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Did Archegos, Like Renaissance Hedge Fund, Avoid Billions in U.S. Tax Payments through a Scheme with the Banks?

Courtesy of Pam Martens

James Simons, Founder of Renaissance Technologies Hedge Fund

James Simons, Founder of Renaissance Technologies Hedge Fund

It has become clear from the ongoing drip, drip, drip of new revelations of what was going on behind the scenes of hedge fund Archegos Capital Management, its wealthy owner, Sung Kook (Bill) Hwang, and Wall Street’s global banks, that the public has seen just the first act in what is certain to be a far more complex drama.

A summary of the basics of what the public has been told thus far sheds light on why the full Archegos story has yet to be revealed. According to major media reports, Archegos was obtaining leverage of more than 6 times the cash it was putting up as collateral to buy stocks that were held in accounts at a handful of Wall Street’s largest banks. Through a privately negotiated derivatives contract, the banks claimed to technically own the stocks but the hedge fund, Archegos, selected the stocks, directed the trading in the accounts and got the upside as well as the downside of trading returns. In exchange, the bank collected a fee.

A critical missing part of this story is this: if the Wall Street banks were claiming to technically own the stocks in the Archegos account, who was responsible for paying the billions in taxes that were owed to Uncle Sam on short-term and long-term capital gains on the stock sales? According to media reports, Hwang had amassed a fortune of $10 billion from his trading accounts between 2013 and early March 2021. Thus, there had to be billions in capital gains taxes owed along the way.

The structure of the Archegos account sounds uncannily similar to a jaw-dropping investigation conducted by the U.S. Senate’s Permanent Subcommittee on Investigations in 2014 that found that hedge funds had used a similar structure to “avoid taxes and leverage limits.” The Renaissance Technologies (RenTec or RenTech) hedge fund was a central focus of the Senate investigation, which concluded that it had avoided paying $6.8 billion in taxes to the IRS as a result of the scheme.

In a hearing held by the Subcommittee on July 22, 2014, Steven M. Rosenthal, a Senior Fellow at the Urban-Brookings Tax Policy Center in Washington, D.C., explained the scheme as follows:

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