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

Case 1:05-cv-00231-EJD

Document 157-9 . ~ . Filed 03/07/2008 '..:;i.:

Page 1 of 15

':'"
. .....

,\

t'

..

~
~
".~
"

~ ! D n

8 B. i~ ..-l
f tif
(J
f'
f f

~~ 0 ~O= #~ ~

! ~.

,c

"

.. ;: GOV

~ GOVERNMENT

.

..

.~l 3~

,i

f EXIBIT .! 4 Ii

090

~

0) o

Page 2 of 15

- ~ ~ ~ ~ ~ .~ . ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Filed 03/07/2008

--

I .. . What is COBRA ?I
i

t

. Foreign currency derivative transaction
. 30..day investment strategy
. Utilizes options to generate.a possible 31 % return
in 30 days with a 38%

Document 157-9

'probability of success

. P~cipation in general parership with other

Case 1:05-cv-00231-EJD

parers with similar investment interests

!I ERNST & YOUG LLP 2
'..,

....,.l.......

l-'

.'~

C\

0) o

Page 3 of 15

- .. .. ..
ow l- ..

_..~_""'l

~.~-~~~~~~~

Filed 03/07/2008

I Step One · ~tion Contrcts I
i

Document 157-9

Each individual sells (writes) short option and receives premium,

and buys long option, .
on foreign currency at

ic

sell option on FX

.
cash

different strike prices.
Each individual invests

..

Investment! Commercial Bank
buy option on FX .

cash

..

or Institution

in diferent type of
foreign currency options (e.g., CAD, JAP, or EURO).

Case 1:05-cv-00231-EJD

f! ERNST & YOUNG UP 3

~=-.

At'

l-"

~

0) o

Page 4 of 15

- ~-~~~~~~

...........-

~--~~~~~~ ~- ~

Filed 03/07/2008

L Ste~ .TWo - Formation . I
t

i '

Individuals transfer foreign currency option contracts

Document 157-9

to a newly formed general partnership.
In addition. individuals
contribute ~h equal to Option Contrcts

100% General

2% of the cost ,of the long' , and Cash
option to the partnership. The Individuals receive a
1 OOO/Ò general partnership

Partnership' Interest

Case 1:05-cv-00231-EJD

interest in exchange for their eontributions to the

General. , Partnership
partnership.

iJERNST&YOUNG,UP ,4

,l" ''''.

--_....

l-

l'.."

~

(j o

Page 5 of 15

- ~~~~-~~~~~
_ '- .. .. .. .. .. ..

- -

Filed 03/07/2008

I . Ste, iTh · Invesent .1 ,
After 30 days, the options ' expire either in or out
wil

r

Optlol"

Document 157-9

of the money. Partnership
recognizes economic gain

Counterparty

or loss oathe spread.
If ordinary loss is desired,

spot foreign currency wil
be purchased by the
partnership. If capital

closes

spread

Case 1:05-cv-00231-EJD

loss

is desired, capital assets

wil be purahased.
" ~.;

General

Partnership

il ERNS & YOUNG UP 5

~"'.

,l-

.:'"

i.

0) o

Page 6 of 15

- - ~ -. . ~ '- ~ ~ ~ ~ - ~

- - -

Filed 03/07/2008

I Step Four · Trer to S Corl
Individuals transfer

l ,

S Corp
100% General

Document 157-9

10oo/o GP interest 10

a newly formed S

corporation, which , wil cause a technical
termination.

Partnership Interest

Case 1:05-cv-00231-EJD

General Partnership

'ilERNS&YOUNGLLP 6

~..:~- ..-.

,.,...,'.

. ~ . - . ~'.

~,

.,',

,-

~ - ~ ~ ~ ~ ~. ~ ~ ~ -

~~~~~~~~~-~~~~~~~~~

.1 Step ~ve. Ditrbution. .1 , l sells assets

Case 1:05-cv-00231-EJD

Pártnership liquidates and distributes its investments , to S Corp.,
receives cash

S Corp

Third Part
, Buyer' .

S Corp then sells assets
to an unrelated third part,

Document 157-9

dIstribution of assets

generatIng a profit or IOS5
for

tax purposes.

General

Filed 03/07/2008

Partership

Page 7 of 15

il ERNST & YOUNG LLP 7

.~ .... ~

".....

~'

.'

o ((

Q)

,. 0) o

Page 8 of 15

- - - _. ----~-------i

.. l- .. _ .. .. - ...

Filed 03/07/2008

I . COBRA I
't:Executive S~mary
. Taxpayer and other non-related indiyJdual(s) sell (write) a short option position on foreign currency

Document 157-9

and receives premium
· Premium receipt is nontaxable event until exercise, assignment, lapse or temunation of option . Long option position on foreign currency is

Case 1:05-cv-00231-EJD

purchased with short option premium +/- equity . Option spread m,ay be bullish or bearish

II

ERNS & YOUNG LLP 8

,,'

r "

."'..

,~

.:

co

(J o

Page 9 of 15

.. .. .. - -l

~~~~~~~~~~~---~~~--~- --

Filed 03/07/2008

r. ÇOBRA I
i

~Executive Summary (Continued)
. Taxpayer and other non-reiat~ individual(s)
contrbute options to newly formed general

Document 157-9

partiership
. Taxpayer and other non-related individual(s)

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

Case 1:05-cv-00231-EJD

money
. Parnership recognizes economic gain or loss on the'

spread

II ERNST & YOUNG UP 9

r,--e ".
, ,

4'

-",

0)

0) o

Page 10 of 15

--~-----l . COBRA ì

-----..I.

~

Filed 03/07/2008

:1

~'

~Exec~tiv~ SUmmary (Continued)
. Transfer of 100% GP interest to S Corp causes
t~cbnicai tennnl!tion of partnership

Document 157-9

. 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

Case 1:05-cv-00231-EJD

. SCorp sells the asets generating ordinary or
capita inc.oineßoss for tax purposes

.'

l! ERNST & YOUNG UP 10,

"'~-

~,

.',

o o ..
"

Page 11 of 15

- -' .. .. -

~~~~~~~~-~~~~~~

.. .. - -

Filed 03/07/2008

I CÓBRA I
i

~ Curency Link~d Digital Swap Example
. Objectlve Is to eenerate SlOOM loss

. CounterparUeS = Deutshe Bank and Client

. Trade Date = 11/99

Document 157-9

. Maturity Date = 12/99

. Notiona Amount of SWAP #1 (short option) = 187.500,000 USD
., Deutse Bank pays $95,00,00
., Cliet pays $0

J If spot EurodollarlUSD is trding at or above 1.0693 .. Deutse Bank pays

Case 1:05-cv-00231-EJD

$0, CUent pays $187,500,00 . Notiona Amount of swAP #2 (long option) = 200,000,000 USD
J Deutse Bank pays USD $0
J Client pays USD $100;000,000

J If,spot EuroollarlUSD,is trading at or above 1.0691 ~ Deutsche Bank pays $200,000,00, Client pays $0

. ERNS & YOUNG UP i 1

r'.".¡,......

--

'.'~

't a 't

Page 12 of 15

.. '_ .. 'l

-~~~~~~~~~~~~ .~~~~~~~~~~~~

Filed 03/07/2008

I COBRA . . I
i

~Currency Linked nigital 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,OOO~OOO .

Document 157-9

Case 1:05-cv-00231-EJD

. If spot EuròdollarlUSD tra~es at or abo~e 1.0693,' client
receives $12,500,000

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

million investment

I! ERNST &,YOL/NG UP 12

.......,. .',

8

..-

~.:...~ :

N

o ~

Page 13 of 15

......'w....~..

....~..~....~..~....
I

Filed 03/07/2008

r ... .. COBRA i

c:Economic Summary
'. Fees arè 4.5% of $100

miion or $4.5 mHOon

Document 157-9

. ~lients' npfront investment in option contraèts is $~ mnlion

., ~lients' additional upfront invesent in parership is 2% or $2 miion cash , . Tota\ cost including fees is $9~5 miion (cash investment-is at no rik and is Dot a cost ,of transction)
desired loss or

Case 1:05-cv-00231-EJD

. 38% probabilty of $12.5 milion payoff . Retun is 32 % if payoff occurs

'. Duration or contract wi be 30 days
. See IDusttion of 4 diferent outcome scenarios on next two

slides

., ERNST & YOUNG LLP 13

;,..e

lI ,

4P"

(' o ..

Page 14 of 15

_ _ .. _ .. ~ .. i- .. 'i .. .. .. .. "- .. - - -l ... .. ..
II.: ..~~!!!l~(õi!ln!!y.:~!!I '-':~!!i!~;~õ_ . ~ . .~~:_..~,.-.:, '::1'. ~~'."'" .~. ...:~': ..,.: ¡ j ,::-: ,..~.~.. ::.:::~',MJ

.. .,

-

Filed 03/07/2008

I~llè~ :.~. '0.. .'. , :' .._,,' . :,~ . - i, s2Jæ5ó,Öoo' .. .,.. S2.250;ÒÖO ! .. . . $2,250,000 ,ii ' '$2.250' 000 i
¡C,apl~~l -iVe~te.d.. . ': ':. . '. :.~" .~.~:I$,g;-O!'~ò~ 0 ~:':. -$~'~~~~O~~'1. ,. .. $21!S~OIOoc';;. " ~2.~ÓO:'ö.oo ,¡

, i I ,I I' '

&iiônomì~Il'ijñlýi"'" 0.. . WiñBë'iïwlntü' Los'. äètIWlñ1'äië i wiii13ïiltJLóse Tax i :Lose Betli.ös'ëTåx I

l!åtai taplt8:I, &' ~~é~. '~':.., :..t..~:.::'!::!SO.OÖ~~" 0 .':,: ~4/SÖ.Oa~. .., . $4. ?~~IOOO ! ! . .. .' ... $4,759:000 ¡

Document 157-9

l;~~~4~!t.rr.clt!' L ;. :i1i~g:~~ , :"-:~($'.7~;;::)r:: .. ;~:;:g~ !. 1I~,~~.~:):

0/ FÏeturñ Afterï=eei' .'....0;... '--"31-:ssok' i ... '0. '-10Õ,OOä¡: 31.Sa""j I .. ""1ÒÖ:OO%

... .. - . .. - ., 1..... ...-.... , -" ,'. .. , .. 1 0 ... I 0 .. 0 ", ;

Õn',fiT.is.8i¡ ..-" '-,1". ---.. ,..... -", .~.. .. ,. I...' ., ....¡

F.d~~"':;.. ;~~ ~~-i~' _. '~;:~~ó.Ö~.! ~-~O. ;~~;ÓÒO ,u u .,;/- :-..: : - . ~b.i

sïå.tËiiriiõiñè táX"såVñgii' "-'2,50Õ;OOO' ¡. _.... $2.sõò;õoèf " ...' $0 l t. . .., ~. ,.. $Ó':

Trâdiñ'"'tõ¡¡öëcuciióñ . .., -... -,_._- '-W --"'S1,12S:ÕÒÔ _.... .. ... . '$Õ! i ' .. . S1,125,OÖÕ ¡

'p'~~;l~~.!r!r~S-'::~~.- ... ::'_$1.0~,~1~~~' :--=:'J1¡P:;2~~q ..~:~:_,$.1~ÔJ.2!50Õll. "~.:...$1,.0~~,~~~',

Case 1:05-cv-00231-EJD

fÖläiTäi Så~n .... ,... ..... ,. .... $23~5f2':5ÒÕ' . ._. ~24;ë31;500- . 0 --$;,012,560 Ii'" "$2,137.500!
:",.~,,~:.~-:-.:...::~q:-.:~~.~..._,~ ,=~~:=-._=_=~. ",:'::~'::__:'~.~.,:=,, i ::::-:... ... '. :1,:.. - ,oo- , .. i

:~:.::::~;.~~~: :~~:~: .::=~:~_I:.:=~:~:¡: I. ..: ~S...~::!
**, Deductn for fees only avalable after application of 2% floor

;~~.~-;~.;å~ã'; ;~::._~~.: ~t~ '----......---;. , ...._,..._._.._..-,1 1...._..' , ..~.... .. . . . .., ,.... .... !

.._.__....... rãte';5õ ......-. . --_.-.... -...--- __.1 . , ,.n.. .. .._- .. .. .,- .....; lfl-âtëõnii ...._..__..__.... ..___......_. _ .._.._.._....__. .. ... .... e_" .._4'_ .. .. . ._. .........

g ERNS & YOUNG UP 14

""..",. ...,..

,~

~,

~ o ~

Page 15 of 15

------_.~---

Filed 03/07/2008

~_. ~~o'iñi~r,~iii~Tï;~..r=-..:)S~i.o~~~~~ ',' ~..,-':~.:-= 1f..' ,.. .~.. . : ¡ _....,- ~'.':: . '!

'g~.~~.$m~~ a-¡'lxT~':." :....'..V'irïåëili~-tax'! ~ósë.ãeiiWlñTaic í .~wlrïëei/LÓ.e TaxI :Lose Bet/Lôse Taxi

F... ,... ... - .. . ... ""$2;260.ÖÕÕ' ..._- S2:250:ëïöå ¡ . '$2,25Ò;ÓOO l . $2.250.00Ö .

, I i ,Ii' 'i'

T~t~I,t?~pll~'I, ~ F!.~!_=~:~."~ '.. ":-=l~:.1~~;~õõ. :'::.:. !4!!.~~&9~ 1. ~4!75Õ,ooó'1 ...' '$,4,,~5Ò.9Øo ~

19..lall"'i~~"::~ _~_. ._: .::jJr~~~;iló $6:26Ô.ÒÒÕ' . ,-.... $t,i;oç.ó9¡ I¡ $6.260.000': ..1$0 :-.:: ~a~f9''o9.~~. . " '-'$0 i :: . .).2:.00.00 p rìe'cls óf Cur¡.ë'nëy-fråde'a' _..

, "

Document 157-9

.. .......00... .'-"'-'-' _.,--_.... -,- ..-- ,..._.-'..'.ii .....'. .. ~i.,.t . ....)\

. 1.1

!

'% Aétum ...' .. ...... ., n ... .. --- ._. . . .-.; . "--'. . '-:,ÕÕ:ÖO% t .... . 31.58'% ¡ ,. I. . .10'0'.06%1 . ..,. Äftê¡'.i!ies-- ... , .. _... '-'-iH.ss%: IÑëtËëÖñÖrnië..PrõfltJLOSiï.... _.._. $1;SOO:ÕOõ_.U- .. ..'.._-_. ..,.. 1.! . .. - I " . ", . . .-... . .., . '($4,75Õ;ÖÓÕ)1 '''S1;SOõ,ÖÖO': t4;7Sõ,OOO

IO'n Ãit81'~Tlii'atlii'¡':' ,.-. ...,_~.._...oo ..~.. .. ..._~~- ..... i!' ...... -- . I" ,..... ," t étà¡ë iñèöñi-¡'täx' sãvr.'s" . ..- -$2.5ÕÓ,ÖÖÕ' ,._. -- $2,'5Õõ,Õõo 11- ", ...- ,,' $Ö'j: .... 'So i

~~~e'ralln'eÕ,ñHt t~~"~~~~~~" :, '''~~~:~~~'.~o~ ,~-: "$l:~~~;Ó~ô~~' l;' , .-.::" . $Ó I i ..:~ ':." ,,'- '.~ : $0 !

,fråëilnglõss'Ded'ucflõñ~-'- . ........ ._.._n'" -sõ ,-_... $1.125;ÕOO!' .... - __a . ". SÕ :... . $1,126,0'00 ' ~~~~ëti~~ ~!':i.~~f.-=~" :': ':'~-F..~,1~;~Ç~ . .:... "'F;õ.f?;~~a !!' '-'~1,012;5~Ö'lr" ..,-, $1,012.6~'Ô i

Case 1:05-cv-00231-EJD

tõtâi TaX"s'iiVir, $"- 'u. "-$f3~51¿',50() .u, $14.e3i;sôo I : $1,o12.SOÒ . . ¡. , . " .. ,...._. ....~... .i;...........,.. --_..._.,',_.- ,'i _.. ._. ..,...,..1" ., .... _.~ '! $2,137,500'1
Net

, l I

, . .._ _, ," ....' "S15,012,SOÕ" ì _.. ,,-,.. h.. I.... I . ',' ._... ...' ($2,612,500)1 ~ Atié,:'tåx'Profit/loss' . . _. ----. --' '$9,8a7.SÓÒ ¡ "$2',ii12';50() II . . ¡, '" ....

t=idêG iåxrãtë'; '2õo: ,... .... .' -_. ,--, ....1' ".._--..'.. . ,- .,..\ ~.. ,_. ~'. ... I...... - ..,

siätåõ(näit'ralë"';T%" . ,-- ------~., ,...-. ' ..... !. .. .. I"~ I .66.00%; I~!i~!!.~:r~~':~"~~'iuin '.':_ .....-,-316:Ò5%... _....., 2ôã:16%1 I ..... -&2.89%. ... .. . . .

';,,'oedüëiiöñ fõrieësönly ãvailãbia-äfteraPPiïëtlóri'of 2% iioó¡.....,. '.. ~ ..',

II ERNST & YOUNG UP is
.¡

:f

,,,-....

,~'

_: