“Two global banks and more than a dozen hedge funds misused a complex financial structure to claim billions of dollars in unjustified tax savings and to avoid leverage limits that protect the financial system from risky debt, a Senate Subcommittee investigation has found. The improper use of this structured financial product, known as basket options, is the subject of a 93-page report released by the Chairman and Ranking Member of the U.S. Senate Permanent Subcommittee on Investigations, Senator Carl Levin, D-Mich., and Senator John McCain, R-Ariz., and will be the focus of a Tuesday hearing at which bank and hedge fund officials and tax experts will testify.

“Over the years, this Subcommittee has focused significant time and attention on two important issues: tax avoidance by profitable companies and wealthy individuals, and reckless behavior that threatens the stability of the financial system,” said Levin. “This investigation brings those two themes together. These banks and hedge funds 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.” “Americans are tired of large financial institutions playing by a different set of rules when it comes to paying taxes,” said McCain. “The banks and hedge funds involved in this case used the basket options structure to change the tax treatment of their short-term stock trades, something the average American investor cannot do. Hedge funds cannot be allowed to have an unfair tax advantage over ordinary citizens.”

The report outlines how Deutsche Bank AG and Barclays Bank PLC, over the course of more than a decade, sold financial products known as basket options to more than a dozen hedge funds. From 1998 to 2013, the banks sold 199 basket options to hedge funds which used them to conduct more than $100 billion in trades. The subcommittee focused on options involving two of the largest basket option users, Renaissance Technology Corp. LLC (“RenTec”) and George Weiss Associates.”