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DIVIDEND TAX ABUSE: HOW OFFSHORE ENTITIES 

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DIVIDEND TAX ABUSE: HOW OFFSHORE ENTITIES 

DODGE TAXES ON U.S. STOCK DIVIDENDS 

HEARING 

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OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

OF THE

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 11, 2008 

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(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

BARACK OBAMA, Illinois 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

SUSAN M. COLLINS, Maine 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

PETE V. DOMENICI, New Mexico 

JOHN WARNER, Virginia 

JOHN E. SUNUNU, New Hampshire 

MICHAEL L. ALEXANDER, Staff Director 

BRANDON L. MILHORN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

CARL LEVIN, Michigan, Chairman 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

BARACK OBAMA, Illinois 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

PETE V. DOMENICI, New Mexico 

JOHN WARNER, Virginia 

JOHN E. SUNUNU, New Hampshire 

ELISE J. BEAN, Staff Director and Chief Counsel 

ROBERT L. ROACH, Counsel and Chief Investigator 

ROSS K. KIRSCHNER, Counsel 

MARK L. GREENBLATT, Staff Director and Chief Counsel to the Minority 

TIMOTHY R. TERRY, Counsel to the Minority 

MARY D. ROBERTSON, Chief Clerk 

(III) 

C O N T E N T S 

Opening statements: Page 

Senator Levin .................................................................................................... 1 

Senator Coleman .............................................................................................. 6 

WITNESSES 

THURSDAY, SEPTEMBER 11, 2008 

Reuven S. Avi-Yonah, Irwin I. Cohn Professor of Law, University of Michigan 

School of Law, Ann Arbor, Michigan .................................................................. 8 

Joseph M. Manogue, Treasurer, Maverick Capital, Ltd., Dallas, Texas ............. 16 

Richard Potapchuk, Director of Treasury and Finance, Highbridge Capital 

Management, LLC, New York, New York ......................................................... 19 

Gary I. Wolf, Managing Director, Angelo, Gordon & Co., New York, New 

York ....................................................................................................................... 20 

John DeRosa, Managing Director and Global Tax Director, Lehman Brothers 

Inc., New York, New York ................................................................................... 31 

Matthew Berke, Managing Director and Global Head of Equity Risk Management, Morgan Stanley & Co., New York, New York ......................................... 34 

Andrea Leung, Global Head of Synthetic Equity Finance, Deutsche Bank 

AG, New York, New York .................................................................................... 35 

Hon. Douglas Shulman, Commissioner, Internal Revenue Service, Washington, DC ............................................................................................................. 50 

ALPHABETICAL LIST OF WITNESSES

Avi-Yonah, Reuven S.: 

Testimony .......................................................................................................... 8 

Prepared statement .......................................................................................... 59 

Berke, Matthew: 

Testimony .......................................................................................................... 34 

Prepared statement .......................................................................................... 88 

DeRosa, John: 

Testimony .......................................................................................................... 31 

Prepared statement with an attachment ....................................................... 80 

Leung, Andrea: 

Testimony .......................................................................................................... 35 

Manogue, Joseph M.: 

Testimony .......................................................................................................... 16 

Prepared statement .......................................................................................... 67 

Potapchuk, Richard: 

Testimony .......................................................................................................... 19 

Prepared statement .......................................................................................... 70 

Shulman, Hon. Douglas: 

Testimony .......................................................................................................... 50 

Prepared statement .......................................................................................... 94 

Wolf, Gary I.: 

Testimony .......................................................................................................... 20 

Prepared statement .......................................................................................... 75 

APPENDIX 

Staff Report entitled ‘‘Dividend Tax Abuse: How Offshore Entites Dodge 

Taxes on U.S. Stock Dividends’’ .......................................................................... 101 

Page

IV 

EXHIBITS 

1. How Offshore Entities Dodge Taxes on U.S. Stock Dividends: Swaps ......... 189 

DOCUMENTS RELATING TO MAVERICK CAPITAL, LTD 

2. UBS email, dated November 2004, re: Dividend Enhancement Flow. (Attaching Dividend Enhancement.doc) ............................................................... 190 

3. Dividend Enhancement Transactions, DRAFT—AS OF 4/26/99, prepared 

by Maverick Capital ......................................................................................... 193 

4. Description of Dividend Enhancement Transactions, dated December 12, 

2006, prepared by Maverick Capital ............................................................... 195 

5. Maverick Capital, Dividend Enhancement Transactions Memo, dated June 

30, 2005 ............................................................................................................. 197 

6. Maverick Capital emails, dated November 2004, re: Microsoft strategy 

on capturing the $3.00 dividend for non-US holders only. (Jim has been 

working on this for the last 2 months and he got UBS to match the 

more aggressive offers we were getting from the Street. For LDC only— 

we lent the stock out and will get 97 percent of the dividend.) ...................... 200 

7. Maverick Capital emails, dated June 2007, re: FIN 48 Tax Positions— 

DRAFT memos .................................................................................................. 203 

8. Maverick Capital/Ernst & Young emails, dated February 2007, re: AMTD 

Dividend ............................................................................................................ 211 

9. Domestic Dividend Enhancements, undated document prepared by Maverick Capital ...................................................................................................... 213 

10. Excerpts from UBS Documents regarding UBS Cayman Ltd. (UBSCL) ..... 216 

DOCUMENTS RELATING TO HIGHBRIDGE CAPITAL MANAGEMENT, 

LLC 

11. Lehman email, dated November 2004, re: Highbridge Utility Fund—Electronic Execution into CFD. (. . . also in discussions with them around 

yield enhancement on their long positions by using a CFD. This service 

involves tax risk for the firm which would be reduced if we can route 

their electronic trades direct to CFD instead of their PB account.) ............... 217 

12. Lehman email, dated November 2004, re: Highbridge LPS Basket. (. . . 

I would like to move the positions back to their PB account. . . . Would 

hate to do this and find out down the road that HB owe withholding 

tax on the dividends.) ....................................................................................... 218 

DOCUMENTS RELATING TO ANGELO, GORDON & CO 

13. Angelo Gordon email, dated August 2004, re: CFDs. (a cfd is used to 

circumvent the tax.) .......................................................................................... 220 

14. Angelo Gordon email, dated July 2006, re: Notes from last meeting with 

Anthony Harpel. (Contracts for Difference—used mostly in offshore fund— 

so we don’t have dividend withholding CFD is probably about 20 percent 

of portfolio) ........................................................................................................ 221 

15. Lehman email, dated December 2004, re: Bloomberg internal message 

sent from PATRICK RYAN. (. . . it tuns out the majority have partial 

withholding so need to stay in CFD. TYPICAL!) ........................................... 222 

16. Lehman emails, dated May 2002, re: SWAPS FOR ANGELO GORDON. 

(rich, I agree . . . if the positions are for longer term we can pay 100 

percent. * * * I think we have to do this to keep AG’s business) .................... 223 

DOCUMENTS RELATING TO LEHMAN BROTHERS INC 

17. Equity Finance Yield Enhancement, presentation document prepared by 

Lehman Brothers Inc ....................................................................................... 225 

18. Lehman Brothers/Highbridge Capital email, dated July 2004, re: CFD 

Presentation. (The CFD is usually used for yield enhancement purposes. 

. . .) ................................................................................................................... 228 

19. EFG US Dividend Exposures, February 2005, Lehman Brothers presentation .................................................................................................................. 229 

20. Lehman Brothers email, dated September 2005, re: MCIP. (HB looking 

for Yield Enhancement on a large position.) ................................................... 237 

21. Lehman Brothers emails, dated October 2004, re: Trade Confirm. (fyi, 

the only reason for HB to SWap is for yield enhancement.) .......................... 238 

22. Lehman Brothers letter to Maverick Capital, dated April 24, 2001, (Dividend Enhancement Solutions—We have a variety of solutions using swap 

and securities lending vehicles for achieving yield enhancement.) ................ 242 

Page

V 

23. Lehman Brothers emails, dated January/February 2004, re: Long Transfers. (. . . tell them about doing long swap/cfd business around record 

date items so that they get enhanced div treatment on us stocks. . . .) ........ 248 

24. Lehman Brothers emails, dated June 2003, re: US Cayman 70 percent 

trade ................................................................................................................... 250 

25. Lehman Brothers emails, dated January 2005, re: Conclusions of US 

div meeting. (Are all the major competitors in the yield enhancement 

game? * * * Borrow via Cayman is considered by Tax dept to be lower 

risk than CFD in LBIE. . . .) .......................................................................... 254 

DOCUMENTS RELATING TO MORGAN STANLEY & CO 

26. Morgan Stanley email, dated July 2004, re: MSFT Total Return Swaps. 

(Here are the main points regarding total return equity swaps on MSFT: 

. . . Morgan Stanley can enhance the dividend payout from 70 percent 

or 100 percent through a total return equity swap.) ....................................... 256 

27. Morgan Stanley email, dated August 2004, re: CRM (MOORE CAPITAL)—Microsoft total return equity swap/Moore Capital ........................... 259 

28. Morgan Stanley email, dated July 2004, re: MSFT div timing .................... 261 

29. MSDW Equity Finance Services (Cayman) Limited (‘‘Cayco’’), Outline operating procedures, undated Morgan Stanley document ............................... 262 

DOCUMENTS RELATING TO DEUTSCHE BANK AG 

30. Deutsche Bank email, dated October 2004, (. . . LOOKING FOR A WAY 

TO MAINTAIN EXPOSURE TO MSFT BUT AVOID THE DIVIDEND 

PAYMENT.) ....................................................................................................... 264 

31. Deutsche Bank emails, dated September 2004, re: Extraordinary Dividend Rules and Microsoft One-Time Dividend ............................................... 265 

32. PROJECT: DBIL Rehypothecation, February 2007 Deutsche Bank document ................................................................................................................... 267 

33. New Product Application, dated January 2005, Deutsche Bank International Limited (‘‘DBIL’’) Equity Finance alternative structure .................. 268 

34. New Product Application, dated December 2003, Deutsche Bank International Limited, Jersey (‘‘DBIL’’) Securities Borrowing and Lending— 

NPA Support document .................................................................................... 275 

35. Correspondence from Maverick Capitol, dated September 30, 2008, to 

the Senate Permanent Subcommittee on Investigations, supplementing 

Maverick’s testimony of September 11, 2008 ................................................. 300 

36. Supplemental information provided by the Internal Revenue Service regarding Notice 97–66 ........................................................................................ 304 

37. Additional documents regarding Citigroup, Inc ............................................. 305 

38. Additional documents regarding Deutsche Bank ........................................... 308 

39. Additional documents regarding Goldman Sachs Group ............................... 321 

40. Additional documents regarding Lehman Brothers Holdings, Inc ............... 342 

41. Additional documents regarding Maverick Capital Management LLC ....... 396 

42. Additional documents regarding Merrill Lynch ............................................. 398 

43. Additional documents regarding Morgan Stanley ......................................... 414 

44. Additional documents regarding UBS Investment Bank .............................. 416 

45. Documents relating to Footnotes found in the Staff Report, Dividend 

Tax Abuse: How Offshore Entities Dodge Taxes on U.S. Stock Dividends, 

prepared by the Minority and Majority Staff of the Permanent Subcommittee on Investigations in conjunction with the Subcommittee hearing held on September 11, 2008: [Note: Footnotes not listed are explanative, reference Subcommittee interviews for which records are not available to the public, or reference a widely available public document.] .......... 431 

* SEALED EXHIBITS retained in the files of the Subcommittee. 

Footnote No. 50, See Attachment .................................................................... 431 

Footnote No. 51, See Footnote No. 50 (above) ................................................. 431 

Footnote No. 52, SEALED EXHIBIT .............................................................. *

Footnote No. 63, See Attachment .................................................................... 433 

Footnote No. 64, See Footnote No. 63 (above) ................................................. 433 

Footnote No. 65, See Attachment .................................................................... 458 

Footnote No. 68, See Hearing Exhibit No. 19 (above) .................................... 229 

Footnote No. 69, See Hearing Exhibit No. 17 (above) .................................... 225 

Footnote No. 70 and 71, See Hearing Exhibit No. 18 (above) ....................... 228 

Footnote No. 72, See Hearing Exhibit No. 13 (above) .................................... 220 

Footnote No. 73, See Attachment .................................................................... 462 

Footnote No. 74 and 75, See Footnote No. 73 (above) .................................... 462 

Page

VI 

Footnote No. 76–79, See Hearing Exhibit No. 12 (above) .............................. 218 

Footnote No. 80, See Attachment .................................................................... 463 

Footnote No. 81–83, See Footnote No. 80 (above) ........................................... 463 

Footnote No. 84, See Attachment .................................................................... 465 

Footnote No. 85, See Attachment .................................................................... 467 

Footnote No. 86, See Hearing Exhibit No. 21 (above) .................................... 238 

Footnote No. 87, See Attachment .................................................................... 469 

Footnote No. 88, See Attachment .................................................................... 471 

Footnote No. 89, See Hearing Exhibit No. 20 (above) .................................... 237 

Footnote No. 90, See Hearing Exhibit No. 22 (above) .................................... 242 

Footnote No. 91–93, See Hearing Exhibit No. 23 (above) .............................. 248 

Footnote No. 94, See Attachment .................................................................... 474 

Footnote No. 95, See Footnote No. 94 (above) ................................................. 474 

Footnote No. 96, See Hearing Exhibit No. 16 (above) .................................... 223 

Footnote No. 97, See Attachment .................................................................... 475 

Footnote No. 98, See Attachment .................................................................... 478 

Footnote No. 99, See Attachment .................................................................... 481 

Footnote No. 100–102, See Hearing Exhibit No. 24 (above) .......................... 250 

Footnote No. 103, See Attachment .................................................................. 483 

Footnote No. 104, See Footnote No. 88 (above) ............................................... 471 

Footnote No. 105, See Attachment .................................................................. 485 

Footnote No. 106 and 107, See Hearing Exhibit No. 19 (above) ................... 229 

Footnote No. 108, See Attachment .................................................................. 487 

Footnote No. 109, See Attachment .................................................................. 489 

Footnote No. 110, See Hearing Exhibit No. 17 (above) .................................. 225 

Footnote No. 111, See Attachment .................................................................. 492 

Footnote No. 112 and 113, See Hearing Exhibit No. 19 (above) ................... 229 

Footnote No. 114, See Attachment .................................................................. 494 

Footnote No. 122, See Attachment .................................................................. 497 

Footnote No. 123, See Footnote No. 122 (above) ............................................. 497 

Footnote No. 124, See Hearing Exhibit No. 3 (above) .................................... 193 

Footnote No. 125, See Attachment .................................................................. 507 

Footnote No. 126, See Footnote No. 125 (above) ............................................. 507 

Footnote No. 127, See Attachment .................................................................. 510 

Footnote No. 128, See Attachment .................................................................. 511 

Footnote No. 129–130, See Footnote No. 128 (above) ..................................... 511 

Footnote No. 132–134, See Hearing Exhibit No. 26 (above) .......................... 256 

Footnote No. 135, See Hearing Exhibit No. 28 (above) .................................. 261 

Footnote No. 136, See Attachment .................................................................. 514 

Footnote No. 137–141, See Footnote No. 136 (above) ..................................... 514 

Footnote No. 142, See Attachment .................................................................. 518 

Footnote No. 143, See Footnote No. 142 (above) ............................................. 518 

Footnote No. 144, See Attachment .................................................................. 520 

Footnote No. 146, See Hearing Exhibit No. 29 (above) .................................. 262 

Footnote No. 147, See Attachment .................................................................. 521 

Footnote No. 148, SEALED EXHIBIT ............................................................ *

Footnote No. 149 and 150, See Hearing Exhibit No. 3 (above) ..................... 193 

Footnote No. 151, See Hearing Exhibit No. 4 (above) .................................... 195 

Footnote No. 152, See Attachment .................................................................. 530 

Footnote No. 153, See Footnote No. 152 (above) ............................................. 530 

Footnote No. 154, See Attachment .................................................................. 531 

Footnote No. 155, See Footnote No. 154 (above) ............................................. 531 

Footnote No. 159, See Attachment .................................................................. 534 

Footnote No. 161, See Attachment .................................................................. 535 

Footnote No. 162, See Footnote No. 147 (above) ............................................. 521 

Footnote No. 163, See Footnote No. 148 (above), SEALED EXHIBIT .......... *

Footnote No. 169, SEALED EXHIBIT ............................................................ *

Footnote No. 170, See Attachment .................................................................. 536 

Footnote No. 171 and 172, See Footnote No. 170 (above) .............................. 536 

Footnote No. 177, See Hearing Exhibit No. 3 (above) .................................... 193 

Footnote No. 178, See Hearing Exhibit No. 31 (above) .................................. 265 

Footnote No. 179, See Attachment .................................................................. 540 

Footnote No. 180, See Attachment .................................................................. 541 

Footnote No. 181, See Attachment .................................................................. 542 

Footnote No. 182, See Attachment .................................................................. 543 

Footnote No. 183 and 185, See Hearing Exhibit No. 34 (above) ................... 275 

Page

VII 

Footnote No. 186 and 187, See Hearing Exhibit Nos. 33 and 34 

(above).............................................................................................................. 268, 275 

Footnote No. 188 and 189, See Footnote No. 169 (above), SEALED EXHIBIT .................................................................................................................... *

Footnote No. 190, See Attachment and SEALED EXHIBIT...................... 544, *

Footnote No. 191, See Footnote No. 181 (above) ............................................. 542 

Footnote No. 192, See Footnote No. 127 (above) ............................................. 510 

Footnote No. 199, See Attachment .................................................................. 702 

Footnote No. 200, See Footnote No. 199 (above) ............................................. 702 

Footnote No. 201, See Attachment .................................................................. 706 

Footnote No. 202–204, See Footnote No. 201 (above) ..................................... 706 

Footnote No. 205, See Hearing Exhibit No. 2 (above) .................................... 190 

Footnote No. 206, See Attachment .................................................................. 707 

Footnote No. 207, See Attachment .................................................................. 709 

Footnote No. 208, SEALED EXHIBIT ............................................................ *

Footnote No. 209, See Footnote No. 208 (above), SEALED EXHIBIT .......... *

Footnote No. 210–213, See Hearing Exhibit No. 2 (above) ............................ 190 

Footnote No. 214, See Attachment .................................................................. 717 

Footnote No. 215, See Footnote No. 214 (above) ............................................. 717 

Footnote No. 220, SEALED EXHIBIT ............................................................ *

Footnote No. 221, See Attachment .................................................................. 722 

Footnote No. 222, See Footnote No. 127 (above) ............................................. 510 

Footnote No. 229, See Attachment .................................................................. 724 

Footnote No. 230–233, See Footnote No. 229 (above) ..................................... 724 

Footnote No. 234, See Attachment .................................................................. 728 

Footnote No. 235, See Footnote No. 234 (above) ............................................. 728 

Footnote No. 236, See Attachment .................................................................. 732 

Footnote No. 237, See Footnote No. 236 (above) ............................................. 732 

Footnote No. 238, See Attachment .................................................................. 735 

Footnote No. 239–241, See Footnote No. 238 (above) ..................................... 735 

Footnote No. 242, See Attachment .................................................................. 736 

Footnote No. 243, See Attachment .................................................................. 742 

Footnote No. 244, See Footnote No. 127 (above) ............................................. 510 

Footnote No. 245, See Attachment .................................................................. 743 

Footnote No. 246–248, See Footnote No. 245 (above) ..................................... 743 

Footnote No. 249, See Attachment .................................................................. 774 

Footnote No. 250–254, See Footnote No. 249 (above) ..................................... 774 

Footnote No. 255, See Attachment .................................................................. 793 

Footnote No. 256, See Footnote No. 255 (above) ............................................. 793 

Footnote No. 257, See Attachment .................................................................. 800 

Footnote No. 258, See Attachment .................................................................. 838 

Footnote No. 259–261, See Footnote No. 258 (above) ..................................... 838 

Footnote No. 262, See Attachment .................................................................. 843 

Footnote No. 263, See Attachment .................................................................. 845 

Footnote No. 264–268, See Footnote No. 263 (above) ..................................... 845 

Footnote No. 269, See Attachment .................................................................. 848 

Footnote No. 270, See Attachment .................................................................. 853 

Footnote No. 271, See Attachments (2)...................................................... 854, 864 

Footnote No. 272 and 273, See Footnote No. 271 (above) ........................ 854, 864 

Footnote No. 274, See Footnote No. 271 (above)....................................... 854, 864 

Footnote No. 276, See Footnote No. 249 (above) ............................................. 774 

Footnote No. 277, See Footnote No. 263 (above) ............................................. 845 

Footnote No. 278, See Footnote No. 243 (above) ............................................. 742 

Footnote No. 279, See Footnote No. 127 (above) ............................................. 510 

Footnote No. 280, See Footnote No. 221 (above) ............................................. 722 

Footnote No. 285, See Attachment .................................................................. 875 

Footnote No. 286 and 287, See Footnote No. 285 (above) .............................. 875 

Footnote No. 289, See Attachment .................................................................. 881 

Footnote No. 290, See Footnote Nos. 285 and 289 (above)....................... 875, 881 

Footnote No. 291–298, See Footnote No. 289 (above) ..................................... 881 

Footnote No. 299, See Attachment .................................................................. 903 

Footnote No. 300, See Attachment .................................................................. 907 

Footnote No. 302, See Attachments (2) and Footnote No. 300 

(above) ..................................................................................................... 909, 911, 907 

Footnote No. 303, See Footnote No. 299 (above) ............................................. 903 

Footnote No. 304, See Footnote No. 289 (above) ............................................. 881 

(1) 

DIVIDEND TAX ABUSE: HOW OFFSHORE 

ENTITIES DODGE TAXES ON U.S. STOCK 

DIVIDENDS 

THURSDAY, SEPTEMBER 11, 2008 

U.S. SENATE,

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,

OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:10 a.m., in Room 

106 of the Dirksen Senate Office Building, Hon. Carl Levin, Chairman of the Subcommittee, presiding. 

Present: Senators Levin and Coleman. 

Staff Present: Elise J. Bean, Staff Director and Chief Counsel; 

Robert L. Roach, Counsel and Chief Investigator; Ross K. Kirschner, Counsel; Mary D. Robertson, Chief Clerk; Mark L. Greenblatt, 

Staff Director and Chief Counsel to the Minority; Timothy R. Terry, 

Counsel to the Minority; Alexandra Brodman, Intern; Tesia 

Schmidtke, Intern; and Mark LeDuc (HSGAC/Senator Collins). 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Good morning everybody. The Subcommittee will 

come to order. 

One of the problems that this Subcommittee has tackled in recent years is the stunning fact that the United States loses perhaps 

$100 billion in tax revenues each year to offshore tax havens that 

aid and abet corporations and wealthy individuals dodging payment of taxes owed to Uncle Sam. 

Since 2001, this Subcommittee has examined this problem from 

multiple angles, exposing the ways that people use tax havens to 

hide their assets and income, and how tax havens have created a 

whole industry to help them exercise control over their offshore assets and use those assets and the revenues they produce for their 

own benefit, often sneaking funds back into the United States without paying the taxes owed. Just 2 months ago, in July, this Subcommittee held a hearing showing how banks in offshore tax havens have knowingly helped U.S. clients hide billions of dollars in 

secret bank accounts never reported to the IRS. 

Today, our spotlight is on another facet of tax haven abuses; we 

call it dividend tax abuse. And the focus today is not on U.S. citizens, but on non-U.S. citizens who are supposed to be paying taxes 

on the dividends they receive from U.S. corporations but do not. 

They do not pay those taxes because major financial institutions 

2 

like Lehman Brothers, Morgan Stanley, Deutsche Bank, UBS, Merrill Lynch, Citigroup, and others have created financial gimmicks 

whose primary purpose is to enable clients to dodge U.S. taxes 

owed on U.S. stock dividends, but which are dressed up with 

phrases like ‘‘dividend enhancement,’’ ‘‘yield enhancement,’’ and 

even ‘‘dividend uplift.’’ Using stock swaps, stock loans, and exotic 

financial instruments, the financial institutions have built a series 

of financial black boxes, surrounded by mind-numbing complexity, 

designed to keep their clients’ money tax free. 

Foreigners who invest in the United States already enjoy a minimal tax burden. For example, non-U.S. persons who deposit money 

with a U.S. bank or securities firm pay no U.S. taxes on the interest earned. They pay no U.S. taxes on capital gains. U.S. citizens 

do pay taxes on that income, but the tax code lets foreign investors 

operate without tax in an effort to attract foreign investment. 

But there is one tax on the books that even foreign investors are 

supposed to pay. If they buy stock in a U.S. company and that 

stock pays a dividend, the non-U.S. stockholder is supposed to pay 

a tax on the dividend. The general tax rate is 30 percent, unless 

their country of residence has negotiated a lower rate with the 

United States, typically 15 percent. 

In addition, to make sure those dividend taxes are paid, U.S. law 

requires the person or entity paying a stock dividend to a non-U.S. 

person to withhold the tax owed Uncle Sam before any part of the 

dividend leaves the United States. If the ‘‘withholding agent’’ fails 

to retain and remit the dividend tax to the IRS, and the tax is not 

paid by the dividend recipient, the tax code makes the withholding 

agent equally liable for the unpaid taxes. 

That is the law. But the reality is that many non-U.S. stockholders never pay the dividend taxes that they owe. In 2003, the 

latest year for which data is available, the Government Accountability Office determined that about $42 billion in dividend payments were sent abroad, but less than 5 percent, or $2 billion, was 

sent to the IRS. In other words, billions of dollars left the country 

untaxed. 

The Subcommittee’s investigation has determined that part of 

the reason for unpaid dividend taxes is that, for more than 10 

years, U.S. financial institutions have been helping non-U.S. clients 

dodge payments. 

Now, listen to this roll call of well-known financial institutions. 

Morgan Stanley enabled its clients to dodge payment of $300 million in U.S. dividend taxes from 2000 to 2007. Lehman Brothers estimated that in 1 year alone, 2004, it helped clients dodge perhaps 

$115 million in U.S. dividend taxes. For UBS, the figure is $62 million in unpaid dividend taxes over a 4-year period, from 2004 to 

2007. One hedge fund adviser, Maverick Capital, calculated that 

from 2000 to 2007, its offshore funds used so-called dividend enhancement products from multiple firms to escape dividend taxes 

totaling nearly $95 million. In 2007, Citigroup surprised the IRS by 

paying $24 million in unpaid dividend taxes on a select group of 

swap transactions from 2003 to 2005, where no dividend taxes had 

been paid. 

Who were the clients? Hedge funds organized offshore, often by 

Americans; tax haven banks; and a host of sophisticated foreign inVerDate Aug 31 2005 08:46 Apr 10, 2009 Jkt 045575 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 P:\DOCS\45575.TXT SAFFAIRS PsN: PAT
3 

1See Exhibit No. 1, which appears in the Appendix on page 189. 

vestors with the means and the know-how to engage in financial 

transactions beyond the reach of ordinary folks. But that is not the 

whole story. Some of those foreign investors begin to look a lot less 

foreign once you take a closer look. 

I am referring in particular to the so-called offshore hedge funds. 

When the Subcommittee began contacting them, all of their key 

personnel turned out to be here in the United States. The so-called 

offshore hedge funds’ main offices were here in the United States; 

their key decisionmakers were here; their investment professionals 

and technical people live here. Most of these offshore hedge funds 

claim to be located in the Caymans. The Cayman Islands, in fact, 

has 10,000 hedge funds, more than any other country in the world. 

But the Cayman hedge funds we examined did not operate in any 

meaningful sense from the Caymans. Instead, their physical presence often amounted to little more than a Cayman post office box 

or a plaque on the wall of the infamous Ugland House, that small 

white building where more than 18,000 companies maintain a Cayman address. 

Hedge funds run by Americans and invested in the U.S. stock 

market often create a shell of a presence in tax havens, presumably 

in part to avoid paying U.S. taxes. Then, when confronted by the 

one U.S. tax imposed on foreign investors receiving U.S. stock dividends, they turn to financial gymnastics to escape paying that tax 

as well. It adds insult to injury when hedge fund managers who 

live in the United States, enjoy all its benefits, protections and 

prosperity and use U.S. markets to make money, arrange tax 

dodges so their offshore hedge funds escape the minimal U.S. tax 

obligations they are supposed to pay. 

Hedge funds and other offshore entities could not perform their 

dividend tax escape act without the cooperation and assistance of 

financial institutions. It is those financial institutions that devise 

the abusive transactions and send the U.S. dividend payments offshore to their clients in the form of dividend equivalent or substitute dividend payments, without remitting any taxes to the U.S. 

Treasury. Their own emails show that they took these actions 

knowingly to attract and retain clients and to profit from the fees. 

With their assistance, billions of dollars in U.S. dividends flowed 

out of this country, and few taxes were withheld. 

Now, let me just explain briefly two of the most common schemes 

used to dodge dividend taxes. They involve swaps and stock loans. 

In both cases, financial sleight of hand is used to recast taxable 

dividend payments as untaxable transfers offshore. 

First consider swaps. Swaps sound complicated, but they are essentially a financial bet, in this case a bet on the future of a stock 

price. 

If we take a look at a chart,1 it shows an offshore hedge fund 

in blue, which is controlled by a U.S. investment manager in green. 

The financial institution, shown in red, tells the hedge fund—which 

owns U.S. stock—that it can escape the 30-percent withholding tax 

on an upcoming stock dividend by purporting to sell the stock to 

the financial institution and simultaneously entering into a swap 

with the financial institution tied to the price of that stock. 

4 

1 Stock Loan. Stock loans are also used to dodge dividend taxes. These transactions pile a 

stock loan on top of a swap to achieve the same tax-free result. 

Under the swap, the financial institution promises to pay the 

hedge fund an amount equal to any appreciation in the stock price 

and the amount of any dividend paid during the term of the swap. 

The payment reflecting the dividend is called a ‘‘dividend equivalent.’’ In return, the hedge fund agrees to pay the financial institution an amount equal to any depreciation in the stock price. The 

financial institution hedges its risk by holding the physical shares 

of stock that were ‘‘sold’’ to it by the hedge fund. It also charges 

a fee, which usually includes a portion of the tax savings that the 

hedge fund will obtain by dodging the withholding tax. 

The swap gives the hedge fund the same economic risks and rewards that it had when it owned the physical shares of the stock. 

So why do it? Because under the tax code, dividend payments are 

taxed, but dividend equivalent payments made under a swap are 

not. 

Dividend equivalent payments made under a swap are tax free, 

because in 1991, the IRS issued a series of regulations to determine 

what types of income will be treated as coming from the United 

States and, therefore, taxable. These so-called source rules treat 

U.S. stock dividends as U.S. source income because the money 

comes from a U.S. corporation. But, the 1991 regulation takes the 

opposite approach with respect to swaps. It deems swap agreements to be ‘‘notional principal contracts’’ and says that the 

‘‘source’’ of any payment made under that contract is to be determined, not by where the money comes from, but by where it ends 

up. In other words, the payment’s source is the country where the 

payment recipient resides. 

That approach turns the usual meaning of the word ‘‘source’’ on 

its head. Instead of looking at the source or origin of the payment 

to determine its source, the IRS swap rule looks to its end point— 

who receives it. That source is not really a source by any known 

definition of the word. It is the opposite—not the point of origin but 

the end point. 

The result is that when a financial institution makes a dividend 

equivalent payment to an offshore client under a swap agreement, 

the payment is deemed under the tax code as being from an offshore source. And then under that interpretation, the swap payment is free of any U.S. tax. 

In our example, the U.S. financial institution makes the swap 

payment to the offshore hedge fund, minus the fee, and stiffs Uncle 

Sam for the amount of taxes that should have been sent to the IRS. 

The swap is then terminated, and the stock is ‘‘sold’’ back to the 

hedge fund. And the sham nature of that sale is disclosed. And, 

under this gimmick, the hedge fund ends up in the same position 

as before the swap, as a stockholder, except it has pocketed a dividend payment without paying any tax. 

Now, stock loans are also used to dodge dividend taxes, and 

these transactions pile a stock loan on top of a swap to achieve the 

same, or are intended to achieve the same, tax-free result. And for 

the sake of time I am going to put my explanation of this transaction in the record.1

5 

The first step is that the client with an upcoming dividend loans its stock to an offshore 

corporation controlled by the financial institution. This offshore corporation promises, as part 

of the loan agreement, to forward any dividend payments back to the client. 

The next step is that offshore corporation enters into a swap with the financial institution 

that controls it, referencing the same type of stock and number of shares that is the subject 

of the stock loan. Essentially, two related parties are placing a bet on the stock, which makes 

no economic sense except, once that stock pays the dividend, the swap arrangement allows the 

financial institution to send it as a tax-free dividend equivalent payment to the offshore corporation it controls. The offshore corporation then forwards the same amount to the client. Because 

the payment is sent to the client as part of a stock loan agreement, it is called a ‘‘substitute 

dividend.’’ The tax code treats substitute dividends in the same way as the underlying dividend. 

So if the underlying dividend came from a U.S. corporation, the substitute dividend would normally be taxed as U.S. source income. 

Suffice it to say that it is complex and relies on another gimmick, 

and this gimmick is that the parties claim that the substitute dividend is tax free by invoking the wording of IRS Notice 97–66, 

which was never intended to be applied to this situation. That notice says that when two parties in a stock loan are outside of the 

United States and subject to the same dividend withholding rate, 

they do not have to pay the dividend tax when passing on a substitute dividend. But the assumption is that the tax was already 

paid by another party in the lending transaction. Some tax lawyers 

have seized on the wording to claim that this IRS notice, which 

was intended to prevent overwithholding, could be used to eliminate dividend withholding entirely, so long as one offshore party 

passes on a substitute dividend to another offshore party subject to 

the same dividend tax rate. The IRS has told this Subcommittee 

that Notice 97–66 was never intended to be interpreted that way, 

but in the 10 years since it was issued and abusive stock loans 

have exploded, the IRS has never put that in writing. 

The end result in our example is that the client pockets a substitute dividend payment—minus the financial institution’s fee— 

without paying any tax. The stock loan is terminated, and the 

stock is returned to the client. The big advantage of this approach 

over a swap is that the client does not have to explain why he got 

his stock back after the transaction. The stock was, after all, only 

on loan. 

Tax avoidance was clearly the economic purpose of the two transactions just described. The client owned U.S. stock both before and 

after each transaction. Neither the swap nor the stock loan altered 

the client’s market risk. The only risk involved in either transaction was that Uncle Sam would catch on and assess the dividend 

taxes that should have been paid but were not. 

To make it harder for Uncle Sam to catch on and prove what is 

going on, financial institutions have added more complexity, more 

bells and whistles, to these transactions. But the purpose of the 

transactions remains the same—to enable clients to escape paying 

the taxes that they owe. 

And it is clear that the participants knew their transactions were 

little more than tax dodging. In one email exchange about a proposed stock loan, a potential client informed Merrill Lynch that its 

tax counsel had said ‘‘the transaction works, as I said, once, maybe 

twice,’’ but ‘‘repeated use, coincidentally around dividend payment 

time, would provide a strong case for the IRS to assert tax evasion.’’ Another client explaining a Lehman Brothers swap transaction to a colleague wrote that the swap ‘‘is used to circumvent 

the tax.’’ That is the unvarnished truth. 

6 

The participants in these transactions also took steps to limit 

their exposure in case the IRS stepped in. Some of the financial institutions, for example, set an annual limit on the amount of unpaid dividend taxes that they would facilitate through their transactions to limit their exposure as withholding agents. Some of the 

clients demanded that the financial institutions indemnify them 

against any tax liability. A few financial institutions, such as UBS, 

Merrill Lynch, and Morgan Stanley, have stopped offering the most 

blatantly abusive transactions, while others have continued doing 

as many deals as ever. 

Now, some may claim that by exposing this tax dodge and being 

determined to end it, we are trying to discredit structured finance 

or the financial markets. I support financial transactions that are 

used for legitimate purposes, including swaps and stock loans that 

facilitate capital flows, reduce capital needs, or spread risk. What 

I oppose is the misuse of financial transactions to undermine the 

tax code, rob the U.S. Treasury, and force honest Americans to 

shoulder the country’s tax burden. And what I oppose are transactions whose patent economic purpose is tax dodging. 

For the last 10 years, as dividend tax dodging took hold and became an open secret among market insiders, the U.S. Treasury Department and the IRS sat on their hands. When firms began claiming they could turn taxable dividend payments into untaxed dividend equivalents under swaps, Treasury and the IRS said nothing. 

When firms began claiming that the 1997 IRS notice designed to 

cure overwithholding could eliminate all withholding in offshore 

stock loans, Treasury and the IRS failed to issue corrective guidance. When firms openly advertised so-called dividend enhancement products to clients, Treasury and the IRS saw nothing, heard 

nothing, and took no enforcement action. 

The government’s failure to act does not in any way excuse the 

actions of the financial institutions or their clients. They are not 

saved from their own abusive conduct by the failure of regulators 

to stop them, any more than going through a red light is OK if you 

are not caught. Nonetheless, the silence and inaction of the Treasury and the IRS in the face of rampant dividend tax dodging has 

encouraged and continues to encourage financial institutions to 

offer their clients financial concoctions designed to enable them to 

dodge U.S. dividend taxes. It is past time to end that silence, to 

end that inaction, and to get those concoctions off the market. It 

is also past time for Congress to take on this billion-dollar offshore 

tax abuse and, like so many others, enact the legislation needed to 

put a stop to it. 

I want to thank my Ranking Member, Senator Coleman, for his 

support of this investigation, for the support of his staff, and now 

invite him to make opening remarks. 

OPENING STATEMENT OF SENATOR COLEMAN 

Senator COLEMAN. Thank you, Senator Levin. 

I want to begin by thanking Chairman Levin for initiating this 

investigation, and I want to commend his longstanding commitment to identifying institutions and individuals who facilitate the 

inappropriate avoidance of legitimate taxes through complex offshore schemes. 

7 

Today, we turn our attention to the findings of another bipartisan inquiry, which the Chairman has just described: That some 

U.S. financial institutions have been structuring equity swap and 

loan transactions to assist their offshore clients in avoiding U.S. 

taxes on stock dividends. The factual findings at issue today and 

identified in this Subcommittee’s bipartisan Staff Report are compelling. They raise valid concerns that demonstrate the need to reevaluate the wisdom and effectiveness of tax laws and policies respecting the treatment of specific equity swap and loan transactions. 

For a foreign investor, there is a significant difference in the 

United States withholding tax consequences between investing synthetically through an equity swap versus directly in physical U.S. 

equities. This difference in treatment has led to certain abuses. 

While the activities may not rise to the level of criminal tax evasion, there is no doubt that some institutions have taken advantage 

of ambiguities in U.S. tax law and pushed the tax-avoidance envelope too aggressively. 

I want to be clear. Our target here today is neither derivatives 

generally nor equity swaps specifically. Derivatives serve many 

purposes critical to the health and dynamism of American markets, 

as well as the U.S. economy, writ large. Swaps, in particular, often 

offer superior leverage, accounting treatment, market access, and 

transactional efficiency, all of which—including the preferential tax 

treatment afforded to swaps under current law—are legitimate factors that may influence the decision to trade in swap form. 

That said, a swaps transaction with no business purpose other 

than the avoidance of withholding tax is a bridge too far. For the 

most part, I am talking about a subset of aggressively structured 

dividend enhancement trades that are short-lived; clustered around 

dividend record dates; involve so-called crossing in just prior to the 

dividend date; and feature the reacquisition of the physical shares 

after the completion of the synthetic transaction. 

During the course of our investigation, we have seen these aggressive schemes executed far too often, and, frankly, some of the 

more egregious fact patterns that we have examined reflect a 

shameless and cynical abuse of U.S. tax policy. 

While there is no doubt that certain financial institutions and 

hedge funds have crossed the line, as the Chairman has noted, the 

conditions for these abuses were largely created by Treasury and 

the IRS. The reality is that the state of the tax law here is muddled; the Treasury and the IRS have known about these ambiguities and have done woefully little to clarify the situation, failing 

to offer taxpayers clear guidance and direction. Therefore, while 

some financial institutions undoubtedly raced to the bottom, Treasury and the IRS bear some responsibility as well. 

We are not just in the blame business, however. We are in the 

problem identification and problem-solving business. The Chairman 

has done a good job in identifying the problem. How do we fix this 

problem? 

In light of the Subcommittee’s findings, we need a comprehensive 

and in-depth analysis of the potential legislative or regulatory responses to these abuses. The relevant Executive Branch agencies, 

the congressional committees of jurisdiction, and experts on tax law 

8 

1The prepared statement of Mr. Avi-Yonah appears in the Appendix on page 59. 

and policy should engage in a deliberative process to evaluate the 

various possible responses and determine the most appropriate 

path. 

I strongly urge, however, that any response to these abuses be 

clearly defined and carefully targeted to preserve the integrity and 

efficiency of our capital markets and avoid unintended consequences. In particular, any response should avoid negatively impacting foreign investment in the United States. Such investments 

are critical to job growth and opportunity expansion and are undeniably necessary for the economic well-being of our citizens. 

Which brings me perhaps to the most important issue: As I have 

said many times before—most recently in the Subcommittee’s hearings on tax cheats and tax shelters—inappropriate tax avoidance 

by a privileged few forces millions of honest American taxpayers to 

shoulder a disproportionate share of the tax base, to dig deeper to 

maintain investment in crucial areas like health care, homeland security, and education. That tax loss sits like a millstone around the 

neck of honest American taxpayers, who are struggling with high 

taxes, ever-increasing gas prices, and rising health care costs. 

Those honest taxpayers are the real victims here. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you, Senator Coleman. 

And now let me call our first witness to this morning’s hearing: 

Professor Reuven Avi-Yonah, who is the Irwin I. Cohn Professor of 

Law at the University of Michigan Law School in Ann Arbor. 

Professor Avi-Yonah, I would like to welcome you back to the 

Subcommittee, having testified at the Subcommittee in August 

2006 on tax haven abuses. We appreciate your sharing your experience in international tax law and your attendance at today’s hearing. We look forward to your testimony and your perspective on 

this dividend tax issue. 

Before we begin, pursuant to Rule VI, all witnesses who testify 

before the Subcommittee are required to be sworn, and so at this 

time I would ask you, Professor, if you would please stand and 

raise your right hand. Do you swear that the testimony you are 

about to give before this Subcommittee will be the truth, the whole 

truth, and nothing but the truth, so help you, God? 

Mr. AVI-YONAH. I do. 

Senator LEVIN. We will use the usual timing system today, and 

about a minute before the red light comes on, you will see the light 

change from green to yellow, giving you an opportunity to conclude 

your remarks, and your entire testimony and the testimony of all 

of our witnesses will be printed in the record. We ask you, if you 

would, to limit your oral testimony to no more than 8 minutes. 

Professor Avi-Yonah, please proceed with your statement. 

TESTIMONY OF REUVEN S. AVI-YONAH,1 IRWIN I. COHN PROFESSOR OF LAW, UNIVERSITY OF MICHIGAN SCHOOL OF 

LAW, ANN ARBOR, MICHIGAN 

Mr. AVI-YONAH. Thank you very much, Chairman Levin and 

Ranking Member Coleman, and the whole Committee and Subcommittee for inviting me to testify today on dividend tax abuse. 

9 

There are three basically economically equivalent ways of investing in U.S. stock and receiving dividend or dividend equivalent 

payments. The first is simply to invest in a physical stock. A foreign buyer buys stock of a U.S. corporation, receives a dividend, 

and that, as you have indicated, Mr. Chairman, is subject to a 30- 

percent or sometimes a 15-percent withholding tax. That is what 

our law says. 

The second alternative is to engage in an equity swap. This is 

a type of transaction in which you enter into an agreement with 

a financial institution, a U.S. financial institution, under which you 

will at the end of the swap receive the appreciation or pay the depreciation in the value of the stock, and during the course of the 

swap, you will receive dividend equivalents every time that the underlying stock pays a dividend. 

And the third one is a stock loan, where you have the stock, you 

lend it to a U.S. institution, and in exchange you receive dividend 

substitute payments. 

As their names indicated, dividend equivalents are equivalent to 

dividends, and dividend substitutes are substitutes for dividends. 

And, economically, the foreign investor is in the same position in 

all three transactions. In all of them, they are exactly at the same 

level at risk for the depreciation of the stock; they have the up side 

of the appreciation of the stock; and they receive the full amount 

of the dividends minus any fees that they have to pay for the financial institutions arranging the transaction. 

However, for tax purposes, as was mentioned, these transactions 

are not treated alike. The actual dividend is subject to a dividend 

withholding tax per the code. The dividend substitutes are also 

subject to a dividend withholding tax; they are treated as dividends 

based on a regulation issued, proposed by the Treasury Department in 1992 and finalized in 1997. But dividend equivalents on 

the swaps are tax free because of the source rule that was mentioned in the introduction. 

So when you have a situation like that where three identical, 

economically identical equivalent transactions are taxed differently, 

there is an open invitation to taxpayers to try to avoid the taxed 

ones and convert them or use the only tax-free one. And that is an 

invitation to abuse, and the abuse occurs, for example, as was mentioned, when a foreign taxpayer actually holds a stock, sells it just 

before the record dividend date, receives a dividend equivalent, and 

then it reacquires the stock back. And sometimes, as was mentioned, even sells it to the financial institution with which it enters 

the equity swap and receives the dividend equivalent from that financial institution. That is really the most extreme example, but 

I would say that even if they buy and sell the stock in the market, 

it does not matter, as long as they hold the actual stock before the 

record date and receive it back, buy it back after the record date 

and receive the dividend equivalent, that is a dodge as well. That 

is an abusive transaction, in my opinion. 

Now, Treasury has been aware of this problem for a long time. 

They first issued the—they created the loophole, as it were. They 

issued the regulation that made dividend equivalents under swaps 

tax free in 1991, as was mentioned. Already in the preamble to the 

proposed 1992 regulations on stock loans, they voiced concerns 

10 

about this, and, again, in another preamble to another regulation 

in 1998, they repeated their concerns. But it has now been 16 years 

since the first time they voiced a concern, and they have not really 

done anything. 

Moreover, in 1997, they issued Notice 97–66, which has had the 

effect, as interpreted by taxpayers, of making dividends subject to 

payments also tax free because of what I regard as a blatant misinterpretation of the language of the notice. But because the notice 

did not say explicitly that the condition for not withholding on dividend substitutes from one foreign payer to another is that there 

will be an actual dividend withholding somewhere in the chain, because the notice was, as was mentioned, intended to prevent overwithholding, taxpayers have used this to structure transactions involving stock loans and try to avoid the dividend withholding tax 

this way. 

Now, in my opinion, the solution is to make the three equivalents 

the same; that is, dividend equivalents should be taxed the same 

way the dividend substitutes are, and the dividend substitutes are 

treated as dividends, so all three should be treated as dividends. 

Moreover, because of the risk that it will be possible to structure 

transactions involving baskets of stock, for example, that behave 

equivalently to a single stock from an economic perspective, I think 

we should use the substantially similar or related property standard, which is already well established and well developed in regulations that is addressed to these kind of transactions. That is, we 

should tax dividend equivalents whenever they are either dividend 

equivalents or a single stock or in a basket of stocks that is substantially similar or relates property to a single share of stock. 

Moreover, the IRS should clarify Notice 97–66 to make clear that 

it never intended, as it states, to apply that notice to the situation 

where the taxpayer cannot show that the dividend has actually 

been collected anywhere in the process. 

Basically, the policy issue here is, if you step back for a moment, 

there is an argument—and I think it is a valid argument, although 

I do not ultimately agree with it. The argument is that we do not, 

as was mentioned, withhold taxes and interest payments typically 

with foreigners, and we do not withhold taxes typically by treaty 

and royalty payments, and those payments are deductible. Why 

should we, as a policy matter, withhold taxes on dividends when 

dividends are not deductible so we already collect the corporatelevel tax? 

However, there is an argument that this policy is OK because 

dividends represent investments in unique U.S. taxpayers. For example, you cannot find many Microsofts in the world, and when 

Microsoft pays a dividend, foreign taxpayers would want to get that 

dividend, and they do not have an alternative investment opportunities like they have in the case of interest. But in any case, even 

if you disagree with the policy analysis and think that dividends 

should not be subject to withholding, that is a matter for Congress 

changing the law, and for the Senate, for example, to ratify treaties 

maybe that we reduce the dividend withholding to zero. 

A lot of taxpayers over the years and a lot of tax policy people 

have lobbied and have argued for a portfolio dividend exemption, 

just like we have a portfolio interest exemption. But, in my opinion, 

11 

1See Exhibit No. 6, which appears in the Appendix on page 200. 

as long as they are not persuasive, as long as they have not managed to persuade Congress to change the law, it is inappropriate 

for taxpayers to try to use dividend equivalents or dividend substitutes to achieve a result that they have not been able to get Congress or the Senate to change by way of the code or the treaty. 

And, moreover, it is inappropriate for Treasury and the IRS to turn 

a blind eye because one way of explaining their behavior is to say 

they do not really believe in the withholding tax on dividends, and, 

therefore, they allow this kind of dodge to take place. And I think 

that is an inappropriate approach. It is up to Congress to determine whether there should be withholding on dividends, and as 

long as that is the law, it is up to Treasury and the IRS to make 

sure the dividend withholding is, in fact, enforced. 

Thank you very much. 

Senator LEVIN. Thank you very much, Professor. That was very 

clear testimony, as always. 

Financial institutions selling these financial products to their 

non-U.S. clients to enable them to dodge U.S. dividend taxes, would 

you agree has just become an accepted way of doing business? 

Mr. AVI-YONAH. Yes, exactly. I think that this was identified as 

a problem as early as 1992 by the Treasury and as early as 1993 

in the literature. And since then, numerous articles have been written about it, but basically what is happening in the last 10 years 

is that the scope of it has really exploded, probably because of the 

growth of the hedge funds, and probably because—I once heard a 

tax lawyer describe this as an ‘‘approved loophole.’’ That was the 

language that was used. 

The interpretation of the inaction by the Treasury and the IRS 

has been that this must be an OK way of doing business. 

Senator LEVIN. Now, take a look at Exhibit 6,1 if you would, 

which is an email between two employees of Maverick Capital, 

which runs a number of offshore hedge funds. The email is from 

2004. It describes a Microsoft special dividend announced that year 

to pay $3 on every Microsoft share for a total of $32 billion. 

On the second page of the email, it says the following: ‘‘Jim has 

been working on this for the last 2 months, and he got UBS to 

match the more aggressive offers we were getting from the Street. 

For LDC only, we lend the stock out and will get 97 percent of the 

dividend.’’ 

Would you say that these hedge funds pressuring financial firms, 

playing one off against the other to get dividend enhancement 

products to relieve them of having to pay a 30-percent dividend tax 

rate, that it has gotten to the point where financial institutions 

have to offer dividend enhancement products to be competitive, 

even if there is a tax risk? 

Mr. AVI-YONAH. I believe that is the case. And, in fact, one thing 

that is interesting about this is that if you watch it over time, the 

fees keep declining, so that in the beginning you can charge 15 percent and in the end you can charge 3 percent or 2 percent or 1 percent. And that is because there is so much competition, and the 

hedge funds can go from one financial firm to the other. 

12 

Senator LEVIN. And, that percentage that you gave was a percentage of the dividend. Is that correct? 

Mr. AVI-YONAH. That is a percentage of the dividend. So anything above 70 prercent is good from the taxpayer’s perspective because 70 percent is what they get if they pay the full tax. So if they 

get 85 percent, it is good. But, of course, if they can get 97 or 98 

percent, it is even better. 

Senator LEVIN. Now, there is no hard data on how much the 

Treasury loses based on these gimmicks, these tax avoidance approaches to these dividends, the way these payments are avoided. 

Would you estimate that this loss to the Treasury involved billions 

of dollars? 

Mr. AVI-YONAH. Yes, certainly. I mean, the only hard data is the 

one that I believe you cited, and that is the GAO report based on 

2003 data. What they say is that in that year, $42 billion in dividends were paid to non-U.S. corporate holders. They do not specify 

non-corporate holders. And of that, only less than $2 billion was 

collected as withholding tax. 

What is striking to me about that number is that it is less than 

5 percent, and 5 percent is typically the rate that by treaty we collect on direct dividends, that is, dividends paid to foreign parents 

of U.S. subsidiaries. 

So my conclusion from that is that essentially there is no withholding tax on portfolio dividends at all, dividends paid on people 

who do not own 10 percent or more by vote of the shares. And the 

reason for that is that nobody except the hopelessly uninformed 

would engage in direct dividend bearing stock investment into the 

United States. 

What everybody does is what we have been talking about, namely, they get dividend equivalents, and we do not have data as to 

the size of dividend equivalents being paid to foreigners because no 

tax is collected, so nobody has the data. 

But I am convinced that billions are lost, and, in fact, the data 

that the Subcommittee has collected shows that for each bank it is 

hundreds of millions, or at least tens of millions, sometimes hundreds of millions. And over time, of course, it adds up to billions. 

Senator LEVIN. We have lost a lot of income to the Treasury, you 

estimate billions. I agree with that. What distortions to the market 

result when this occurs? You have dividends taxed, but dividend 

equivalents not taxed, substitute dividends not taxed. 

Mr. AVI-YONAH. The obvious distortion is that people engage in 

the transactions that are not taxed and do not engage in the transactions that are taxed. So sometimes as an economic matter or as 

a business matter, they would prefer to have the actual stock, the 

physical stock, or they would prefer to engage in a direct stock loan 

into the United States. And since both of these transactions are 

taxed, instead what they do is that they engage in a swap, which 

is economically equivalent in terms of their returns, but the terms 

of it and the precise business terms may be different. Or they 

would engage in transactions that are really meaningless in order 

to avoid the tax, like inserting an artificial foreign entity into a 

stock loan transaction so that the stock loan will be foreign-to-foreign benefit from Notice 97–66; whereas normally they would do 

the stock loan directly into the United States. 

13 

So I think the main distortions are the distortion between the 

three forms of transactions, but also just useless and wasted transaction costs when there are transactions that are engaging only for 

the purpose of avoiding taxes, all of the other transactions are just 

a burden on the economy. 

Senator LEVIN. Now, these problems have been known for 10 or 

more years. What in your judgment is the reason that the IRS and 

the Treasury have not taken this issue on and corrected it? Is it 

because there is a debate over the policy? Or is it because there is 

a debate over, whether that interpretation is clearly wrong? What 

is the reason? 

Mr. AVI-YONAH. I do not think there is a debate on the interpretation or the fix because we know they know how to fix it because 

that is what they did with dividend substitutes. They issued the 

dividend substitute rule. They proposed it in 1992. They finalized 

it in 1997. They knew how to fix that. I mean, before that rule, dividend substitute also could be arguably tax free. 

They made the mistake with Notice 97-66. I do not think that 

was deliberate. I think they were duped, essentially, into thinking 

there was an overwithholding problem that did not really exist, 

and they did not think about the ways—they did this very fast, 

within a month of issuing the final regulations, so they did not 

really think about the way the notice could be abused. 

Fundamentally, I do think—or at least this is my surmise—that 

on some level it is a policy debate. I have had this discussion with, 

for example, former Clinton Administration tax officials who told 

me that fundamentally the issue is whether there should be withholding on dividends, and they do not fundamentally believe there 

should be withholding on dividends because the corporate tax is already paid and dividends are not deductible and because we have 

a portfolio interest exemption and, arguably, it is possible to convert dividends to interest and vice versa. So, therefore, why should 

they try to enforce the law in this particular regard? And as I said, 

I think that is inappropriate. 

Senator LEVIN. Now, if we decide—and I hope we do—that the 

clear intent of the law is that dividends or these foreign distributions of dividend amounts be taxed, that is the clear intent of the 

law, if we decide that, how do we enforce the law? Do we need to 

amend the law, particularly as it relates to swaps? As it relates to 

the loans? If the Treasury refuses to clarify their regulation, do we 

pass a law? Assuming that we want to enforce the policy, which is 

clearly intended currently, how do we do that? 

Mr. AVI-YONAH. Well, in principle, since this is all regulatory, it 

is either regulations or even just a notice, Treasury can tomorrow, 

at least certainly prospectively, amend its regulations and clarify 

the notice. 

Senator LEVIN. On both swaps and—— 

Mr. AVI-YONAH. Yes, on both swaps and—— 

Senator LEVIN. And if they refuse to do this, as they have—— 

Mr. AVI-YONAH. Then I think—— 

Senator LEVIN [continuing]. For 10 years, then what? 

Mr. AVI-YONAH. Then I think legislation is appropriate, and I 

think the legislation should say that dividend equivalents on single 

stock swaps and on economically equivalent baskets of stocks 

14 

should be treated like dividend substitutes and that dividend substitutes should be subject to withholding if there is no showing that 

there was an actual withholding somewhere in the chain. I think 

that would be appropriate. 

Senator LEVIN. Thank you. Senator Coleman. 

Senator COLEMAN. Thank you. Thank you, Mr. Chairman. 

In some ways, this is complex. But in many ways, it is actually 

pretty simple. And yet your testimony took a very complex issue 

and made it very simple. There is a form of transaction here involving dividend-paying U.S. securities, and the Treasury and IRS 

have set it up so that it is very easy to avoid the tax consequences 

of these transactions. And folks have known about that for years. 

And the Chairman asked the $64,000 question: Why have we not 

acted on this? Your response confirms what I have been reflecting 

on. 

Our tax policies are such that they favor foreign investment. We 

want foreign investment in this country. Is that correct? 

Mr. AVI-YONAH. Yes. 

Senator COLEMAN. So non-U.S. persons who deposit money with 

a U.S. bank or securities firm do not pay tax on interest earned or 

capital gains, and it almost seems to me that this situation exists 

because Congress has failed to clarify this one way or the other. 

Mr. AVI-YONAH. Well, there are policy issues going in both directions. The argument for interest is pretty clear, and that is why 

since 1984 we have not been withholding on interest, and that is 

that interest is simply money lent, and money can be lent anywhere in the world, and the interest rate is basically determined 

on the global market. And if we impose, try to impose withholding 

taxes on interest, then either the money will simply go somewhere 

else, and instead of coming here, it will go to another one; or maybe 

more likely because we are a big market, the interest cost will simply be shifted forward to American borrowers, and they will have 

to bear it. And that is not particularly good either because it increases the cost of capital. That is the argument for interest. 

And the other one for royalties, for example, which are exempt 

by treaty, is that because we have a lot of intangibles in this country developed, we benefit more from foreigners not taxing royalties 

coming to us than we do by excusing royalties paid to them. So as 

a revenue matter, it is a gain. 

Now, dividends are different, though, because dividends are an 

investment in U.S. companies. So if you take Microsoft, which is 

a prominent company in these examples because it pays very big 

dividends out after—the dividend tax was reduced in 2003—$32 

billion, as was mentioned. Now, that particular stock represents a 

unique investment opportunity. There is no other Microsoft in the 

world. They have what the economists call ‘‘rents’’; that is, they 

have unique intangibles that they develop—Windows software and 

all the rest of it—and that is the only company that has it and the 

only company where you can make that particular money. 

So, in my opinion, even if we tax the dividend on Microsoft and 

tax dividend equivalents on Microsoft stock, the foreigners will still 

come, and they will still invest in Microsoft because of this unique 

opportunity. And my judgment is that in most situations that is 

the case. 

15 

In addition, one thing that needs to be investigated on the policy 

level is what is the policy of our trading partners on dividends and 

dividend equivalents? And at least in one case—namely, the U.K.— 

I know that they tax dividends and what they call manufactured 

dividends, which is dividend equivalents, etc. 

Senator COLEMAN. If I can follow up on that question about 

whether the folks would simply accept the 30-percent haircut in 

order to get Microsoft, are there close, overseas alternatives, areas 

where the investors would simply shift their capital? 

Mr. AVI-YONAH. Yes. 

Senator COLEMAN. What are they? 

Mr. AVI-YONAH. Well, there are, I would imagine, American companies where you can—I mean, if you are looking at an investment 

at, let’s say, General Motors or Toyota or Volkswagen, maybe they 

are equivalent enough so that if we tax GM, they would shift to 

Toyota or shift to Volkswagen, or Daimler or whatever. And in 

those kind of industries where American companies do not have a 

unique competitive advantage, there would be a risk of imposing a 

tax that you would be shifting the investment elsewhere. So that 

is the policy debate about whether we should be taxing dividends 

or not. 

Senator COLEMAN. And that is a legitimate policy. One part of 

the concern I have here—and the Chairman has done a tremendous job of identifying the problem is: What is the solution? I am 

not sure I am there yet. But one of the solutions could simply be 

let’s not tax dividends, treat them like capital gains, treat them 

like interest, and then what you do is you take a lot of folks out 

of the business, but you no longer have the ambiguity and you no 

longer have agencies involved in turning a blind eye to something 

that we all see going on. 

Mr. AVI-YONAH. Yes, and I think that is a legitimate argument 

for Congress to have. The problem is that this argument has been 

made to Congress for many years, and they have not acted. And 

as long as they have not acted, I do not think it is appropriate for 

taxpayers to avoid the actual dividend tax that we have in place. 

Nor is it appropriate for Treasury and the IRS to close a blind eye 

to these transactions. 

Senator COLEMAN. I do not disagree with that assertion, Professor. Thank you, Mr. Chairman. 

Senator LEVIN. Thank you. I think that is exactly the issue. The 

IRS here is not the policymaker. They are supposed to be enforcing 

the law. The law is that these dividends are supposed to be taxable. I do not think there is any doubt about the intent of this law. 

The IRS, indeed, I think knows that is the intent. And so even 

though you may have a policy debate going on in the IRS, which 

may be a perfectly appropriate debate, that is not the issue before 

us. The issue before us is we have a tax law, and it is being avoided and evaded by these kinds of gimmicks which clearly are intended to avoid what is the clear intent of the law. And the IRS, 

knowing that, is doing nothing. And that is unacceptable in terms 

of any kind of a separation of powers. 

Mr. AVI-YONAH. Yes. 

Senator LEVIN. You cannot have the IRS become the policymaker. They can recommend changes in policy if they want to, and 

16 

1The prepared statement of Mr. Manogue appears in the Appendix on page 67. 

that is a perfectly fair issue. But what they cannot do is not enforce 

the law because that opens up the kind of lawlessness which we 

have seen on these offshore tax havens, which have resulted in a 

loss of literally, we think, of $100 billion a year. I am determined 

to stop that. That is the remedy that, one way or another, I am 

going to fight to get established: Enforce the tax laws. And if we 

want to change them, change them. But do not evade them, do not 

avoid them, do not ignore them, do not circumvent them with the 

use of these transactions and concocted structures which have as 

their purpose getting around the clear intent of our tax laws. This 

is where we have got to fight back, and we need the IRS to help 

us in that fight. 

You have been very helpful in terms of clarifying what the issues 

are and then distinguishing between the policy issues and the enforcement issues. 

Senator Coleman, do you have anything else? 

Senator COLEMAN. No. 

Senator LEVIN. Again, let us thank you for all you have done 

here. 

Mr. AVI-YONAH. Thank you very much. 

Senator LEVIN. Now, our second panel of witnesses today are Joseph Manogue—who is the Treasurer of Maverick Capital of Dallas, Texas; Richard Potapchuk, the Director of Treasury and Finance at Highbridge Capital Management of New York; and Gary 

Wolf, who is the Managing Director of Angelo, Gordon & Co., of 

New York. 

If you could come and stand and raise your right hands, please. 

Do you swear that the testimony you are about to give before this 

Subcommittee will be the truth, the whole truth, and nothing but 

the truth, so help you, God? 

Mr. MANOGUE. I do. 

Mr. WOLF. I do. 

Mr. POTAPCHUK. I do. 

Senator LEVIN. Thank you so much. Thank you for being here. 

I think you heard me describe the timing system before, so I will 

not repeat that. 

Mr. Manogue, we will have you go first. Am I pronouncing your 

name correctly? 

Mr. MANOGUE. Yes, you are. 

Senator LEVIN. Thank you. And then you will be followed by Mr. 

Potapchuk. Am I pronouncing your name correctly? 

Mr. POTAPCHUK. Yes, you are, Chairman. 

Senator LEVIN. Thank you. And then Mr. Wolf, and then after 

hearing from all of you, we will then turn to questions. 

So, Mr. Manogue, please. 

TESTIMONY OF JOSEPH M. MANOGUE,1 TREASURER, 

MAVERICK CAPITAL, LTD., DALLAS, TEXAS 

Mr. MANOGUE. Thank you. Members of the Permanent Senate 

Subcommittee, my name is Joseph Manogue, and I am the Treasurer of Maverick Capital, Ltd. I submit this statement as Maverick’s representative in response to the invitation that we received 

17 

late last week from the Subcommittee in order to assist the Subcommittee in its review of certain industry practices that have been 

commonly referred to as ‘‘dividend enhancement transactions.’’ 

Maverick is an investment advisor that manages client capital 

primarily through hedging strategies based on long and short positions in U.S. and foreign equity securities. To that end, Maverick 

undertakes typical industry transactions, including the purchase 

and sale of stocks, shorting stocks, and borrowing and lending 

stocks. 

Investors in Maverick managed funds include both U.S. and foreign institutions and individuals, and our funds include both domestic and foreign entities in structures that are typical for our industry. I would like to note in particular that our structures and 

policies provide for investment by U.S. taxpayers in domestic partnerships that are subject to full Internal Revenue Service return 

and information reporting requirements that typically apply in a 

domestic context. 

In 1994, Maverick made the decision to register as an investment 

adviser under the Investment Advisers Act of 1940, and thereby 

voluntarily submitted to periodic review and inspection by the Securities and Exchange Commission. Our company prizes above all 

its reputation for client service and the highest ethical standards. 

In the course of its operations, Maverick utilizes the services of 

a variety of prime brokerage firms that support implementation of 

its trading strategy on behalf of Maverick’s client funds. These 

firms are among the most well-established institutions on Wall 

Street. Beginning in the late 1990s and through the subsequent 

years, the services offered by these firms included dividend enhancement programs. 

The proposal was as follows: U.S. tax laws subjected dividends 

paid by U.S. companies to foreign stockholders to a 30-percent 

withholding tax. Under the relevant tax regulations, however, 

foreign investors who received equivalent payments under total return swaps and foreign stockholders of U.S. companies who received substitute dividend payments from many foreign stock borrowers were not subject to the 30-percent withholding tax. 

Maverick’s financial institution service providers offered to help 

Maverick enter into total return swap transactions that involved 

Maverick’s Cayman funds selling the U.S. company stock eligible 

for an expected dividend to the financial institution for a price and 

negotiated fees that would be substantially equivalent to getting 

the value of the dividend. Alternatively, they suggested that Maverick’s Cayman Island funds should consider lending the U.S. company stock to a Cayman affiliate of the service provider. In consideration for the loan, the financial institution’s Cayman affiliate 

would pay to the Maverick Cayman fund an amount that was 

somewhat less than the dividend but exceeded the amount that it 

would have received had it received the dividend net of the tax. 

Maverick’s tax personnel considered these proposals and examined the tax regulations that applied to these transactions. Taking 

into account their compliance with the rules, the number of different blue chip firms offering the services, and their assurances 

that the transactions had been thoroughly vetted, there seemed to 

be little cause for concern that they were legitimate. 

18 

Of the alternatives presented, however, those requiring that the 

Maverick Cayman funds enter into swaps directly presented greater complexity relating to variable transaction terms and operational considerations than those providing for simple stock loans. 

Moreover, IRS Notice 97–66 appeared to provide express confirmation that ‘‘substitute dividend payments’’ received with respect to 

stock loans to a borrower located in the same jurisdiction as the 

lender would not be subject to the withholding tax. 

Thus, in 1999, Maverick began engaging in dividend enhancement stock loans in reliance on Notice 97–66. On a case-by-case 

basis, a Maverick employee would ask one of the financial institutions that had offered to provide dividend enhancement services 

whether it wished to borrow a particular security. If the financial 

institution did wish to borrow that security, Maverick would negotiate terms with that institution. We did not engage in swaps or 

other cross-border transactions for purposes of dividend enhancement, and we did not participate in any subsequent transactions 

involving the borrowed shares that may have been undertaken by 

the borrowers. 

We engaged in these transactions through various financial institutions until 2007. In 2007, however, the business press published 

a number of reports about these programs and suggested that the 

IRS was taking a close look at their legitimacy. Understandably, 

the financial institutions involved suspended the services until any 

questions about the industry practices could be resolved. Maverick 

estimates that its Cayman funds received approximately $63 million in substitute dividend payments beyond the amount that they 

would otherwise have received as a result of participation in dividend enhancement stock loan transactions since 2000. 

When the staff of this Subcommittee issued a request for information earlier this year, our counsel promptly complied by producing thousands of pages of documents. We have made our personnel available to assist the staff in understanding industry practices in this area and, on the basis of numerous discussions over 

the past several months, believe we have developed a candid and 

cooperative relationship. I am hopeful that they have conveyed consistent impressions of Maverick to you. 

The regulation and taxation of financial transactions such as 

those under discussion today are complex and evolving subjects. As 

I have indicated, we believe we have acted in accordance with the 

governing legal precedents and existing guidance, but understand 

that those precedents may be subject to further interpretation or 

revocation on the basis of further policy review such as the one you 

are conducting here. Maverick will conform to any new laws and 

regulations that result from this review. 

Thank you very much. 

Senator LEVIN. Thank you. And we also want to acknowledge the 

cooperation of your company. You have indeed cooperated with the 

Subcommittee. We very much appreciate it, and we are not the 

least bit reluctant to thank you for that. 

Mr. Potapchuk. 

19 

1The prepared statement of Mr. Potapchuk appears in the Appendix on page 70. 

TESTIMONY OF RICHARD POTAPCHUK,1 DIRECTOR OF TREASURY AND FINANCE, HIGHBRIDGE CAPITAL MANAGEMENT, 

LLC, NEW YORK, NEW YORK 

Mr. POTAPCHUK. Thank you, Mr. Chairman and Members of the 

Subcommittee and staff. I want to thank you first for this opportunity to appear before you at this hearing. My name is Richard 

Potapchuk. I am the Director of Treasury and Finance at 

Highbridge Capital Management, LLC. 

Highbridge is New York-based investment adviser that manages 

a group of investment vehicles more commonly known as ‘‘hedge 

funds.’’ We currently have $27 billion under our management. 

Over a period of many years reaching back into the 1990s, 

Highbridge has used financial instruments known as ‘‘total return 

swaps’’ for a variety of different investment purposes. One such 

purpose, which is the subject of today’s hearing, is to gain financial 

exposure to U.S. dividend-paying securities on behalf of non-U.S. 

investors in a manner that does not subject certain of those distributions to these non-U.S. investors to a dividend withholding tax 

of 30 percent. Highbridge’s position on this subject is set out in 

more detail in my written testimony which has been submitted to 

you earlier. 

In these opening remarks, I would like to highlight three points. 

First, Highbridge does not design investment strategies solely to 

profit from the tax status of payments received under total return 

swap agreements. Our investment decisions were and continue to 

be guided by our analysis of the securities to which we want to 

gain economic exposure. Once these investment decisions are made, 

like any other prudent investment manager or investor, we choose 

a form of investment, among other things, that is both lawful and 

minimizes our costs. 

Second, we believe the transactions in which we engaged are 

lawful. In entering into these transactions, we have prudently 

sought tax advice, legal advice, and we are mindful of the legal consensus about the transactions. In light of this consensus, total return swap transactions have been widely used in the financial industry for many years, as you well know. 

Third is the question of whether changes in the tax treatment of 

certain total return swap payments are appropriate and/or desirable? This question is a very complicated one and has no simple 

or easy answer. And, of course, it is a decision really for you, the 

lawmakers and the authors of the tax code. Highbridge will be 

happy to provide any information or insight that it can to help address this question. 

I am pleased, of course, to answer any questions you may have 

on any of these subjects. And, again, I thank you very much. 

Senator LEVIN. Thank you very much, Mr. Potapchuk, and we 

want to also acknowledge the cooperation of your company. We appreciate that very much. 

Mr. Wolf. 

20 

1The prepared statement of Mr. Wolf appears in the Appendix on page 75. 

TESTIMONY OF GARY I. WOLF,1 MANAGING DIRECTOR, 

ANGELO, GORDON & CO., NEW YORK, NEW YORK 

Mr. WOLF. Thank you, Mr. Chairman. My name is Gary Wolf. I 

am a Managing Director at Angelo, Gordon & Co., a Delaware limited partnership and an SEC-registered investment adviser. 

Angelo, Gordon & Co. was founded in 1988 and currently man- ages with its affiliates in excess of $19 billion. We seek to achieve 

attractive risk-adjusted returns while preserving capital primarily 

through investments in non-traditional strategies. Angelo, Gordon 

& Co. manages capital across four principal lines: Distressed debt 

and par loans; real estate; private equity; and hedged strategies. 

Our client base is global and is comprised of institutions including 

corporations, public funds, endowments, foundations, and high-networth individuals. We have associated offices in London, Amsterdam, Hong Kong, Seoul, Tokyo, Singapore, and Mumbai. 

I joined the firm in 1993 and have been a convertible securities 

research analyst and portfolio manager during the past 15 years. 

Since 1995, I have been the head of the firm’s convertible securities 

department. 

The Subcommittee has asked me to testify about one investment 

product which has been offered by investment banks for many 

years. The use of this product, often referred to as a ‘‘swap’’ or a 

‘‘CFD,’’ has been common practice in the financial world and was 

marketed to Angelo, Gordon & Co. by many of the largest, most sophisticated investment banks in the world. The investment banks 

offering these products represented to Angelo, Gordon & Co. that 

the structure of these transactions, including the tax implications, 

had been cleared by their legal advisers, a position which was confirmed by our own legal advisers. Angelo, Gordon & Co. did not 

construct or market these swap products but, rather, these products were created and marketed by the investment banks. 

While the specific products offered by different investment banks 

varied in particular aspects, this product in general is one in which 

the investor is not the actual owner of the security but, rather, enters into a contract with the investment bank to receive or to make 

payments which mirror the performance of the referenced security. 

The investment banks, which is the counterparty to the contract, 

may or may not actually hold or own the security. If the price of 

the security rises, the investment bank is obligated under the contract to pay an amount equal to that increase. If the price of the 

security falls, the investor must pay the bank an amount equal to 

the decline. Under the contract, an amount equal to some or all of 

the value of any dividend paid to stockholders during the contract 

period is paid to the investor by the investment bank. 

Depending on the specific circumstances of a given transaction, 

sometimes the best way to maximize returns for our investors was 

to engage in a swap transaction. While I am not a tax expert, it 

is my understanding that while the person or entity actually owning the security and receiving the actual dividend payment may be 

subject to the Federal tax on dividends, the tax treatment of a payment received under a contract is determined by other provisions 

of the tax code. At times, this tax treatment of swaps will provide 

21 

a tax benefit resulting in a higher total yield on the investment for 

a foreign investor. This benefit was a central aspect of the marketing pitches that were made to us by the investment banks. 

While the tax consequences were a significant factor considered 

in deciding whether to enter into a swap transaction, this was far 

from the only consideration. In fact, there were other significant 

economic realities that factored into the decision to enter into a 

swap transaction, including increased leverage and competitive 

transparency benefits. While swap transactions do have a significant number of positive benefits, including those related to leverage, transparency, and tax, there are a number of potential negative consequences or risks associated with such transactions. There 

was the economic reality that since we would not be the actual 

owner of the security, we would not have the normal stockholders 

role in the control of the company. Also, there were often significant transaction costs associated with swap transactions, including 

the fees for leverage. In addition, unlike those situations where we 

held the actual security under a swap contract, we were exposed 

to the risk that our counterparty would not make the payments 

called for by the contract. Recent events have demonstrated that 

counterparty risk is real. 

We were told by the investment banks, as well as by our own 

legal advisers, that this form of investment offered a legal way for 

us to enhance or maximize our total return since we would be receiving contract payments and not actual dividend payments. The 

investment strategies we pursue are not designed around dividends 

but, rather, focus on movement in the price of the equity. While the 

value of any dividends paid during the time we held a position in 

a company would be, we hoped, minor compared to what we would 

realize from the movement of the price of the security, we were attracted to a form of investment that resulted in lower rather than 

higher taxes for our investors. Just as an individual deciding between renting and homeownership is well advised to consider the 

tax consequences of each approach, it is incumbent on financial 

firms and institutions to also consider the tax consequences, among 

many other factors, inherent in a given transaction. 

The tax advantage of these products was certainly one of the primary considerations that made them attractive when they were 

marketed to us by the investment banks. But the tax advantage 

was not the only substantive aspect of these contracts. During the 

time period when Angelo, Gordon & Co. was active in swap transactions, leverage was also a considerable factor driving such decisions. In fact, often one of the most important negotiation points 

when entering into a swap transaction was the amount of leverage 

that could be obtained. Leverage was deemed to be so critical to investment decisions that the prime brokerage arms of investment 

banks would compete for business on the basis of the amount of leverage that could be offered. 

Another significant benefit associated with swap transactions relates to competitive transparency. When Angelo, Gordon & Co. 

holds a security in swap, it prevents other competing investors 

from tracking and either mirroring or undermining our positions. 

Given the myriad of benefits and positive economic results that 

can be realized through swap transactions, Angelo, Gordon & Co. 

22 

engaged in such transactions on a global level, and this activity 

was not simply limited to U.S. dividend-paying securities. In fact, 

Angelo, Gordon & Co. has entered into swap transactions for securities ranging from U.S. convertible bonds to bank debt to foreign 

securities—none of which would be subject to the U.S. withholding 

tax even if owned directly. And this has been the case with both 

our domestic and foreign funds. 

My understanding is that some of the recent media discussion regarding swap transactions has centered on the practice of acquiring 

a position in a security shortly before dividend date and then 

exiting that position shortly after the dividend date, often referred 

to as ‘‘bracketing’’ a dividend. Not only did Angelo, Gordon & Co. 

not engage in bracketing dividends, but such a practice runs 

counter to Angelo, Gordon & Co.’s core investment philosophy of focusing on well-researched, longer-term investments. Almost always, 

Angelo, Gordon & Co. would hold the security in swap for at least 

9 months, and sometimes as long as 2 years. In only a handful of 

instances did Angelo, Gordon & Co. hold a security in swap for less 

than 30 days. 

Finally, due to economic and business realities in the marketplace, and at Angelo, Gordon, and Co. the firm currently engages 

in very few swap transactions, and the number of swap transactions engaged in has decreased significantly over time. Given the 

decrease in opportunities in the marketplace, Angelo, Gordon & 

Co.’s dedicated convertible securities funds, which used to engage 

in such swap transactions, closed in late 2006. Angelo, Gordon & 

Co.’s real estate securities funds, which also used to engage in such 

swap transactions, closed in late 2007. Notably, the significant decrease in swap transactions has had no relationship to any change 

in the tax treatment of dividend-based payments but, rather, is 

based on other economic and business realities. 

I hope my testimony has aided the Subcommittee in understanding these issues, and I will do my best to answer any questions you might have. 

Senator LEVIN. Thank you very much, Mr. Wolf, and thank you 

and your company for your cooperation also with the Subcommittee. 

Mr. Manogue, let me start with some questions to you. You have 

engaged in the stock loan transactions with financial institutions 

to enhance dividends for some time. Is that correct? 

Mr. MANOGUE. That is correct. 

Senator LEVIN. What was the purpose of those transactions? 

Mr. MANOGUE. The purpose of the transactions was to enhance 

dividends. 

Senator LEVIN. And how long would a typical transaction last? 

Mr. MANOGUE. Over the years, that has been negotiated, so it 

has been different time periods. But it ranged from 30 days down 

to 15 days. 

Senator LEVIN. And then after the 15 days or 30 days, or whatever the period was, the stock would be returned? 

Mr. MANOGUE. That is correct. 

Senator LEVIN. Now, when you say that the purpose of these 

transactions, loan transactions, was for dividend enhancement— 

and we appreciate your candor on that—the dividend itself was not 

23 

1See Exhibit No. 16 which appears in the Appendix on page 223. 

enhanced, as I understand it, but rather the amount of the dividend was not enhanced. The enhancement came through the tax 

not being paid. Is that correct? 

Mr. MANOGUE. Through the substitute dividend payment, yes, 

correct. 

Senator LEVIN. And that not being taxable. 

Mr. MANOGUE. Correct. 

Senator LEVIN. Is that why that particular technique was pitched 

to you by the financial institution, in order to enhance the dividend 

through its not being taxable? Was that the basis of the pitch to 

you from whatever financial institution was—— 

Mr. MANOGUE. Correct. That was the premise. And I just want 

to clarify one point. I am not a tax expert, so I am not sure that 

a substitute dividend is not necessarily taxable. 

Senator LEVIN. All right. But the payment that you received was 

not taxable. 

Mr. MANOGUE. Correct. 

Senator LEVIN. OK. Now, Mr. Wolf, I wonder if you would take 

a look at Exhibit 16 in the book that is in front of you.1 If you look 

at page 2 of that exhibit where it says that Gary Wolf called regarding the swap that was discussed? 

Mr. WOLF. Yes, sir. 

Senator LEVIN. And he said that he—‘‘Gary Wolf called regarding 

the swap that was discussed on his prefs.’’ 

Mr. WOLF. Yes. 

Senator LEVIN. ‘‘Prefs,’’ what is that? 

Mr. WOLF. Preferred securities. 

Senator LEVIN. ‘‘And he said that he is being quoted by other 

brokers on the street 100-percent dividend doing it via a total return swap as opposed to the 92 percent that we offer. He said he 

would be looking to do this on a more long-term position as opposed 

to ones that he knows they will be getting out of.’’ Is that accurate? 

Do you remember that phone call? 

Mr. WOLF. Vaguely. 

Senator LEVIN. All right. And to the extent that you remember 

it, was the return on that swap important to you? 

Mr. WOLF. Sure. 

Senator LEVIN. The transactions that you engaged in there were 

aimed at enhancing your dividend. Is that correct? 

Mr. WOLF. That was one of the significant factors in entering 

into a total return swap or a CFD. 

Senator LEVIN. Was that, would you say, a significant factor? Is 

that the way you would phrase it? 

Mr. WOLF. Well, I would say it is a very significant factor—in 

fact, a primary factor; but not the only economic substance to the 

transaction. 

Senator LEVIN. All right. And, Mr. Potapchuk, let me ask you the 

question. Did you engage in the transactions that we are discussing 

here to enhance the dividend? 

Mr. POTAPCHUK. We do engage and have engaged for quite some 

time, back into the 1990s, in transactions involving taking exposure to securities in the form of total return swap, yes. With reVerDate Aug 31 2005 08:46 Apr 10, 2009 Jkt 045575 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 P:\DOCS\45575.TXT SAFFAIRS PsN: PAT
24 

spect to the stock lending transactions that were referred to, the 

answer to that is no. 

Senator LEVIN. In terms of the swaps? 

Mr. POTAPCHUK. In terms of stock loan transactions, no. 

Senator LEVIN. What about swaps? Did you engage—— 

Mr. POTAPCHUK. Swaps, yes. We engaged, have engaged, and 

continue to engage in transactions that involve taking exposure to 

securities in the form of total return swaps. 

Senator LEVIN. All right. And the principal purpose there 

was—— 

Mr. POTAPCHUK. Well, the principal purpose—— 

Senator LEVIN. The principal reason, I think your testimony is, 

although not necessarily the only reason, of these total return 

swaps was to reduce the tax burden on the non-U.S. investors. Is 

that your testimony I am reading from? 

Mr. POTAPCHUK. Yes. There are other economic reasons for entering into a swap, but quite frankly, the most compelling one by far 

is the tax savings. And without that tax savings, a lot of those 

swaps, I would say, at Highbridge would not have occurred. 

Senator LEVIN. Thank you. 

Mr. POTAPCHUK. Some would and some would not. 

Senator LEVIN. But many of them would not have occurred? 

Mr. POTAPCHUK. That is true. 

Senator LEVIN. Mr. Manogue, you said that in 2007 a number of 

financial institutions suspended offering dividend enhancement 

services. 

Mr. MANOGUE. That is correct. 

Senator LEVIN. And how many stopped, and who were they? 

Mr. MANOGUE. To the best of my knowledge, all of them stopped. 

Senator LEVIN. Let me ask each of you, how did your firm learn 

about these types of transactions in the first place? Did this come 

from a financial institution of some kind? 

Mr. MANOGUE. Yes, financial institutions would market us for 

this product. 

Senator LEVIN. ‘‘Mark’’ you? What does that mean? 

Mr. MANOGUE. Market. 

Senator LEVIN. Oh, market. 

Mr. MANOGUE. They would come up and try to convince us to buy 

their product. 

Senator LEVIN. Who are some of those institutions; do you remember? 

Mr. MANOGUE. Over the years they have ranged from every 

major financial institutions, but, in particular, for us it was UBS, 

Merrill Lynch, Morgan Stanley, Lehman Brothers, Nomura, and 

ING. 

Senator LEVIN. OK, so they initiated it, came to your company 

to try to persuade you to use the type of transaction? 

Mr. MANOGUE. Yes, they did. 

Senator LEVIN. Mr. Potapchuk, did you initiate this or was this 

a financial institution which marketed this to you? 

Mr. POTAPCHUK. Well, as I explained, what we do at Highbridge 

is enter into total return swap transactions and not the other stock 

lending type transactions. We enter into total return swaps for, 

again, many other reasons in many other markets. We are very 

25 

1See Exhibit No. 35 which appears in the Appendix on page 300 for clarification of these remarks. 

aware that under current tax law, payments under total return 

swaps are not subject to dividend withholding, so—— 

Senator LEVIN. There was not a financial institution which came 

to you to market it? 

Mr. POTAPCHUK. They all come to us to market it in the sense 

that we may be doing it with someone, with a UBS company, and 

they would like us to do it with them instead just to gain some 

market share of our business. But once approached by any of these 

firms, we have a practice whereby internally we vet any of the 

issues that they bring up. We confer with our own in-house counsel, our own in-house tax advisers. We go outside to the extent we 

need to with our tax professionals. And we basically came to the 

same conclusion as they did with respect to the appropriate tax 

treatment of these payments under the swap contracts. 

Senator LEVIN. But these total swaps are marketed to you? 

Mr. POTAPCHUK. They are marketed to us, just like a normal 

prime brokerage is marketed to us, yes. 

Senator LEVIN. And when they are marketed to you as the principal—I will leave it there. 

Mr. Wolf, how did your company get involved in the swaps? Was 

this something internal, or was this marketed to you by financial 

institutions? 

Mr. WOLF. It was marketed to us by a number of major financial 

institutions. 

Senator LEVIN. And who are they? 

Mr. WOLF. Several on this list that are—Lehman Brothers, Deutsche Bank, Morgan Stanley, Goldman Sachs, Merrill Lynch, and 

others. 

Senator LEVIN. OK. Mr. Manogue, is Maverick LDC a U.S. company? 

Mr. MANOGUE. No. It is a Cayman Island entity. 

Senator LEVIN. And how many people does Maverick have in the 

Caymans? 

Mr. MANOGUE. We do not have any. 

Senator LEVIN. So this is a company that you own that is in the 

Caymans or listed in the Caymans, but you do not have any people 

there? 

Mr. MANOGUE. Correct. It is registered in the Caymans.1

Senator LEVIN. Registered. Thanks. So you do not have an office 

there? 

Mr. MANOGUE. Correct. 

Senator LEVIN. And how many people do you have in the United 

States? 

Mr. MANOGUE. Close to 200 people. 

Senator LEVIN. And where are the investment specialists who 

make all the investment decisions, perform all the investment decisions, and perform all the research located? 

Mr. MANOGUE. We have several offices here in the United States. 

The primary office would be Dallas as well as New York City. 

Senator LEVIN. But all the 200 or so are in the United States? 

26 

2See Exhibit No. 10 which appears in the Appendix on page 216. 

Mr. MANOGUE. Almost all of them. We do have some folks in 

London, Taipei, and Shanghai. 

Senator LEVIN. All right. Now, when you performed the stock 

loan transactions with UBS, the record indicates that the transactions were with UBS’ Cayman Island facility. If you would take 

a look at Exhibit 10,2 and this is the way UBS described its Cayman Island facility. It said, ‘‘UBSCL is not licensed, registered, or 

regulated, e.g., by reason of capital adequacy requirements, as a 

broker-dealer or similar entity in any jurisdiction, cannot access 

the capital markets except through a broker-dealer, and does not 

hold itself out as a broker-dealer. UBSCL’’—that is their Cayman 

operation—‘‘is not and does not hold itself out as being capable of 

servicing customers, e.g., it does not possess adequate systems or 

personnel. UBSCL’s counterparties do not view themselves as 

UBSCL’s customer. And UBSCL does not have any fiduciary duties 

to its counterparties. UBSCL does not make markets, possess inventory, or have an established place of business. UBS does not 

hold itself out as a merchant or as willing to enter into either side 

of securities or derivative trades.’’ 

I cannot think of a better definition of a shell than that one. 

Now, your operation in the Caymans, as you just indicated, was 

a shell operation, and over the years the stock loan transactions between the two Cayman Islands shells cost the U.S. Government 

about $90 million in dividends that were not withheld. And that 

loss came because the transactions supposedly took place between 

the two Cayman entities. So far are you with me? 

Mr. MANOGUE. I am with you, Senator. 

Senator LEVIN. OK. Do you disagree with anything I have said 

so far on this question? 

Mr. MANOGUE. Well, I am not sure what the question is, but—— 

Senator LEVIN. Well, what I have said so far, that there were two 

entities—there was a loan transaction between—one of them was 

your entity, which you have described as not having any people 

there and being registered there; the other one, UBS described just 

the way I have just read it. 

Mr. MANOGUE. Yes. 

Senator LEVIN. Were you aware that UBS Cayman—— 

Mr. MANOGUE. We knew of the entity, yes. 

Senator LEVIN. All right. Now, do the financial institutions that 

Maverick has dealt with more recently also run these trades 

through these kind of registered offices in offshore jurisdictions? 

Mr. MANOGUE. Yes. 

Senator LEVIN. And, again, I think you have been clear that the 

trades are structured through these jurisdictions as a way of enhancing your dividend, as you put it. So I think you have been 

clear on that. 

Now, Mr. Wolf, does Angelo, Gordon & Co. have a Cayman Island hedge fund? 

Mr. WOLF. We have—yes. 

Senator LEVIN. And how many people do you have in the Caymans? 

Mr. WOLF. We do not have any employees in the Caymans. 

27 

1See Exhibit No. 7 which appears in the Appendix on page 203. 

Senator LEVIN. Do you have an office in the Caymans? 

Mr. WOLF. No. We have an administrator. 

Senator LEVIN. No employees? 

Mr. WOLF. That is correct. 

Senator LEVIN. And about how many people work for Angelo, 

Gordon & Co.? 

Mr. WOLF. About 250. 

Senator LEVIN. And none of them are in the Caymans. Where are 

they? 

Mr. WOLF. They are in New York, offices in London, Amsterdam, 

several in Asia, Chicago, and Los Angeles. 

Senator LEVIN. OK. Thank you. 

Mr. Potapchuk, what about Highbridge? Does Highbridge have a 

Cayman hedge fund? 

Mr. POTAPCHUK. The funds that Highbridge manages are generally registered in the Cayman Islands, yes. 

Senator LEVIN. And how many folks do you have in the Caymans? 

Mr. POTAPCHUK. We have none. We have an administrator, some 

legal experts, etc. 

Senator LEVIN. But no employees there? 

Mr. POTAPCHUK. No employees. 

Senator LEVIN. And do you have an office there? 

Mr. POTAPCHUK. We do not have an office there. 

Senator LEVIN. Mr. Manogue, would you take a look at Exhibit 

7, please?1 Leading up to my question, Mr. Manogue, about Exhibit 

7, let me see if you would agree with this. According to the materials that you have provided to the Subcommittee—and, again, we 

appreciate that cooperation—your firm received about $63 million 

in dividend enhancements. Now, those are portions of dividends 

that would normally be withheld but are not under the transactions that you engaged in, and the financial institutions that you 

were trading with received about $31 million, the portion of Maverick’s enhancement that was paid to them. That would be money, 

obviously, which would have otherwise been withheld and turned 

over to the U.S. Government. 

Now, I want to ask you about Exhibit 7. What I have said so far 

is based on your documents, and so I will proceed from there unless 

you disagree with those figures that I just gave. 

Mr. MANOGUE. I do not disagree. 

Senator LEVIN. All right. Thanks. 

Now, Exhibit 7, this is a communication between Mr. Chisholm 

of Maverick and a representative from Ernst & Young. In the 

memo, Mr. Chisholm raises the question of whether money from 

dividend enhancement transactions should be reserved or paid to 

the government as part of Maverick’s tax return. And this is what 

he says: ‘‘Now that June 15th is approaching, we are considering’’—again, I am reading from Exhibit 7—‘‘whether we need to 

go ahead and remit the 2006 income tax withholding that we accrued for FIN 48 purposes in connection with the stock loan fee income earned during 2006. We determined in December that we 

should probably accrue these taxes even though nothing is actually 

28 

2See Exhibit No. 35 which appears in the Appendix on page 300. 

withheld by our other brokers. We will need to address whether or 

not to pay these taxes for pre-2006 years whenever we file protective returns for those years.’’ 

Has Maverick paid any money to the government as part of a tax 

payment related to these dividend enhancement transactions? 

Mr. MANOGUE. I am not aware of that. I would have to talk to 

our tax advisers and service folks. 

Senator LEVIN. All right. Let us know then. Would you do that 

for the record?2

Mr. MANOGUE. We will. 

I believe this memo also is driven by a discussion on compliance 

with FIN 48. There is a reserve that has been determined that we 

should take related to fees that we earn for lending our stocks out. 

So I believe there are two issues being discussed in this memo. 

Senator LEVIN. All right. Now, that same exhibit, I think it is 

page 5, but at the bottom it is MAV0001119. Do you see that page? 

It is in the lower right-hand corner. 

Mr. MANOGUE. Yes. 

Senator LEVIN. OK. Now, if you look at the top paragraph there, 

this is addressed to Joe Bianco, who is a Maverick employee. Is 

that correct? 

Mr. MANOGUE. No. He works for Ernst & Young, I believe. 

Senator LEVIN. Matt Blum at the bottom. Do you see he works 

for Ernst & Young? 

Mr. MANOGUE. As well, yes. 

Senator LEVIN. So they both work for Ernst & Young? 

Mr. MANOGUE. I believe so, yes. 

Senator LEVIN. All right. As you read the first paragraph, if the 

prime broker does not withhold and the IRS catches the prime 

broker, then perhaps the prime broker can go after Maverick for 

contribution or indemnification, complex point if the contract is silent, but if the IRS figures out what is going on, the IRS can bypass the prime broker and go straight after Maverick for failure to 

pay tax imposed under Section 881. The only limit is that the IRS 

may not collect the tax twice. 

So if the IRS figures out what is going on, the IRS can go 

straight after Maverick. Were you aware that was the Ernst & 

Young opinion? 

Mr. MANOGUE. I was not until preparing for this testimony. 

Senator LEVIN. OK. Mr. Wolf, how much withholding did Angelo, 

Gordon & Co. get back from these dividend enhancement transactions over the years? Do you have that figure for us? 

Mr. WOLF. For the years 2000 to 2007, the total amount of U.S. 

dividends that Angelo, Gordon & Co. received in offshore funds was 

$137 million. So we would have gotten contract payments of $137 

million. 

Senator LEVIN. All right. 

Mr. WOLF. Therefore, what you were calling dividend—30 percent of that number is the number. 

Senator LEVIN. Thirty percent of that $137 million. 

Mr. WOLF. Correct. 

29 

Senator LEVIN. And, Mr. Potapchuk, how much withholding did 

Highbridge get back from the dividend enhancement transactions 

over the years? 

Mr. POTAPCHUK. The analysis that we have done and submitted 

to the staff previously covered the 6-year period from 2002 through 

2007, where it is indicated that if during that time there was a 30- 

percent withholding requirement on payments received on swap 

transactions, the likely amount of withholding amounts that would 

have occurred at Highbridge would have been approximately $100 

million. And I can walk you through that number a bit. It works 

like this. 

We received during that period about $425 million in payments 

under total return swap contracts. These were received by our master fund. Our master fund has a combination of U.S. and non-U.S. 

investors. The U.S. portion ranges from 10 to 20 percent. So let’s 

say that 15 percent of that number, or about $60 million, would not 

be subject to withholding because they would be directly received 

by—they would be indirectly effectively received by U.S. persons. 

That would bring us down to about $360 million. 

Additionally, there are several amounts included in those payments received that would otherwise not be taxable. For instance, 

in many cases, in particular with respect to large dividends that 

are paid, many of the dividends are treated as returns of capital 

for U.S. tax purposes. They are not paid out of current earnings 

and profits of the corporations. Conservatively, we estimate that about $20 million of that total 

would have been made up of something classified as return of capital by the corporations, which would bring us to $340 million, and 

about 30 percent of that number gets me to the $100 million over 

the 6-year period ending in 2007. 

Senator LEVIN. I have got it. And I can ask both of you, Mr. Wolf first, was any of that $137 million ever paid back to the government as part of a tax payment? 

Mr. WOLF. Well, again, it was not the $137 million. That was 

the—— 

Senator LEVIN. The 30 percent of that, was any of that ever paid 

to the government? 

Mr. WOLF. Not to my knowledge. 

Senator LEVIN. All right. And do you know, Mr. Potapchuk, if any of that approximately $100 million you talked about was ever 

paid to the government? 

Mr. POTAPCHUK. No, it was not paid to the government at all. 

Senator LEVIN. Thank you. 

Mr. MANOGUE. Senator, if I may, I would like to clarify one other 

point. 

Senator LEVIN. Sure. 

Mr. MANOGUE. We discussed Exhibit—I believe it is Exhibit 7, 

page MAV0001119. 

Senator LEVIN. Yes. 

Mr. MANOGUE. The memo from Matt Blum to Joe Bianco of 

Ernst & Young. I believe after having a chance to look at this, the 

first two paragraphs refer to a discussion about the reserve for 

stock loan fees that have been paid in our tax return. The last 

paragraph in that email exchange refers to dividend enhancement, 

30 

where they conclude that there is a need to come up with a better 

than 50-percent chance of succeeding under FIN 48 analysis. So I 

believe the top two paragraphs are referring to something different, 

not dividend enhancement. 

Senator LEVIN. The one I read you do not think referred to—— 

Mr. MANOGUE. I do not. 

Senator LEVIN. But you are confident that this memo was an internal memo at Ernst & Young? 

Mr. MANOGUE. Yes. 

Senator LEVIN. And that the ‘‘Joe’’ referred to is an Ernst & 

Young employee? 

Mr. MANOGUE. Joe Bianco, yes. 

Senator LEVIN. And that these points in this memo were not 

shared with you? 

Mr. MANOGUE. They were not shared with me, no. 

Senator LEVIN. I mean with your company. 

Mr. MANOGUE. I believe they were shared and through the email 

chain would have gotten to our tax department. 

Senator LEVIN. Who in your tax department? Who in that email 

chain—— 

Mr. MANOGUE. Keith Hennington and Chad Chisholm. 

Senator LEVIN. So your tax department was aware of this document, then? 

Mr. MANOGUE. Yes. 

Senator LEVIN. OK. Let me again thank our witnesses, and I 

would note that these hedge funds are not the only hedge funds 

that engage in these activities. These are representative of these 

actions and activities that go on, and we selected three because we 

needed to have representative witnesses here, and you have been 

helpful. We appreciate it and you are excused. 

Mr. MANOGUE. Thank you. 

Mr. POTAPCHUK. Thank you. 

Mr. WOLF. Thank you. 

Senator LEVIN. Let me now welcome our third panel of witnesses: 

John DeRosa, the Managing Director and Global Tax Director of 

Lehman Brothers, New York; Matthew Berke, the Managing Director and Global Head of Equity Risk Management of Morgan Stanley of New York; and Andrea Leung, the Global Head of Synthetic 

Equity Finance of Deutsche Bank of New York. 

Let me thank each of you again for being here today, and pursuant to Rule VI, all witnesses who testify before the Subcommittee 

are required to be sworn. So I would ask that you please stand and 

raise your right hand. Do you solemnly swear that the testimony 

that you will give to this Subcommittee today will be the truth, the 

whole truth, and nothing but the truth, so help you, God? 

Mr. DEROSA. I do. 

Mr. BERKE. I do. 

Ms. LEUNG. I do. 

Senator LEVIN. Thank you. 

I think you were all here when we described the timing system, 

so I will not repeat that. Mr. DeRosa, we will have you go first, followed by Mr. Berke, and then Ms. Leung. And then we will turn 

to questions. 

So, Mr. DeRosa, you may proceed. 

31 

1The prepared statement of Mr. DeRosa with an attachment appears in the Appendix on page 

80. 

TESTIMONY OF JOHN DeROSA,1 MANAGING DIRECTOR AND 

GLOBAL TAX DIRECTOR, LEHMAN BROTHERS INC., NEW 

YORK, NEW YORK 

Mr. DEROSA. I am John DeRosa, Managing Director and Global 

Tax Director at Lehman Brothers. I appreciate the opportunity to 

appear before the Subcommittee today on behalf of Lehman Brothers. 

Lehman Brothers, an innovator of global finance, serves the financial needs of corporations, governments, municipalities, and 

high-net-worth individuals worldwide. Founded in 1850, Lehman 

Brothers maintains leadership positions in equity and fixed-income 

sales, trading and research, investment banking, private investment management, asset management, and private equity. The 

firm is headquartered in New York, with regional headquarters in 

London and Tokyo, and operates offices worldwide. 

As global tax director, I can state with confidence—and I want 

to emphasize—that Lehman Brothers takes its obligations under 

the U.S. tax code very seriously. Lehman Brothers has worked diligently to follow the letter and spirit of the law governing both equity swaps and stock loan agreements. The rules governing the applicability of U.S. withholding tax for payments made to non-U.S. 

counterparties on swap and stock loan transactions referencing 

U.S. equities are clear. 

Under Treasury Regulation Sec. 1–863–7(b)(1), the source of notional principal contract income—i.e., swap payments—is determined by reference to the residence of the taxpayer receiving the 

payment, not the residence of the payor on the underlying referenced asset. Thus, when Lehman Brothers makes a payment on 

an equity swap referencing a U.S. asset to a non-U.S. counterparty, 

the payment is sourced to the residence of the swap counterparty 

and does not attract U.S. withholding tax. 

With respect to stock loans, IRS administrative Notice 97–66 exempts from U.S. withholding tax in-lieu payments made to a foreign counterparty when the criteria articulated in that notice are 

met. Thus, under these rules, the transactions that the Subcommittee is reviewing do not attract U.S. withholding tax. When 

Lehman Brothers makes payments, whether pursuant to an equity 

swap or a stock loan, to foreign counterparties referencing U.S. equities, Lehman Brothers complies with these rules. We understand 

that Treasury and the IRS may now be considering whether these 

rules should be changed going forward, including possibly advancing a new rule that would recharacterize some, but not all, of these 

transactions. I can assure you that, to the extent that Treasury or 

the IRS now changes these rules, Lehman Brothers will comply 

with those new rules. 

Equity swaps and stock loan agreements are basic financial instruments that have been in existence for decades and are critical 

to the proper functioning of today’s global capital markets. There 

are many reasons—totally unrelated to withholding tax—why clients use these instruments. Fundamentally, clients employ these 

instruments to gain economic exposure to underlying assets withVerDate Aug 31 2005 08:46 Apr 10, 2009 Jkt 045575 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 P:\DOCS\45575.TXT SAFFAIRS PsN: PAT
32 

out beneficially owning those assets. These instruments can provide clients with leverage, operational and administrative efficiency, and other balance sheet and regulatory capital benefits. In 

return, Lehman Brothers receives financing spreads and commissions as appropriate. These financial instruments, like many others 

such as municipal bonds, offer tax efficiency in certain circumstances—a result fully recognized by Treasury and the IRS. 

In fact, however, most of Lehman Brothers’ equity swaps and 

stock loans have nothing to do with U.S withholding tax efficiency. 

The overwhelming majority of Lehman Brothers’ equity swaps and 

stock loans simply do not implicate U.S. withholding taxes at all 

because they have one or more of the following characteristics: 

One, the counterparty takes a short, rather than a long, position; 

two, there is no distribution payment on the underlying referenced 

security; three, the swap or stock loan is not held by the 

counterparty over a dividend record date; four, the underlying referenced security makes a payment characterized for tax purposes 

as interest, which is generally not subject to U.S. withholding tax; 

five, the underlying security is foreign, rather than United States; 

or, six, the counterparty is a resident in the United States. 

It has been well understood for years that even when these basic 

financial instruments do reference underlying U.S. dividend-paying 

securities and are entered into as long positions by non-U.S. 

counterparties over a dividend record date—a relatively small universe of the transactions at Lehman Brothers—they do not attract 

withholding tax under U.S. tax laws. As I stated earlier, the basic 

rule for equity swaps, established by Treasury in 1991, is that payments made to non-U.S. counterparties pursuant to these basic financial instruments must be sourced based on the residence of the 

counterparty and, therefore, do not implicate U.S. withholding 

taxes. In addition, an IRS administrative notice specifically exempts from U.S. withholding taxes in-lieu payments on stock loan 

transactions like the ones in which Lehman Brothers participated. 

These fundamental rules—and the resulting tax treatment for certain counterparties—have long been understood by market participants and, notably, the Department of Treasury and the IRS. 

Indeed, most, if not all, of the major Wall Street investment 

banks and commercial banks engage in equity swap and stock loan 

transactions referencing U.S. underlying equities with non-U.S. 

counterparties. Over the last 15 years, numerous commentators in 

widely respected taxation journals have addressed the withholding 

tax consequences of equity swaps similar to those offered throughout Wall Street, including articles by the current chief of staff for 

the Joint Committee on Taxation and his former law firm. In 1998, 

a Notice of Proposed Rulemaking was published in the Federal 

Register that expressly addressed the same issue. It said, ‘‘Treasury 

and the IRS are aware that in order to avoid the tax imposed on 

U.S. source dividends . . . some foreign investors use notional principal contract transactions based on U.S. equities. . . . Accordingly, 

Treasury and the IRS are considering whether rules should be developed to preserve the withholding tax with respect to such transactions.’’ 

In May 2007, the Practicing Law Institute hosted a panel focused 

specifically on the U.S. withholding tax aspects of equity swaps and 

33 

stock loan transactions. The panel included well-recognized practitioners in the tax field including, most notably, a representative 

from the IRS. Lehman Brothers has provided the Subcommittee 

with a copy of that panel’s presentation. 

Despite the IRS’ clear recognition for at least a decade that these 

financial instruments, in certain circumstances, may have U.S. 

withholding tax implications, to date, no new rules governing equity swaps or stock loan arrangements have been promulgated. 

This is not surprising when one considers what a fundamental 

change any such new rules would present, particularly if those new 

rules were to articulate circumstances warranting recharacterization of certain transactions. 

I should note, however, that even under existing law, Lehman 

Brothers exercised appropriate care when entering into financial 

instruments. Lehman Brothers consulted extensively with tax experts both internally and at major Wall Street law firms, receiving 

both oral and written advice. Based on the advice of its legal counsel, Lehman Brothers put in place guidelines and parameters governing the use of these instruments. For example, Lehman Brothers instituted a minimum duration requirement and established requirements governing the size of underlying baskets. Under the 

prevailing rules applicable to equity swaps and stock loans, transactions meeting these guidelines should not be recharacterized for 

tax purposes. In other words, according to the U.S. tax laws as currently written, the payments made to non-U.S. counterparties pursuant to equity swaps must be sourced to the residence of the 

counterparty and, therefore, do not trigger U.S. withholding taxes. 

Likewise, the type of in-lieu payments made by Lehman Brothers 

on stock loans are specifically exempt from withholding tax pursuant to the IRS administrative notice mentioned earlier. 

Lehman Brothers made every effort to ensure that its equity 

swaps and stock loans complied with these guidelines. Indeed, we 

know that in some situations clients approached Lehman Brothers 

in an effort to transact in instruments in a way that did not align 

with our product parameters—for example, by seeking to hold a position for a very short period of time around a dividend record 

date—and that Lehman Brothers refused to engage in those transactions. 

But Lehman Brothers did even more than that. In October 2007, 

when David Shapiro, Senior Counsel in the Treasury Department’s 

Office of Tax Policy, stated publicly that Treasury would ‘‘welcome 

input’’ from the industry on the proper tax treatment, Lehman 

Brothers responded. First, Lehman Brothers participated with the 

Securities Industry and Financial Markets Association to help develop a framework on behalf of the industry. This analytical framework was shared with Treasury and the IRS. Second, Lehman 

Brothers proactively and independently engaged the Treasury Department in constructive discussions explaining the equity swap 

business and a possible new framework. These discussions culminated with Lehman Brothers’ submission earlier this year of a 

request to the IRS, pursuant to the Industry Issue Resolution Program, for official guidance. I have attached a copy of that submission to my written testimony. 

34 

1The prepared statement of Mr. Berke appears in the Appendix on page 88. 

As I said at the outset, if new rules governing the tax treatment 

of equity swaps and stock lending transactions are promulgated, 

Lehman Brothers will comply with those new rules. In the meantime, Lehman Brothers has made a concerted and good-faith effort 

to comply with current tax law. We will continue to do so. 

Thank you again for the opportunity to appear here today. I 

would be happy to answer any questions you may have. 

Senator LEVIN. Thank you, Mr. DeRosa. Mr. Berke. 

TESTIMONY OF MATTHEW BERKE,1 MANAGING DIRECTOR 

AND GLOBAL HEAD OF EQUITY RISK MANAGEMENT, MORGAN STANLEY & CO., NEW YORK, NEW YORK 

Mr. BERKE. Thank you, Senator. My name is Matt Berke, and I 

am a Managing Director and Global Head of Equity Risk Management for Morgan Stanley. Thank you for inviting Morgan Stanley 

to participate in today’s hearings. We have been pleased to assist 

the Subcommittee’s staff as it examined these issues, and I hope 

that I have been a useful resource and will continue to be today. 

I understand that the Subcommittee is focused on two issues: 

Whether industry participants are complying with applicable laws 

regarding dividend withholding obligations, and whether new laws 

and policies may be appropriate. I cannot speak for others, but 

Morgan Stanley believes that its practices in these areas are in 

compliance with relevant tax laws and regulations, and on the conservative end of the spectrum. We have submitted a longer written 

statement for the record, but I want to summarize a few key points 

now about our equity derivatives and stock lending businesses. 

Swap trading is widespread and commonly accepted in today’s financial markets, and Morgan Stanley is a leader in the equity 

swap market. I understand that the Subcommittee is particularly 

interested in a subset of the equity swap business, namely, total return swaps with non-U.S. counterparties obtaining long exposure to 

dividend-paying U.S. stocks. I will refer generally to these as 

‘‘swaps’’ or ‘‘total return swaps’’ in my comments and in response 

to your questions. But I should be clear that the swaps I am referring to constitute a small subset of Morgan Stanley’s overall global 

swaps business. 

There are a variety of reasons why an investor may choose to 

transact via swap, including leverage, operational efficiency, and in 

some instances, tax benefits. I know from talking with the Subcommittee staff members and from reading the staff report that 

there is a great deal of focus on business purpose and client motivation for these trades. Let me start by saying our clients are, first 

and foremost, investors. Their business purpose, their motivation 

when they transact, is to put capital at risk in hopes of obtaining 

a positive investment return. Only after making their threshold investment decision of what to buy and what to sell do they begin 

to confront the issue of the best means by which to put their capital at risk, and tax can be an important part of that decision. 

Non-U.S. counterparties can choose to transact in swap in part 

to reduce their tax obligations. This is a legitimate choice and permissible under applicable tax laws, provided the swaps are exeVerDate Aug 31 2005 08:46 Apr 10, 2009 Jkt 045575 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 P:\DOCS\45575.TXT SAFFAIRS PsN: PAT
35 

cuted properly. We believe our swaps are properly executed in compliance with relevant tax laws and regulations. 

The relevant laws, as I understand them, provide that payments 

made under swap contracts are treated differently than dividends 

paid to owners of physical shares. That is the law, and it reflects 

a decision made by policymakers. At Morgan Stanley, our focus is 

on ensuring that what we offer to clients as swaps are, in fact, 

swaps. And we do not enter into swaps that could be recharacterized as repurchase agreements or agency arrangements, which are 

subject to different U.S. tax treatment. 

To take a conservative position, Morgan Stanley has always prohibited two-sided crosses to reestablish a physical long position and 

currently prohibits swaps with crosses on either end. We also do 

not allow our swap counterparties to direct our hedge or tell us 

how or whether to vote any shares that we may choose to purchase 

as part of a hedge. 

I understand the Subcommittee is also interested in the tax 

treatment of certain stock lending transactions. As one of the 

world’s leaders in equity financing services, Morgan Stanley is active in borrowing and lending stocks both inside and outside the 

United States. 

One aspect of our stock loan business is an intermediation business with Morgan Stanley standing between custodial lenders and 

borrowers of U.S. dividend-paying stocks and earning a spread between the cost of borrowing and the fees generated by our on-lending activities. At Morgan Stanley, the stock loan activity you have 

focused on is conducted by a desk in our London office, focused 

largely on non-U.S. stocks but involving some U.S. stocks as well. 

We believe we conduct this business in compliance with IRS Notice 

97–66, as we understand it, and that our practices are on the conservative end of the spectrum. 

Finally, I would like to say a word about tax policy in general. 

The tax treatment of dividends generally differs from the tax treatment of derivatives. Some have suggested a comprehensive rethinking of how we tax capital investment returns, regardless of 

whether the return is classified as a dividend or not, and regardless of whether the investor is U.S. or non-U.S. In light of today’s 

hearings, additional guidance on which investment structures the 

IRS would critique or respect would be helpful, particularly for organizations like Morgan Stanley, where we try to conduct our business on the conservative end of the spectrum. 

Thank you for the opportunity to testify, and I look forward to 

your questions. 

Senator LEVIN. Thank you, Mr. Berke. Ms. Leung. 

TESTIMONY OF ANDREA LEUNG, GLOBAL HEAD OF SYNTHETIC EQUITY FINANCE, DEUTSCHE BANK AG, NEW YORK, 

NEW YORK 

Ms. LEUNG. Good morning, Chairman Levin and Members of the 

Subcommittee. My name is Andrea Leung. I am the Global Head 

of Synthetic Equity Finance for Deutsche Bank AG. I am based in 

New York and have worked at Deutsche Bank since 2002. 

Among my responsibilities is the management of the synthetic 

equity desk in Deutsche Bank’s New York office. Our clients can 

36 

use synthetic equity to replicate the economics of a long or a short 

position in any particular equity security or in a basket of securities. Specifically, we enter into derivative or swap transactions 

with clients who want the economics of purchasing or selling a single stock, a basket of stocks, or an index of stocks without actually 

acquiring the underlying securities. 

Synthetic equity is a well-recognized, well-developed financial 

product that has business purposes unrelated to taxation in general or withholding taxes on dividends in particular. Indeed, many 

of our clients manage ongoing portfolios and execute trading strategies without owning any of the underlying securities. All of their 

investments are held in synthetic equity. Furthermore, we do 

transactions every day with domestic U.S.-based entities. We use 

synthetic equity to replicate short positions and to replicate positions in stocks that do not pay dividends. This product was not devised and is not held out by Deutsche Bank as a vehicle to avoid 

dividend withholding taxes. 

As my title Global Head of Synthetic Equity Finance suggests, 

this New York business is a financing business. As with any bank 

engaged in a financing business, we hope to profit from spreads— 

here the difference between our own cost of funds and that which 

we charge to the client. All clients, whether they are large or small, 

long or short, onshore or offshore, trading in dividend-paying securities or not, are charged a fee based on Deutsche Bank’s cost of 

funds plus our cost of balance sheet usage, stock execution, and 

any risks associated with the transaction, including the credit risk 

of the counterparty. 

We enter into swaps on all types of securities, including convertible bonds. Our swaps business based on U.S. stocks covers both 

dividend and non-paying dividend stocks. Approximately 60 percent 

of our clients have long positions with us, while the remaining 40 

percent have short positions. About one-third of our clients are 

based onshore, while the remainder are based offshore. Our swap 

product allows clients to execute trading strategies and take positions on U.S. equities and equity markets without holding the underlying physical securities. 

Clients establish synthetic versus actual equity positions for 

many reasons. Synthetic equity exposure, whether long or short, is 

advantageous to clients as a financing technique. Swaps provide 

clients with leverage, allowing them to gain the economic benefit 

of purchasing and selling securities without expending their own 

capital or having to pay the full cost of trading such securities. 

Clients are relieved of having to pay settlement costs and other 

back-office expenses. Also, because swaps involve synthetic and not 

actual trading positions, swaps shift from clients to the brokerdealers the obligation of certain market trading rules, such as locates for short sales. 

Synthetic position also allow clients to protect their proprietary 

trading strategies from market competitors. Because our synthetic 

equity product is intended to replicate the economics of a position 

in the underlying security, we make or receive payments under our 

swap agreements to give our clients the financial equivalent of dividend payments. The same economics could be replicated through a 

futures or option transaction. I and my colleagues across Wall 

37 

Street always have understood that, as a matter of tax law, swap 

payments are not subject to withholding tax, and the institution 

that makes them is not a withholding agent. That remains my understanding. 

Further, I have always understood that Deutsche Bank could not 

be deemed a withholding agent unless its transactions with customers were susceptible of being recharacterized as repo transactions or stock loans. 

We have taken a series of steps to eliminate any possibility that 

our transactions could be recharacterized in a manner that would 

violate tax laws or turn Deutsche Bank into a withholding agent. 

We have done this in part by establishing policies designed to prevent clients from entering swap transactions close to a dividend 

event. Thus, our policies are designed to encourage clients to hold 

for a minimum of 30 and preferably 45 days. 

In addition, we do not hedge our synthetic positions by both buying and selling the underlying stock with our client. We expect leverage to be a primary driver for entering into synthetic positions, 

so we do not permit clients fully to collateralize their positions. We 

also employ volume limits and pricing policies to ensure that our 

hedging involves market activity. 

We believe our policy has worked and that our synthetic equity 

business is not a tax dodge. The information we have provided to 

the Subcommittee demonstrates that two-thirds of all of our New 

York swap clients hold their swap positions at least 60 days before 

dividend record dates, and two-thirds of them hold their positions 

at least 60 days after dividend record dates. Typically, our clients 

unwind their swap positions not because dividends have just been 

paid, but because their trading strategy dictates a change in investment position. Further, we successfully market our synthetic equity 

product to customers who want short positions and to customers 

who want to enter into swaps on non-dividend-paying stocks. 

The entirety of the business clearly supports our understanding 

that our clients are entering into swaps for sound business reasons 

and our transactions are entirely legal under existing law. 

Thank you for your time. I will do my best to answer any questions that you may have. In the interest of time, I have left out portions of my prepared statement, including those addressed to the 

business conducted by my colleagues in London and Jersey. With 

your permission, I will submit those portions together with my 

written remarks for the record. 

Senator LEVIN. Ms. Leung, you are reading a statement. You 

have asked that the parts that you did not read be submitted to 

the record. We asked you to provide a copy of that written statement in advance, and you failed to do so. Why? 

Ms. LEUNG. We were certainly trying to comply with everything 

that you had requested and just as a matter of time, did not have 

the chance to get that to you. 

Senator LEVIN. You could not have gotten it to us this morning? 

You could not have given it to us last night? Everyone else gave 

us a copy of the written statements that they read from. 

Ms. LEUNG. I am sorry we did not do that. 

38 

1See Exhibit No. 26 which appears in the Appendix on page 256. 

Senator LEVIN. Mr. Berke, did Morgan Stanley market or engage 

in swap or stock loan transactions principally for the purpose of 

avoiding U.S. dividend withholding tax? 

Mr. BERKE. Senator, as I said in my opening remarks, we believe 

the primary purpose of clients engaging in equity swaps is to gain 

exposure to the underlying equity. Choosing swaps as a means of 

gaining that exposure or choosing entering into a stock loan is a 

secondary decision on their part on how to potentially deal with 

issues, including taxes. 

Senator LEVIN. Did you ever market your swap transactions or 

stock loan transactions so your client could avoid U.S. dividend 

withholding taxes? 

Mr. BERKE. We market the products generally and include disclosure about all the relevant aspects of it, including any tax implications or considerations that clients should have when considering 

those investment opportunities. 

Senator LEVIN. But did you ever market it focusing on enhancing 

the dividend payout by not having to pay withholding? 

Mr. BERKE. Our marketing materials include a discussion about 

taxes. 

Senator LEVIN. Did this discussion ever tell your recipient of 

your proposals that they would enhance the dividend payout? 

Mr. BERKE. Specific marketing materials may have, but generally we do include—— 

Senator LEVIN. Take a look at Exhibit 26,1 would you? 

Mr. BERKE. I am familiar with this from preparation for today’s 

testimony. 

Senator LEVIN. All right. This says, ‘‘Here are the main points 

regarding total return equity swaps on Microsoft why offshore 

funds are subject to withholding tax of up to 30 percent on cash 

dividends from U.S. stocks. Morgan Stanley can enhance the dividend payout from 70 percent to 100 percent through a total return 

equity swap. This is a great opportunity to highlight an application 

that is relevant to all dividend-paying securities, not just Microsoft.’’ 

Is that a Morgan Stanley document? 

Mr. BERKE. It is an internal distribution Morgan Stanley document, so it is marketing to our internal sales people and traders. 

Senator LEVIN. And did those folks that were marketing this particular type of a product use this argument? 

Mr. BERKE. They may very well have discussed these issues as 

opposed to using this piece as a marketing piece, yes. 

Senator LEVIN. But whether or not this particular piece was used 

in marketing, is it fair to say that they would have used this argument, this point in marketing for Morgan Stanley? 

Mr. BERKE. Yes, it is fair to say that. 

Senator LEVIN. And so, therefore, is it not fair to say that Morgan Stanley, when it was offering and suggesting total return equity swaps to potential customers, used as an argument that Morgan Stanley can enhance the dividend payout from 70 percent to 

100 percent through a total return equity swap? 

39 

1See Exhibit No. 22 which appears in the Appendix on page 242. 

Mr. BERKE. It is certainly the case in respect to the Microsoft 

dividend, yes. 

Senator LEVIN. Well, doesn’t it say here ‘‘not just Microsoft’’? 

Mr. BERKE. Yes, it does. 

Senator LEVIN. Mr. DeRosa, did Lehman Brothers market or engage in swap or stock loan transactions with the presentation of 

the argument that your customer could avoid U.S. dividend withholding tax? 

Mr. DEROSA. Similar to Mr. Berke’s answer—— 

Senator LEVIN. Give me your answer, if you would. 

Mr. DEROSA. Fine. We included among the benefits from entering into equity swaps the tax features. 

Senator LEVIN. The tax features being? 

Mr. DEROSA. Meaning the reduction of taxes payable. 

Senator LEVIN. OK. Now, if you will look at Exhibit 22? 1 This 

is a letter from you to Maverick Capital. Do you see on page 2 it 

says, ‘‘We have a variety of solutions using swap and securities 

lending vehicles for achieving yield enhancement’’? 

Mr. DEROSA. I see that. 

Senator LEVIN. Was that not clearly marketing to Maverick a vehicle for increasing dividend yield, enhancing a dividend yield? Is 

that not clearly what you were marketing there? 

Mr. DEROSA. Among the other items listed in this letter, yes, 

that was featured. 

Senator LEVIN. And where are those other items? 

Mr. DEROSA. In just looking down the list of starting at the first 

page, it goes through several different aspects of synthetic financing, I believe. 

Senator LEVIN. Were any of those applying to your swap product 

or your securities lending product? 

Mr. DEROSA. I have not seen this document before this morning, 

so I am just skimming it now. But I presume it is with respect to 

all of the products that we offer. 

Senator LEVIN. Well, why don’t you read it now and tell me 

whether any of those items on page 1 refer to your swap and securities lending vehicle and whether you say anything about your 

swaps and security lending vehicle except that it will achieve yield 

enhancement. And then you propose that Maverick provide Lehman Brothers with an interest list on a weekly basis for possible 

enhancement trades. If that is not marketing a vehicle to increase 

your dividend yield, I do not know what is. 

Mr. DEROSA. Again, just looking at it for the first time, at the 

bottom of the first page it is discussing our prime-plus product; 

prime-plus provides U.S.-based hedge fund risk-based margin lending. 

Senator LEVIN. Right. 

Mr. DEROSA. With all the benefits of traditional prime brokerage, 

including insurance wrapper. 

Senator LEVIN. Is that your swap lending to achieve yield enhancement? 

Mr. DEROSA. I am not sure exactly which product that is. I 

apologize. But, again, what I am suggesting is that the letter deals 

40 

1See Exhibit No. 31 which appears in the Appendix on page 265. 

with other aspects that are advantageous to the client in addition 

to the dividend enhancement. 

Senator LEVIN. Well, you are selling a lot of things in this letter. 

You are promoting a lot of things. One of the things you are promoting is a swap and security lending vehicle for achieving yield 

enhancement. Are you promoting it for anything else other than 

achieving yield enhancement? Just take a look at the paragraph. 

It says ‘‘Dividend Enhancement Solutions. We have a variety of solutions using swap and securities lending vehicles for achieving 

yield enhancement.’’ Do you list anything else there that you are 

using swap and securities lending vehicles other than for that? 

Mr. DEROSA. That paragraph does not. It references the dividend 

enhancement feature associated with swaps and security lending 

transactions. 

Senator LEVIN. All right. Ms. Leung, did Deutsche Bank engage 

in swap or stock loans transactions for the principal purpose of 

avoiding U.S. dividend withholding tax? 

Ms. LEUNG. We did not. 

Senator LEVIN. All right. Now, take a look at Exhibit 31.1 On Exhibit 31, where it says, ‘‘We are in the process of determining 

hedge fund demand for ‘All In’ enhancement to clients for our proprietary trades,’’ does that relate to dividend enhancement? 

Ms. LEUNG. This would relate to dividend enhancement. However, I will note that we did not actually, to the best of my knowledge, engage in any activity that came off of this memo. 

Senator LEVIN. So you determined there was no demand? 

Ms. LEUNG. We determined that this was not something that we 

wanted to market to our clients and actually discouraged any marketing documents with regards to the Microsoft dividend. 

Senator LEVIN. Did you hear Mr. Wolf on the prior panel testify 

that Deutsche Bank marketed dividend enhancement swaps to 

them? Did you hear him say that? 

Ms. LEUNG. Yes, I did hear that. 

Senator LEVIN. He was under oath. 

Ms. LEUNG. Yes. 

Senator LEVIN. You are under oath. 

Ms. LEUNG. I understand. 

Senator LEVIN. Do you disagree with him? 

Ms. LEUNG. We market swaps to clients for a variety of reasons—— 

Senator LEVIN. No. I am saying for dividend enhancement. 

Ms. LEUNG. Dividend—— 

Senator LEVIN. That is what he testified to. Did you market dividend enhancement swaps to them? 

Ms. LEUNG. Sure, well, to—— 

Senator LEVIN. Pardon? The answer is ‘‘sure,’’ or your answer 

is—— 

Ms. LEUNG. No. To address both of your questions separately, 

first regarding this document, this is regarding Microsoft, and in 

the case of Microsoft, we did not market the Microsoft transaction. 

In fact, under our New York swaps desk, we did a total of 500,000 

shares worth of swaps during the time of Microsoft, which is a very 

41 

1See Exhibit No. 19 which appears in the Appendix on page 229. 

de minimis amount in the context of our business, as well as had 

trading parameters around making sure that there was investment 

intent with those trades. 

With regards to selling our product and Mr. Wolf’s comments before, our swaps are marketed for a variety of reasons, for 

counterparties who want long exposure and who want short exposure, for those who have onshore and offshore entities, and a variety of reasons including and most primarily leverage, as well as 

protecting clients’ market strategies and global market access. 

Senator LEVIN. Now, did Deutsche Bank market dividend enhancement swaps—— 

Ms. LEUNG. We marketed—— 

Senator LEVIN [continuing]. For—all those other purposes you 

just listed. But did you ever market swaps for dividend enhancement? 

Ms. LEUNG. We did market swaps with dividend enhancement as 

part of one of the many other factors for doing swaps. 

Senator LEVIN. Did you ever market swaps primarily for dividend enhancement? 

Ms. LEUNG. No, we did not. 

Senator LEVIN. And so when Mr. Wolf said that Deutsche Bank 

marketed dividend enhancement swaps to them, you are saying 

that that was never the primary purpose that you marketed them 

for? 

Ms. LEUNG. To the best of my knowledge, yes. 

Senator LEVIN. Would you have knowledge if you had done that, 

if your firm had done that, if the bank had done that? Would you 

be aware of it if Deutsche Bank did that? 

Ms. LEUNG. Yes, I would be, and to the best of my knowledge, 

we market swaps for many reasons, and—— 

Senator LEVIN. But never primarily for dividend enhancement. Is 

that what you are telling us, under oath, that your bank never 

marketed swaps primarily for dividend enhancement. Is that what 

your testimony is? 

Ms. LEUNG. We do not market swaps primarily for dividend enhancement. 

Senator LEVIN. And never have? 

Ms. LEUNG. I can’t speak to the lifetime of my firm. 

Senator LEVIN. While you were there? 

Ms. LEUNG. While I was there, correct. 

Senator LEVIN. You never did that? 

Ms. LEUNG. We did not—we did not market swaps primarily for 

dividend enhancement. 

Senator LEVIN. OK, good. And how long have you been there? 

Ms. LEUNG. Since 2002. 

Senator LEVIN. Thank you. 

Mr. DeRosa, could you take a look at Exhibit 19? 1

[Pause.] 

Senator LEVIN. Are you familiar with this document? 

Mr. DEROSA. Yes, I am. 

Senator LEVIN. OK. Now, this is an internal review document, as 

I understand it, a briefing paper that was devoted to dividend enVerDate Aug 31 2005 08:46 Apr 10, 2009 Jkt 045575 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 P:\DOCS\45575.TXT SAFFAIRS PsN: PAT
42 

hancement and what the exposure would be of that enhancement. 

Is that fair? 

Mr. DEROSA. That is fair. 

Senator LEVIN. And it lists Lehman Brothers’ yield enhancement 

product and has a chart estimating the amount of dividends affected by each product, the amount of ‘‘withholding tax risk’’ that 

the company thinks it might face if the IRS rules against these 

products. It even has a description and diagram of a stock loan 

transaction used for yield enhancement. 

Now, is it fair to say that the reason that Lehman Brothers prepared this document is in order to market yield enhancement products and to look at what the potential risks would be of that use 

in that market? Is that correct? 

Mr. DEROSA. No. This document did not have to do with marketing. This, as you indicated initially, was an internally prepared 

document, shared internally, designed to assess the different potential risks on the transactions. 

Senator LEVIN. Of engaging in those transactions? 

Mr. DEROSA. Correct. 

Senator LEVIN. OK. So you were looking in some detail at the exposure to you of these transactions. Is that correct? 

Mr. DEROSA. The person who prepared this document, who was 

not familiar in detail with all these businesses, was—with all these 

products, rather, was trying to craft a high-level assessment. 

Senator LEVIN. Do you know who prepared this document? 

Mr. DEROSA. Yes. 

Senator LEVIN. Who was that? 

Mr. DEROSA. Ian Maynard. 

Senator LEVIN. OK. Why would you do this kind of an analysis 

if you were not marketing these products? 

Mr. DEROSA. What I think he was trying to give information on 

was around Lehman Brothers’ risk profile. Maybe I am missing 

your use of the word ‘‘marketing,’’ but—— 

Senator LEVIN. You were engaged in these products, you were involved in these products. 

Mr. DEROSA. Correct. 

Senator LEVIN. And your involvement was in products which enhanced the yield of dividends. Is that correct? 

Mr. DEROSA. Correct. 

Senator LEVIN. Through the use of swaps. 

Mr. DEROSA. And stock loans? 

Senator LEVIN. And loans. 

Mr. DEROSA. Correct. 

Senator LEVIN. And so this was looking at what the risks were 

of doing that? 

Mr. DEROSA. Correct. 

Senator LEVIN. But you were doing that despite these risks? 

Mr. DEROSA. The risk was created due to the vacuum in which 

we were operating as far as guidance is concerned, so at Lehman 

Brothers, we measure the risk across all of our transactions, and 

these are no exception. So what this document was appreciative of 

is the fact that the IRS had indicated that they might have a concern with the characterization of these transactions, and, therefore, 

43 

1See Exhibit No. 12 which appears in the Appendix on page 218. 

2See Exhibit No. 18 which appears in the Appendix on page 228. 

what we were trying to do here was to create an indication of what 

the total maximum possible could be, much like—— 

Senator LEVIN. What was that total maximum possible? 

Mr. DEROSA. I am not sure what the total maximum was because this document is fundamentally incorrect in assessing the 

risk. What I can tell you is that the examination in which we are 

involved by the IRS has generated a much smaller number. 

Senator LEVIN. What is that number? 

Mr. DEROSA. Roughly ten and a half million across the 2004–05 

period. 

Senator LEVIN. What period? 

Mr. DEROSA. For 2004 and 2005. 

Senator LEVIN. And before that? 

Mr. DEROSA. We did not measure that pursuant to the IRS 

exam. The audit is restricted to those 2 years. 

Senator LEVIN. And did you do any subsequent to that? 

Mr. DEROSA. Subsequent to 2005, we have not taken the detailed 

review, but we have done a fair amount of work around 2006 and 

2007, and transactions that remotely, I think, replicate the transaction as described in the Subcommittee report probably generate 

several hundred thousand dollars of dividends. 

Senator LEVIN. OK. Take a look, if you would, Mr. DeRosa, at 

Exhibit No. 12.1 This is an email from Mr. Demonte to Elizabeth 

Black. They are both Lehman Brothers employees, as we understand it. And here is what it says, that ‘‘the spread sheet contains 

long positions for Highbridge which we currently buy into a swap 

to enhance their yield for dividends.’’ Is that accurate? 

Mr. DEROSA. That is what it says. 

Senator LEVIN. Are you familiar with this? 

Mr. DEROSA. I have seen this document in my preparation. 

Senator LEVIN. All right. So this spread sheet, then, looks at 

Highbridge stocks which Lehman Brothers currently buys into a 

swap to enhance their yield for dividends. That is the stated purpose. Is that correct? There is no other purpose stated for that 

swap except to enhance their yield for dividends. Is that correct? 

Mr. DEROSA. There is no other purpose stated in this email. That 

is correct. 

Senator LEVIN. And do you have any other document which 

shows there was any other purpose for that particular swap? 

Mr. DEROSA. I do not. 

Senator LEVIN. OK. Could you take a look, if you would, Mr. 

DeRosa, down at the page number at the bottom 33324. 

Mr. DEROSA. Which tab? 

Senator LEVIN. This is Exhibit 18.2 Now, if you take a look at 

this exhibit, in the second paragraph—do you have it in front of 

you now? 

Mr. DEROSA. I do. 

Senator LEVIN. It says that the CFD—and that is a swap product—is usually used for yield enhancement purposes. And that is 

a Lehman Brothers swap product, right? 

Mr. DEROSA. CFD, yes. 

44 

1See Exhibit No. 27 which appears in the Appendix on page 259. 

Senator LEVIN. Is that Lehman Brothers? 

Mr. DEROSA. CFD is a general term, not specifically Lehman 

Brothers. But, yes, it is a Lehman Brothers product. 

Senator LEVIN. But you are referring here to the Lehman Brothers CFD, right? 

Mr. DEROSA. I believe that is what he was referring to. 

Senator LEVIN. Well, take a look at the previous paragraph. It 

says the Lehman Brothers CFD, right? 

Mr. DEROSA. Correct. 

Senator LEVIN. OK. So we are talking about a Lehman Brothers 

CFD and it is usually used for yield enhancement purposes. Is that 

an accurate reading of your document? 

Mr. DEROSA. That is an accurate reading. 

Senator LEVIN. So you have this product, which is usually used 

for yield enhancement. None of those other reasons are specified. 

Is that correct? 

Mr. DEROSA. You have got a salesperson drafting a document 

here to one of his clients, and that is the purpose that he is indicating in this document. 

Senator LEVIN. Is he using any other purpose beside yield enhancement in this document? 

Mr. DEROSA. No, not in this document. 

Senator LEVIN. So is that anything other than marketing this 

particular product for yield enhancement purposes? What is this 

other than marketing for yield enhancement purposes in this situation? 

Mr. DEROSA. I am not trying to debate the—— 

Senator LEVIN. Well, I am not trying to debate. I am trying to 

get a straight answer from you. What other reason is given in this 

document, and is this not a marketing document? 

Mr. DEROSA. He gives no other reason in this document to the 

person with whom he is communicating for doing the transaction 

other than yield enhancement. 

Senator LEVIN. And is it a marketing document, would you not 

say? 

Mr. DEROSA. I wouldn’t necessarily call it a marketing document, 

but that is fine. I don’t object to that. 

Senator LEVIN. Mr. Berke, take a look at Exhibit 27,1 if you 

would. 

This is an August 9, 2004, email from Daniel Brennan to Alan 

Thomas, both Morgan Stanley employees. It says, ‘‘Spoke again’’— 

are you with me. 

Mr. BERKE. Yes. 

Senator LEVIN. Do you see where I am reading from? 

Mr. BERKE. Yes. 

Senator LEVIN. ‘‘Spoke again with Bill Scazzero who works on 

Moore’s,’’ which is a hedge fund, ‘‘trading desk, to ascertain usefulness of the Microsoft total equity swap for Moore Capital. Bill informed me that Morgan Stanley and Moore Capital frequently 

transact such swaps to maximize returns given offshore status and 

dividend withholding issues.’’ 

Now, that is a Morgan Stanley document, right? 

45 

1See Exhibit No. 29 which appears in the Appendix on page 262. 

Mr. BERKE. Yes. 

Senator LEVIN. It is a contemporaneous document. Do you have 

any reason to say that it is inaccurate, that there were not frequent transactions using such swaps to maximize returns given offshore status and dividend withholding issues? Do you have any 

reason to say that is an inaccurate statement in August 2004? 

Mr. BERKE. No. 

Senator LEVIN. These are Morgan Stanley employees emailing 

each other. Is that accurate? Daniel Brennan to Alan Thomas. 

Mr. BERKE. Yes, these are Morgan Stanley employees. 

Senator LEVIN. All right. Mr. Berke, let me ask you about your 

Cayman Islands operation. Do you employ folks in the Caymans? 

Mr. BERKE. Not to my knowledge, no. 

Senator LEVIN. If you will take a look at Exhibit 29.1

Mr. BERKE. Yes, Senator. 

Senator LEVIN. All right. Before I ask you specifically about that 

document, in your opening statement, Mr. Berke, you testified that 

between 2000 and 2007, Morgan Stanley Cayman and Morgan 

Stanley International U.K. paid about $2.4 billion in substitute 

dividends as a result of stock loans involving U.S. dividend-paying 

securities. The Subcommittee understands that about 49 percent, 

or $1.6 billion of that, was from your Cayman Islands entity. 

If U.S. withholding taxes on those dividends had been collected 

at the 30-percent rate, the amount would total approximately $300 

million. However, no withholdings were collected because Morgan 

Stanley took advantage of an IRS notice and inserted a Cayman Islands shell company into this transaction, and as a result, Morgan 

Stanley did not withhold any of the dividend payments. 

So far am I accurate? 

Mr. BERKE. Yes, by complying with IRS Notice 97–66—— 

Senator LEVIN. No, but is my statement, what I just read, totally 

accurate in its total? Do you have any disagreement with what I 

just read to you about your opening statement? 

Mr. BERKE. No. 

Senator LEVIN. OK. Now, you said that you have no folks in the 

Caymans, and now you are looking at Exhibit 29, which says that 

Cayco—and Cayco is your company in the Caymans. Is that correct? 

Mr. BERKE. Yes. It has a longer name, but we refer to it as 

‘‘Cayco.’’ 

Senator LEVIN. OK. It is a thinly capitalized company, cannot absorb losses, and it should never hold long stock positions. Is that 

correct? 

Mr. BERKE. Yes, it is. 

Senator LEVIN. It also says that it must not enter into stock lending arrangements directly with MSIL. Who is that? 

Mr. BERKE. That is the former name of our U.K.-registered 

broker-dealer. 

Senator LEVIN. OK. Surplus cash in Cayco must not be lent to 

any affiliate or entity in the United States without the approval of 

the tax department. If it enters into derivative transactions, dispensation should always be obtained from the law and compliance 

46 

department. It may not sell stock positions to U.S. institutional investors. It may not enter into stock lending transactions with any 

U.S. counterparties. It may not purchase securities from any person in the United States. It may not enter into derivative transactions with any U.S. person. It may not carry out repo transactions with any U.S. person. It may not source collateral from MS 

& Company. It may not lend U.S. equities against cash collateral 

unless the cash is equal to 200 percent. It may not carry out advisory business. It may not invest in futures. 

What can it do? 

Mr. BERKE. With respect to the United States, it primarily engages in stock lending activity of U.S. stocks. 

Senator LEVIN. All right. That was its purpose? 

Mr. BERKE. That is the primary purpose that I am aware of that 

the vehicle is used for. 

Senator LEVIN. Now, is it fair to say that is a shell corporation, 

in common parlance? 

Mr. BERKE. That is a fair estimate, yes. 

Senator LEVIN. Mr. DeRosa, Lehman Brothers has a Cayman facility that it has used to run two stock loan transactions. Does Lehman Brothers have people working in the Cayman Islands? 

Mr. DEROSA. No, we do not. Just to clarify, the Cayman Islands 

operation is a branch of our Hong Kong entity. 

Senator LEVIN. That is Lehman Brothers’ Hong Kong entity? 

Mr. DEROSA. Correct. 

Senator LEVIN. Can I call it Lehman Brothers without any misunderstanding? 

Mr. DEROSA. Sure. 

Senator LEVIN. OK. Is that location in the Caymans still used to 

transact stock loans involving U.S. dividend-paying securities? 

Mr. DEROSA. I believe it is. 

Senator LEVIN. Ms. Leung, in 2004, Deutsche Bank Limited 

began to use a facility in the Isle of Jersey to transact stock loans 

using U.S. securities. According to an internal Deutsche Bank application seeking approval for those transactions, the reason for the 

proposed transaction and its location was so Deutsche Bank could 

insert a ‘‘non-U.S. treaty entity’’ in its stock loan transactions to 

avoid dividend withholding and lower its stock loan pricing to 

match its competitors. 

Is that the case, that Deutsche Bank set up this program in the 

offshore jurisdiction of Jersey to exploit the IRS rule on substitute 

payments and avoid the withholding tax on dividends, thereby generating a bigger return on the transactions? 

Ms. LEUNG. It is true that we started trading through our Jersey 

entity. We did not feel that it was to exploit, but we felt it was 

legal, perfectly legal under Notice 97–66. 

Senator LEVIN. All right. To utilize that rule. 

Ms. LEUNG. Yes. 

Senator LEVIN. Except for that word—and I will say ‘‘utilize’’ instead of ‘‘exploit’’—was what I read to you accurate? 

Ms. LEUNG. Yes, it is accurate. 

Senator LEVIN. Part of the desire to be more competitive, to 

match its competitors, as I said, in order to match the substitute 

dividend payments for stock loans and avoiding the withholding 

47 

1 Counsel to Deutsche Bank provided the Subcommittee with a letter dated September 29, 

2008, explaining that the $27 million figure ‘‘was derived from an analysis of data reflecting 

stock lending transactions and forward contract transactions involving the DBIL entity . . . in 

which securities were held ‘for 21 days or less, where such a time period covered a dividend 

record date of the securities[.]’ ’’ 

The Subcommittee advised Deutsche Bank that the request for the approximate amount of 

total withholding taxes avoided through dividend enhancement, yield enhancement, or other 

transactions that had the reduction of withholding tax as a primary purpose was not limited 

to transactions with a duration of 21 days or less. The Subcommittee asked Deutsche Bank to 

Continued 

tax on those substitute dividends to the extent that your competitors were doing it. Is that correct? You wanted to be competitive 

with your competitors in that area. 

Ms. LEUNG. What we were trying to be competitive with was on 

the ability to bid on pools of stocks available for lending. We did 

not enter into any of these transactions with hedge funds. The primary purpose of this in order to be competitive with pricing was 

to tap into the pools of stock loan available through institutions 

where, when bidding on those securities and paying a fee to those 

institutions, a portion of those securities would be U.S. securities. 

And under Notice 97–66, we felt we could be more competitive in 

our pricing in order to win those pools of securities. 

Senator LEVIN. In order to be more competitive on your pricing, 

you would, like your competitors, need to avoid the withholding on 

those dividends. Is that correct? 

Ms. LEUNG. We would need to not be subject to the 15-percent 

withholding that we would have been subject to. 

Senator LEVIN. And you used Notice 97–66 to avoid the taxes. Is 

that correct? 

Ms. LEUNG. We used Notice 97–66 because we felt that was within the letter of the law. 

Senator LEVIN. Right, and that would help you avoid those 

taxes? 

Ms. LEUNG. Notice 97–66 would keep us from being withheld on 

those dividends. 

Senator LEVIN. Ms. Leung, Deutsche Bank told the Subcommittee staff that approximately 98 percent of the loans transacted through the Deutsche Bank Jersey entity involve U.S. dividend-paying securities. Are you aware of that? 

Ms. LEUNG. I am not intimately familiar with it, but, please, I 

will try to answer your question. 

Senator LEVIN. Do you disagree with that? 

Ms. LEUNG. No, I don’t disagree. 

Senator LEVIN. It also reported that in 2007 alone, DBIL engaged in stock lending transactions involving U.S. dividend-paying 

securities with a notional value of over $30 billion. We have asked 

Deutsche Bank to supply us the amount of dividends paid as a result of those $30 billion worth of loans, and when are we going to 

get this information from you? 

Ms. LEUNG. I have that information for you now. Again, if these 

transactions were subject to withholding from the periods 2004 to 

2007, that amount would be $27 million. 

Senator LEVIN. OK. Would you submit to the Subcommittee the 

way in which you reached that result? Not now, but would you for 

the record submit to us your computations which led you to the $27 

million figure?1

48 

provide the total amount of withholding taxes avoided through transactions conducted through 

DBIL. 

On October 30, 2008, counsel for Deutsche Bank responded with the following information 

encompassing transactions from October 2004, when DBIL commenced operations, through the 

end of 2007: 

‘‘[T]he total hypothetical estimated withholding figure for all DBIL transactions of any tenor [is] $97,349,757.24. . . . $27,819,148.73 of this total is due to transaction where a position was held for 21 days or less. Another $8,479,821.51 is from transactions of more than 

21 days and fewer than 30 days. And the bulk of this total, $61,050,787, is due to transactions where a position was held for 30 days or more. Deutsche Bank does not believe that 

a transaction where a counterparty holds a position for a month or longer over a dividend 

record date is one that necessarily ‘has as a primary purpose the reduction, minimization, 

or elimination of withholding tax liability.’ ’’ 

Ms. LEUNG. Yes, we can do that. 

Senator LEVIN. Ms. Leung, why did Deutsche Bank conduct its 

stock loan business on U.S. securities with entities in 15-percent 

tax jurisdictions from the Isle of Jersey? 

Ms. LEUNG. I am not intimately familiar with that business, but 

for these pools of—for these securities lending pools, these were 

bids for international securities, and that was run out of our London office. 

Senator LEVIN. Was that to take advantage of Notice 97–66? 

Ms. LEUNG. I do not believe—— 

Senator LEVIN. Was that utilizing that regulation? 

Ms. LEUNG. It utilized the regulation, yes. 

Senator LEVIN. All right. Let me ask you, Mr. DeRosa. Lehman 

Brothers established tax risk limits for all of the swap and stock 

loan transactions that you used for dividend enhancement purposes, the Cayman stock loan transactions had a $25 million annual limit, which was later raised to $50 million. Why did you set 

a tax risk limit? 

Mr. DEROSA. It goes back to not having clear guidance around 

the products. 

Senator LEVIN. All right. Was that tax guidance from the IRS, 

you mean? 

Mr. DEROSA. Yes. 

Senator LEVIN. And, Mr. Berke, did Morgan Stanley set any tax 

risk limits on any dividend enhancement transactions involving 

U.S. dividend-paying securities? 

Mr. BERKE. Yes, there is a risk limit on a type of equity swap 

done out of London. 

Senator LEVIN. That is it? 

Mr. BERKE. That is the only tax limit that I am aware of. 

Senator LEVIN. And did Deutsche Bank have any tax risk limits, 

Ms. Leung? 

Ms. LEUNG. We did not have any risk limits. 

Senator LEVIN. All right. And what about indemnity agreements? 

First of all, Lehman Brothers, Mr. DeRosa, did you have indemnity 

agreements? 

Mr. DEROSA. My understanding is that there are standard indemnity agreements found both in the ISDA contract governing 

swaps and the OSLA contract governing securities lending. In addition to that, when specifically asked by several clients with respect 

to our stock lending activities, we did provide further documentation, which basically provided more specificity around the indemnification that is found in the OSLA. 

49 

Senator LEVIN. Further documentation that had greater specificity. Would that say that the customer wanted to be clearer in 

terms of indemnity? 

Mr. DEROSA. I think it does mean that the client wants more 

guidance than the standard language that is found in the OSLA. 

That is relatively broad. I think the wording is all encompassing, 

but I think in certain instances clients would like a more granular 

documentation. 

Senator LEVIN. And would that granularity, speaking with greater clarity, mean specific indemnity for substitute payments? 

Mr. DEROSA. The indemnity provides that the counterparty 

would be not held liable if there were a withholding tax imposed 

at a later date. 

Senator LEVIN. On those substitute dividends? 

Mr. DEROSA. Correct. 

Senator LEVIN. Let’s see. Did I ask you, Mr. Berke about the indemnity? 

Mr. BERKE. Not yet. [Laughter.] 

Senator LEVIN. I would not want to leave you out. Did you issue 

indemnity agreements? 

Mr. BERKE. In connection with our Notice 97–66 business, we 

have issued a handful of indemnities to order placers acting in a 

fiduciary capacity on behalf of investment clients. 

Senator LEVIN. Ms. Leung, did your bank issue indemnity agreements? 

Ms. LEUNG. We did not. 

Senator LEVIN. OK. Finally, let me ask the three of you: UBS has 

halted and Merrill Lynch has suspended stock loan programs that 

use entities in offshore tax havens for the purpose of utilizing that 

IRS notice. Do any of your companies plan to take any similar type 

of action? Mr. DeRosa, do you know of any plans by your company? 

Mr. DEROSA. Not to the best of my knowledge. 

Senator LEVIN. Mr. Berke. 

Mr. BERKE. Not to the best of my knowledge. 

Senator LEVIN. Ms. Leung. 

Ms. LEUNG. Not to the best of my knowledge. 

Senator LEVIN. OK. Thank you for your appearance here today, 

and I appreciate your testimony. 

We are going to take a 5-minute break. 

[Recess.] 

Senator LEVIN. We will come back to order. 

Let me welcome our final witness, Hon. Doug Shulman, Commissioner of the IRS. 

Commissioner Shulman, I want to thank you for being here. I 

want to welcome you back to the Subcommittee. You have testified 

before this Subcommittee before on tax haven banks and U.S. tax 

compliance, and we very much appreciate your being with us today. 

I know you are familiar with our rule that we have to swear in all 

of our witnesses, and so I would ask you to stand and please take 

the following oath: Do you solemnly swear that all the testimony 

you will give before this Subcommittee will be the truth, the whole 

truth, and nothing but the truth, so help you, God? 

Mr. SHULMAN. Yes. 

50 

1The prepared statement of Mr. Shulman appears in the Appendix on page 94. 

Senator LEVIN. Thank you so much, and I think you know our 

rule in terms of timing, and so we will just turn it right over to 

you directly for your testimony. 

TESTIMONY OF HON. DOUGLAS SHULMAN,1 COMMISSIONER, 

INTERNAL REVENUE SERVICE, WASHINGTON, DC 

Mr. SHULMAN. Thank you, Chairman Levin, and good morning. 

I want to thank you for the opportunity to appear before you today 

to discuss an issue of great interest both to the Internal Revenue 

Service and this Subcommittee: The practice of using certain financial instruments to reduce or eliminate the U.S. withholding tax 

that applies to payments of dividends on U.S. stocks to foreign persons. 

Let me reiterate what I told you previously: That I have made 

international issues a top priority for the IRS during my 5-year 

term as Commissioner. I am only 5 months into that term, but I 

am committed to aggressively pursue enforcement actions where 

taxpayers use the complexities of international commerce to circumvent their duties under the law. 

I also want to tell you that I am personally focused on these 

issues and am in the process of shifting more resources to the financial markets in international arenas. 

Let me also just reiterate the appreciation that I and everyone 

at the IRS have for the support of the Members of this Subcommittee and, commend you and your staff for your excellent 

work. You really do great work, and it helps us out quite a bit in 

doing our job. 

In my limited time this morning, I would like to make a few 

points about securities lending and equity swaps, and the extent to 

which such transactions are being used as a means of avoiding the 

withholding tax on dividends paid to foreign persons. 

Before going into my testimony, I must start by saying that, as 

you know, taxpayer confidentiality laws preclude me from disclosing information relating to specific taxpayers or specific audits. 

Accordingly, I will not be able to comment or respond to questions 

on any specific facts that have been reported by the Subcommittee 

or other witnesses. 

Our statutory and regulatory framework in this area, which includes both legislation and administrative guidance, would objectively be called ‘‘a patchwork.’’ Dividends in the cash market are 

taxed at 30 percent, with a 30-percent withholding tax. By contrast, capital gains earned by foreign persons on these same stocks 

are generally exempt from U.S. tax by statute. In addition, most 

forms of interest paid to foreign persons are not subject to U.S. tax. 

And at the same time, income earned by foreign residents with respect to total return swaps are generally considered to be exempt 

from U.S. tax. With that as a background and recognizing this 

patchwork, let me connect the dots for the Subcommittee on the 

IRS’s approach and strategy in this area. 

First, the IRS has numerous active investigations of the types of 

transactions that we are discussing today. In these types of large 

complex audits, our investigations lag behind the tax years. For inVerDate Aug 31 2005 08:46 Apr 10, 2009 Jkt 045575 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 P:\DOCS\45575.TXT SAFFAIRS PsN: PAT
51 

stance, the current examinations that we have open generally focus 

on years 2004 to 2006, but we also have investigations open in 

years before that. As you know, we do not receive 2007 corporate 

tax returns until later this month. However, if some of the type of 

information in your report plays out as we look at current or later 

years, we would have serious concerns and investigate the issues 

thoroughly. 

Examinations in this area are extremely complex, often involving 

multiple taxpayers, some of whom are foreign citizens located outside the United States. As we discussed when I was here before, 

when we have foreign citizens and entities outside the United 

States, it can be harder for us to get there on our investigative resources, and we talked about some potential solutions like extending the statute of limitations. 

In the course of our examinations, we have issued numerous information document requests, requesting information related to 

suspicious transactions. Depending on the nature of the request, 

we look for emails, other documentation, and we also take testimony. As I noted before, these are extremely complex investigations, and they are still ongoing. 

And while we are seeing some financial institutions whose swaps 

and securities lending business is structured for bona fide business 

purposes, we are also seeing some fact patterns that are troubling. 

I cannot comment on the specifics of the ongoing investigations, but 

I can tell you that where we see transactions that we believe are 

abusive, under my tenure at the IRS we will challenge them. 

As I said before, the Subcommittee staff has done excellent work 

in producing this report. There is one aspect of the report, however, 

that is troubling to me. The report may leave the reader with the 

impression that the IRS is reluctant to challenge financial institutions on tax matters. The report references the so-called Wall 

Street rule. 

Let me state very plainly and unequivocally that where the facts 

are favorable for the government, we will challenge sham transactions that have no economic purpose other than tax avoidance. 

On the policy front, we are aware that some companies believe 

there is a loophole in Notice 97–66 which allows them to structure 

securities lending deals that avoid all withholding on the payment 

of dividends. As you know, Notice 97–66 is 10 years old. I agree 

that Notice 97–66 should be reviewed to determine if it can be 

modified in such a way as to retain the original intent. I have 

asked the IRS staff to work with the Treasury Department on this 

analysis. 

As the Nation’s tax administrator, I always welcome dialogue on 

better ways to run our system of taxation. As we look at this notice, however, we also have to recognize that it opens broader economic policy issues, and we will need to consider how it fits into 

our patchwork of taxation for the capital markets. 

Regardless, you should rest assured, Mr. Chairman, that on my 

watch, the IRS will aggressively pursue financial institutions who 

are using the complexity of the global capital markets to avoid paying the taxes that they owe. 

52 

Thank you for the opportunity to appear today. I appreciate the 

support that your Subcommittee has given the IRS over the years, 

and I am happy to respond to questions. 

Senator LEVIN. Thank you very much, Commissioner. 

This has been going on for 10 years. You have only been there, 

I guess, half a year—how many months have you been there? 

Mr. SHULMAN. Five months. 

Senator LEVIN. Five months. We basically have heard for 10 

years, not from you but from other folks at the IRS, that this is 

troubling; they are reviewing particularly Notice 97–66. 

Now, if you are sitting out there and you are a taxpayer in this 

country and you are paying your taxes, including taxes on dividends that you are receiving from companies, and then folks overseas who are receiving dividends who are supposed to be paying 

taxes on those dividends are using these gimmicks to avoid paying 

taxes, and it was clearly not intended that they be able to avoid 

paying taxes on dividends because we have a withholding requirement—which has got teeth in it, but they have avoided it through 

these gimmicks which you know about and have heard about again 

this morning, why not just end it? I know the policy arguments. 

Those policy arguments will rage until someone resolves those policy arguments. And I take it you have participated in policy discussions about this issue. Is that a fair statement? 

Mr. SHULMAN. Only very recently. 

Senator LEVIN. Only very recently. 

Mr. SHULMAN. Yes. 

Senator LEVIN. But there are policy discussions which are raging 

around this issue, I assume, within the IRS and in the Treasury. 

Is that a fair statement? 

Mr. SHULMAN. I think everyone is aware there are policy issues. 

Senator LEVIN. This hearing is not into the policy issues. We will 

let the Finance Committee and others have that debate. This is a 

question of enforcing our tax laws. They are not being enforced. It 

is very simple. It is very clear. They are not being enforced. We 

heard it here very clearly this morning. They are clearly not being 

enforced on the stock loans, where everyone acknowledges that 

that regulation was not intended to allow for the avoidance of taxes 

when it comes to the stock loans which we heard described. But 

then you have got these phony stock sales that then are used as 

part of a swap transaction to avoid the tax on dividends where 

swaps are used. 

Now, why can’t we just simply modify Notice 97–66? You have 

acknowledged this morning its purpose is being obviated. I know 

there are policy issues involved, but why not change the regulation? It is acknowledged that its purpose is being circumvented, so 

why not change it? 

Mr. SHULMAN. You brought up a few things there. Let me first 

say, if I were a financial institution testifying before you, I would 

sit up here and be assertive and claim my view of the tax law. I 

think the IRS may have a view that is different from some of the 

things you have heard. 

Senator LEVIN. Not on Notice 97–66. 

Mr. SHULMAN. Well, second is we have a number of ongoing investigations. On the spectrum of rules that are easy to enforce or 

53 

not, I would say Notice 97–66 happens to be one of the more difficult ones, and that is why I acknowledge and agree with you, and 

have asked the staff to start looking to see if there is a way to modify it with the current Treasury. And clearly, we are also going to 

have to have this discussion with the next Administration. 

But I do not think companies should take comfort, and I do take 

issue with the notion that we are not being aggressive and actively 

looking at these situations. As I said, we have open investigations, 

some of which are in the years you have looked at. All the things 

in this report are not things that are going to go unnoticed. We are 

going to push on this very hard. 

As you noted, I am 5 months into my term, and I think our staff 

clearly understands that I think we should be aggressive about this 

and make sure people are not circumventing the law. 

Senator LEVIN. Well, you heard Professor Avi-Yonah say that he 

heard a tax professional call these dividend enhancement transactions an ‘‘approved loophole.’’ What is your reaction to that? 

Mr. SHULMAN. My reaction is for the current transactions that 

are under investigation in the future, which are the ones that I can 

influence on my watch. If I were a taxpayer, I certainly would not 

take comfort that the IRS is not going to challenge them. 

Senator LEVIN. And you say that the so-called ‘‘Wall Street Rule’’ 

that says if financial firms do certain transactions for years, claim 

they are tax free, and the IRS does not object, that the IRS loses 

the authority to challenge that transaction. You challenge that 

rule? 

Mr. SHULMAN. I do challenge that rule. I think there has been 

no private letter rulings on this, which gets you a little further 

down the road. Also, as we have talked about in other hearings, I 

think you would agree that over the last 6 months the IRS record 

of aggressively targeting international transactions, taking a hard 

run at the QI program, and using our John Doe summons authority, has shown improvement. These are all things that had not 

been done before, and I think the IRS is at least showing, since I 

have been here, an aggressive stance. If I were a prudent taxpayer, 

I would not take comfort in the notion of the Wall Street rule—that 

if we have not looked at something before, we therefore think it is 

not within the law, and will not look at it now or in the future. 

A prudent taxpayer should not take comfort with that. 

Senator LEVIN. Here is the testimony of Mr. DeRosa, which I 

think you heard this morning: ‘‘Most, if not all, of the major Wall 

Street investment banks and commercial banks engage in equity 

swap and stock loan transactions referencing U.S. underlying equities with non-U.S. counterparties. Over the last 15 years, numerous 

commentators in widely respected taxation journals have addressed 

the withholding tax consequences of equity swaps similar to those 

offered throughout Wall Street, including articles by the current 

chief of staff for the Joint Committee on Taxation and his former 

law firm. In 1998, a Notice of Proposed Rulemaking was published 

in the Federal Register that expressly addressed the same issue. It 

said, ‘Treasury and the IRS are aware that in order to avoid the 

tax imposed on U.S. source dividends . . . some foreign investors 

use notional principal contract transactions based on U.S. equities 

. . . Accordingly, Treasury and the IRS are considering whether 

54 

rules should be developed to preserve the withholding tax with respect to such transactions.’ ’’ 

Now, according to this testimony, that is 1998—so, in other 

words, 10 years ago. So now the Treasury and the IRS have been 

aware for 10 years because they said they were aware back in 

1998. 

If you are aware of something for 10 years and do nothing about 

it, why would you expect any other reaction on the part of this 

business other than to just pile on, keep on using it, keep on costing the Treasury and the IRS billions of dollars over these 10 

years? Why would you expect any other reaction except that this 

is, in the words of the tax professional, an ‘‘approved loophole’’? 

Isn’t that a kind of normal reaction after 10 years? 

Mr. SHULMAN. Well, I cannot speak to people’s reactions. What 

I can tell you is clearly, as I said before, some of the testimony you 

heard today was people justifying transactions. As you know, the 

tax code is four times as long as ‘‘War and Peace,’’ and they picked 

out a nice sentence to give them comfort, which might be false comfort. 

We have a number of investigations underway. Some of the stock 

lending under Notice 97–66 presents to us real questions about the 

substance of the underlying corporation. In swaps, we have investigations underway in the broadest terms on some of the kinds of 

things you have looked at, crossing in, crossing out only for tax 

avoidance purposes. 

And so the notion that a lot of experts have opined on this in the 

past, again, I would not, if I were a firm, take false comfort in that. 

The IRS is looking at these issues and is going to be aggressive. 

Senator LEVIN. I am not talking about the number of experts. I 

am talking about the Notice of Proposed Rulemaking of the IRS. 

That is your own statement. This is an expert’s—not yours, the 

previous IRS Commissioner. ‘‘Treasury and IRS are aware that in 

order to avoid the tax imposed on U.S. source dividends . . . some 

foreign investors use notional principal contract transactions based 

on U.S. equities . . . Treasury and the IRS are considering whether rules should be developed to preserve the withholding tax with 

respect to such transactions.’’ Are you still considering it? 

Mr. SHULMAN. Well, I think this is the swap—— 

Senator LEVIN. Yes. Are you consider it? 

Mr. SHULMAN [continuing]. Issue that you are looking at? 

Senator LEVIN. Right. Are you considering whether rules should 

be developed to preserve the withholding tax with respect to swap 

transactions that are used in the way we have defined very specifically to avoid withholding? Is that under consideration? 

Mr. SHULMAN. I would tell you what you said earlier, that certainly tax policy is not solely in the purview of the IRS Commissioner. We are, however, actively investigating people who use 

swaps potentially in ways that are only meant to avoid the tax law, 

and do not really transfer benefits and burdens. I just would not 

comment on broader swaps policy. 

Senator LEVIN. And what is your policy about dividend enhancement transactions? 

Mr. SHULMAN. As you would agree, we do not have broad policies. I think I, like you, find some of these marketing materials disVerDate Aug 31 2005 08:46 Apr 10, 2009 Jkt 045575 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 P:\DOCS\45575.TXT SAFFAIRS PsN: PAT
55 

1See Exhibit No. 36 which appears in the Appendix on page 304. 

tasteful. For us, though, as the administrator of the law, we need 

to be fair and look at the rules and enforce them. 

So our concern is that when we see people exploiting the tax law, 

not meeting the spirit and the letter of the law, not meeting their 

tax obligations, we will go after them aggressively. 

Senator LEVIN. Are you able to put in writing what the IRS position is about dividend enhancement transactions? Could you issue 

just a statement as to what your position is? 

Mr. SHULMAN. I am not—— 

Senator LEVIN. I think it will have a very salutary effect if you 

could do that. First, on swaps, if you could do that, as to when, 

from the IRS’s perspective, is it appropriate that a swap be used 

which involves a sale which is not a sale, which then shifts the 

source. I think that it is reasonable for us to know where you stand 

on that practice. And so I am going to ask whether you would provide that for the country. 

Mr. SHULMAN. Yes, I am not going to agree to write a specific 

policy on dividend enhancements. I think we are pretty clear that 

there is a current swap rule that has been in place since 1991. 

With people who try to circumvent that rule, we are going to be 

aggressive. We actually have ongoing investigations that are complex and fact specific that I am not going to jeopardize by going further and changing policy or discussing that here, which is not 

clearly purely under my purview. I think I owe it to the current 

and future Treasury Secretary to have this discussion with them. 

Senator LEVIN. I am not talking about whether the policy should 

be changed. I am talking about what the current policy is. 

Mr. SHULMAN. Yes, I think the current policy on swaps is 

this—— 

Senator LEVIN. Swaps when used in connection with these phony 

sales in order to avoid taxes on dividends from non-Americans. 

That is the issue. 

Mr. SHULMAN. Oh, I think we have been pretty clear on that, and 

I am happy to make sure we continue to be clear. 

Senator LEVIN. If you could give us the clear statement for the 

record, that would be very helpful. 

Mr. SHULMAN. Here is what I am going to do. My biggest concern 

is to make sure that we administer the law effectively, and so I 

need to talk to the people who have ongoing investigations and 

make sure anything we give you is not going to endanger the government’s position in the ongoing investigation so that I can meet 

my promise of being aggressive in this area to you. 

Senator LEVIN. I accept that. We do not want to jeopardize an 

investigation. But you said that the position of the IRS is clear on 

that, and I would just like a copy of that clear statement. OK? Is 

that fair enough? 

Mr. SHULMAN. That is fair. I will give you as clear a statement 

as I can get.1

Senator LEVIN. Good. And then, second, on the Notice 97–66 regulation, since it is clear, I think everyone would agree, that the Notice 97–66 regulation has been used in a way that it was not intended, can you say that? And can you be that clear? 

56 

Mr. SHULMAN. I can tell you that certain financial institutions 

have interpreted Notice 97–66 to mean that they do not need to 

pay dividends if they structure a transaction a certain way. I will 

also tell you what I said before about the Wall Street rule, that 

people should not take comfort in the notion that if we have not 

challenged transactions in the past, we will never challenge them 

in the future. I can also commit to you what I said before, that I, 

as IRS Commissioner who does not have the sole authority to make 

broad policy changes, have instructed our staff to start working 

with Treasury to review this notice very closely. 

Senator LEVIN. And can you state clearly what the intent was of 

Notice 97–66 and what the intent was not? 

Mr. SHULMAN. Well, first of all, I was not there when it happened. But I will tell you what my understanding is. My understanding is that it was intended to prevent cascading of dividends, 

where there was a lot of confusion in the market that multiple people were going to be paying tax on the substitute dividends payments. 

There was a notion that when the lending happened, it would 

stay at the bank and the bank would pay the dividend, so that a 

taxpayer would pay the tax on the dividend. I think the market has 

gotten much more complex and much more sophisticated in derivatives since then, and we potentially have unintended consequences. 

But the original intent was to take care of the cascading problem. 

Senator LEVIN. And so it was intended that taxes be paid on dividends. 

Mr. SHULMAN. I cannot tell you that. What I can tell you is that 

the original intent—the reason this notice was issued—was to take 

care of the cascading problem. 

Senator LEVIN. To avoid multiple tax. 

Mr. SHULMAN. Yes. And, again, that was 10 years ago. I am sitting here today, and you have my commitment to take a hard look 

at this. 

Senator LEVIN. And, finally, should we not under current law 

treat dividend equivalent payments the same way we treat dividends, as Professor Avi-Yonah recommends, under current law? 

Mr. SHULMAN. I think there are a whole bunch of ways to structure synthetic transactions to avoid paying dividends on economic 

structures that look pretty similar to a dividend being paid. We 

have talked about swaps. We have talked about securities lending. 

Equity-linked notes under statute, which have nothing to do with 

IRS regulation, can be structured in such a way that you can get 

money for dividends and a payment for dividend and not pay the 

taxes on that same economics. So what I would tell you is that this 

country does not have a consistent approach to cash markets 

versus derivatives markets and how to take them. That is a subject 

worthy of a broader policy debate, and I think it would be relatively irresponsible of me to lay down a stake on it now, since it 

involves a whole bunch of other agencies and, clearly, the Congress. 

Senator LEVIN. Thank you, Commissioner. I will just conclude 

with this statement, that we are dealing here with major financial 

players. They presumably do not want to be on the wrong side of 

the law. If the IRS tells them to stop, they would stop. So far, the 

IRS will not say ‘‘Stop.’’ It won’t say ‘‘Go.’’ So the financial commuVerDate Aug 31 2005 08:46 Apr 10, 2009 Jkt 045575 PO 00000 Frm 00066 Fmt 6633 Sfmt 6633 P:\DOCS\45575.TXT SAFFAIRS PsN: PAT
57 

nity does not really know if it is on the wrong side of the law or 

not. Many of them claim everyone is waiting for the IRS to make 

up its mind. After 10 years of mixed signals, the IRS’ failure to say 

where it stands, I think it makes a mockery of your mission. And 

we need to have your resolution promptly. And if you cannot do it 

this year, I hope you can do it by the spring of next year. 

Is that a fair request? 

Mr. SHULMAN. Yes. 

Senator LEVIN. Thank you. We stand adjourned. 

[Whereupon, at 12:23 p.m., the Subcommittee was adjourned.] 

(59) 

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811 


45575.595
812 


45575.596
813 


45575.597
814 


45575.598
815 


45575.599
816 


45575.600
817 


45575.601
818 


45575.602
819 


45575.603
820 


45575.604
821 


45575.605
822 


45575.606
823 


45575.607
824 


45575.608
825 


45575.609
826 


45575.610
827 


45575.611
828 


45575.612
829 


45575.613
830 


45575.614
831 


45575.615
832 


45575.616
833 


45575.617
834 


45575.618
835 


45575.619
836 


45575.620
837 


45575.621
838 


45575.622
839 


45575.623
840 


45575.624
841 


45575.625
842 


45575.626
843 


45575.627
844 


45575.628
845 


45575.629
846 


45575.630
847 


45575.631
848 


45575.632
849 


45575.633
850 


45575.634
851 


45575.635
852 


45575.636
853 


45575.637
854 


45575.638
855 


45575.639
856 


45575.640
857 


45575.641
858 


45575.642
859 


45575.643
860 


45575.644
861 


45575.645
862 


45575.646
863 


45575.647
864 


45575.648
865 


45575.649
866 


45575.650
867 


45575.651
868 


45575.652
869 


45575.653
870 


45575.654
871 


45575.655
872 


45575.656
873 


45575.657
874 


45575.658
875 


45575.659
876 


45575.660
877 


45575.661
878 


45575.662
879 


45575.663
880 


45575.664
881 


45575.665
882 


45575.666
883 


45575.667
884 


45575.668
885 


45575.669
886 


45575.670
887 


45575.671
888 


45575.672
889 


45575.673
890 


45575.674
891 


45575.675
892 


45575.676
893 


45575.677
894 


45575.678
895 


45575.679
896 


45575.680
897 


45575.681
898 


45575.682
899 


45575.683
900 


45575.684
901 


45575.685
902 


45575.686
903 


45575.687
904 


45575.688
905 


45575.689
906 


45575.690
907 


45575.691
908 


45575.692
909 


45575.693
910 


45575.694
911 


45575.695
912 


45575.696
913 


45575.697
914 


45575.698
915 


45575.699
916 


45575.700
917 


45575.701
918 


45575.702
919 


45575.703
920 


45575.704
921 


45575.705
922 


45575.706
923 


45575.707
924 


45575.708
925 


45575.709
926 


45575.710
927 


45575.711
928 


45575.712
929 


45575.713
930 


45575.714
931 


45575.715
932 


45575.716
933 


45575.717
934 


45575.718
935 


45575.719
936 


45575.720
937 


45575.721
938 


45575.722
939 


45575.723
940 


45575.724
941 


45575.725
942 


45575.726
943 


45575.727
944 


45575.728
945 


45575.729
946 


45575.730
947 


45575.731
948 


45575.732
949 


45575.733
950 


45575.734
951 

Æ 


45575.735