate, the people said. – Bloomberg
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