Free Motion in Limine - District Court of Federal Claims - federal

Case 1:06-cv-00245-EJD

Document 45-9....:.' . Filed 03/07/2008

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EXHIBIT

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r .. . What is COBRA? i I

Filed 03/07/2008

. Foreign currency derivative transaction

Document 45-9

. . 30-day investment strategy
. Utilizes options to generate.

a possible 31 % return

in 30 days with a 38%'probability of success
. P~cipation in general parnership with other

Case 1:06-cv-00245-EJD

parers with similar investment interests

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I Step One · Option Contrcts I
Each individual sells

(writes) short option .
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and receives premium,

and -buys long option, . on foreign currency at
different strike prices. Each individual invests

..

Investment! Commercial Bank
buy option on FX .

cash

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or Institution

Case 1:06-cv-00245-EJD

in different tye of foreign currency options
(a.g., CAD, JAP, or EURO).

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I Ste, Two - Formation . I
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Individuals transfer foreign currency option contracts to a newly formed general

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partership.
In addition. individuals

oontrlbute cash equal to Option Contracts 20/0 of the cost .of the long . and Cash option to. the partrship.
The individuals receive a
1000/0 general partnership

100% General

Partnership Interest

Case 1:06-cv-00245-EJD

Interest in exchange for their contributions to the

General, . Partnership
partnership.

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I . Step Th .. Invesent I
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After 30 days, the oPti6ns
wil

expire either in or out

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ptl

of the money. Partnership
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ol'

recognizes economic gain or loss oathe spread.
If ordinary loss is desired,
spot foreign cu rrency wil

Counterparty

closes spread

Case 1:06-cv-00245-EJD

be purchased by the
partnership. If capital

loss

is desired, capital assets

wil be purahased.

General

Partnership

,::'

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I Step. Four · Trer to S Coriû
I ndividuals transfer
1000/0 G P intereSt to

. . . ,. .

S Corp
100% General

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a newly formed S corporation, whioh

Partnership Interest

wil cause a technical
termination.

Case 1:06-cv-00245-EJD

General Partnership

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1 SteR Five · Diibution .1 . l ,
sells assets

Case 1:06-cv-00245-EJD

Partnership liquidates and distributes its Investments . to S Corp..
receives cash

S Corp

Third Party
. Buyer' .

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S Corp tHen sells assets

distribution of assets

to an unrelated third part, . generating a profit or loss for tax purposes.

General

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Partnership

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I . CQBRA I
i

'r:Executive SWnmary
. Taxpayer and other non-related indivjdual(s) sell

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(wrte) a short option position on foreign currency and receives premium
· Premium receipt is nontaxable event until exercise,

Case 1:06-cv-00245-EJD

assignment, lapse or termation of optioii . Long option pòsition on foreign currency is
purchased with short option premium +1.. equity
. Option spread may be bulUsh or bearish

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r:Executive Summary (Continued)

( . iCOBRA I 1

. Taxpayer and other non-reiat~ individual(s)

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contribute options to newly formed general partiership'
. Taxayer and other non-related individual(s)'

contribute cash to general partnership
. · Non-related individual's investment in partnership
must be at least 10%
. After 30 days, options expire either in or out of the

Case 1:06-cv-00245-EJD

money · Partnership recognizes economic gain or loss on the spread

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I. . tOBRA 1
~Exec:utivt Summary (Continued)
. Transfer of 100% GP interest to S Co~p causes t~chnicai termnl!tion of partnership . In liquidation of partership interest, S Corp
receives equivalent fair value amount of foreign
currency. or capital assets '.
. Distributed assets take on taxpayer's outSide basis

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. S Corp sells the asets gener~ting ordinary or

capita incomeßoss for tax purposes

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i: Curency Linkcid Digita Swap Example
. Objective is to generte $l00M los

I . . COBRA I

. CounterparteS = Detse Bank and Client

. Trade Date = I1f99

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. Maturity Date = 1221
. Notional Amount of SWAP #1 (short option) = 187,500,000 USD
.¡ Deutse Bank pays $95,000,00
., Client pays $0

J If spot EurodolIarlUSD is trding at or above 1.0693 .. Deutshe Bank pays
Client pays $187,500,000

Case 1:06-cv-00245-EJD

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. Notiona Amount of SWAP #2 (long option) = 200,000,000 usn
J Deutse Bank pays USD $0

., Client pays USD $100,00,000 J If.spot EuroollarlUSD.ls trading at or above 1.0691 - Deutsche Bank pays $200,000,00, Client pays $0

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I COBRA. .. I
i:Currency Linked Digital Swap Exampie. (Continued) .
. If spot EUrodollarlUSD trades at or below i .0691, client loses. $5,000,000 . If spot Eurodollar/USD trades at 1.0692, client receives
$200,000,000 .
. If spot BurodolhirlUSD traítes at or abo~e 1.0693,

Document 45-9

Case 1:06-cv-00245-EJD

client

receives $12,500,000

.38% chance 'client will make $7.5 million profit on $5.

million investment .

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COBRA . .1
$100

t: Economic Sumary
.. Fees arè 4.5% of

miion or $4.5 iilion

Document 45-9

+ ~lients' apfront i~vestment in option contracts is $5 mnuon +. ~lients' additional upfront investment in parerslup is 2% or . desired loss or $2 miion cash .
+ To~ cost including fees is $9~S miion (èash investment

is at

no rik and is Dot a costol transaction) .

Case 1:06-cv-00245-EJD

. 38% probabilty of $12.5 mion payoff . Retun is 32% if payoff occurs
. Duration of contract wi

be 30 days
. See ilustration of 4 diterent outcome scenarios on next two

sUdes

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E'¡ô'¡øm;Ïts'Önlvi-" ..' .. . WiñB"ä&Wintö' Los's BètiWln Tãiê i wl¡'''èliltlLó.ë Tax ¡ losè Bet/Lö8'è"Tåiè!

~8è~ :.:.. . w ... .:' ._.._' . .' ~ . - 1'12;25Ó,ÔOO' I. - . - $2.250;OÕO I. . . . $2,250;000'1 i . "$2,250',000 ¡
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Document 45-9

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N~t.~~~o~l~ ~.~!~t!~~,~ ,~...._ .~J~B~Ó.Ó90. J$4,',~.a,CJO~ì¡, $1,~O~,ooO I! ($~.760,OOO):

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Sïåteïñcõiñè Tåiëö'å\ñ9is' .....'la;ióõ;ooo. i- _.. ,. $2,5ÕÖ;ÖOÖ' ... . SÔ ' (- . '" -.. . ." $6-1
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Case 1:06-cv-00245-EJD

~~i!f.!~l~~n.a!':.:.:~ :..~:.... .~':'. j~~~i2':~~r '.:~: ~;~:~ts.9f ... ~_~$i,oi~!5~ 11':' . '$~,.137.~O.O !
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Ñei Afte',.fåx'% Rëtiï¡.ñ--- - ..--:- ....526.58% . . -- . "--¡fälii%" .... ..._,_.. 52.89%- . .._... :65.00%'
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".Dedion for

fees only avaable after application of 2% floor

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gåpltall~~!'t~~ w~'.~. _'~:.' ..: .:'~.:~!~a-~.O:~~OÒ :-..: a-2~f~1fç~:r . $?,5ÒÇ.Ó?9' ¡ f:: . .J.2.!iOa.OOO i

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Document 45-9

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.i, Return Afiè¡"¡:ies--' - .. .. _... '--31.58%. __.u .. '-:iõõ:òo%' i.. ..h . 31.58%1! . . -10o'.oõ%1

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Staie liièörñe'.tå'X' sã\Ï"s .. . .... -s2.sõ6,ÖÖõ' ..- _. - $2,sõõ,õå ,1- ..' ..... ... $Ö'1: ..., '$0 i .frádliigLõãi'''õëducHõñ!.-,- . "'-' ._u____. sõ --- $1;125,00'0!' ...... - . .. - SÔ :... . $1,126,ÖOO '

~j,~l!ëti~~ i§r~:.~Jff.-=~" :.: '~:'-~1~~.1~;~~~ . .::.. "'F,Õ.f~~5~~! i' '-"~~,012;6~Ö.."r' ..... $1,012,S.Ò'Ó I

Case 1:06-cv-00245-EJD

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tõtåi Ì'aiè~s'å..'ii s .,.. ..._. ---$13;S1:f,50b . _....$14.e3t;SÒO I : $1.of:l.sOò !'¡ $2,13Í',50Ò'¡ .._. ..._... .il............ ______... _.- . __ ._ .........1.,.. ......... .., ..

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ï~'et Alié,~tå)è .. .oM ...... _....._._...~.. ._. .. l ¡ .. . . ¡i:!,ii1'2,50l) ¡ I .. . ($2.612,500)\ . . l ..- _. 'Profit;(óss' "S15,Ô12,SOÕ" 1 _.. '$9,éã'i .sÓå .a..... l' . .._.... . ...: ........ i
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FelfëG iåXrãië';' '20"; ..... ...... -_.._.-. ..--f. ...._-..... . .,. ....\,.. .._.., _..... . i ,.. .. -- ... I.

släïe ___.. ___ ,l-.'ii'm ... . ._- -----.~. .. . .- _.. _ u... .'A." ..."" .... . ; .. Ie ecniüt'r'lë-';s%" ._. ... _.__...____......... ... . -52.8i% .. !!. \Nei Äfi.r=í'ax'" __.__.__...... ----3HS;Ö5%" ---Ll 2öã:--B%1..........I! ..." ..-55.00%;
.. Deducton for fees only available after application of 2% floor

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