Free Motion for Summary Judgment - District Court of Federal Claims - federal

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS _____________ No. 95-758T (Judge Nancy B. Firestone) _____________

NATIONAL WESTMINSTER BANK PLC Plaintiff,

v.

THE UNITED STATES, Defendant. _____________

PLAINTIFF S MOTION FOR SUMMARY JUDGMENT _____________ D. SCOTT WISE Attorney of Record for Plaintiff Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 (212) 450-4000 (telephone) (212) 450-3800 (facsimile)

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TABLE OF CONTENTS PAGE TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii TABLE OF EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv PRELIMINARY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 STANDARD OF REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 I. NATWEST S PROFITS ON ITS TAX RETURNS WERE BASED UPON SEPARATE ACCOUNTS THAT WERE PROPERLY MAINTAINED BY THE U.S. BRANCHES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ALL OF NATWEST S U.S. INTERBRANCH AND INTERCOMPANY INTEREST INCOME AND EXPENSE WAS AT ARM S-LENGTH RATES . . . . . . . . 12 A. B. III. NatWest s Money Market Dealings Were at Arm s-Length Market Rates . . . . . . 13 NatWest s Clearing Accounts Were at Arm s-Length Market Rates . . . . . . . . . . 17

II.

APART FROM AMOUNTS ALREADY CONCEDED, PLAINTIFF DID NOT DEDUCT ANY INTEREST ON CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 A. B. C. NatWest Has Identified and Conceded All Interest Deducted on Capital . . . . . . 23 Defendant Has Proposed No Adjustments on the Capital Issue . . . . . . . . . . . . . . 28 Contrary to Defendant s Claim, Plaintiff s U.S. Branches Did Not Require Additional Capital to Fund Fixed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 1. There is No Support for Defendant s Disaggregated Approach to Determining NatWest s Business Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 2. There is No Evidence of Capital Advances Even Under a Disaggregated Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

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TABLE OF AUTHORITIES Cases Page Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Celotex Corp. v. Catrett, 477 U.S. 317 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Cook v. United States, 46 Fed. Cl. 110 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Lewis v. Reynolds, 284 U.S. 281, modified, 284 U.S. 599 (1932) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 LNC Investments, Inc. v. Republic of Nicaragua, 1999 U.S. Dist. Lexis 1846 (S.D.N.Y. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574 (1986)... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 National Westminster Bank PLC v. United States, 40 Fed. C1. 120 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 9, 10 National Westminster Bank PLC v. United States, 58 Fed. C1. 491 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Sweats Fashions, Inc. v. Pannill Knitting Co., Inc., 833 F.2d 1560 (Fed. Cir. 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Trans Sport, Inc. v. Starter Sportswear, 964 F.2d 186 (2d Cir. 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Statutes & Rules 26 U.S.C. § 884 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33, 34 12 C.F.R. § 204.8(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 35 12 C.F.R. § 204.8(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

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Page Fed. R. Evid. 408 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 RCFC 56 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 RCFC 56(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 RCFC 56(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Treas. Reg. § 1.882-5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Treas. Reg. §1.6012-2(g)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Other Authorities 1963 OECD Model Treaty and Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 34, 35 Convention for the Avoidance of Double Taxation, Dec. 31, 1975, U.S.-U.K., 31 U.S.T. 5668, T.I.A.S. No. 9682. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,9,10,31,34

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TABLE OF EXHIBITS Declaration of Roger Walmsley dated April 28, 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Affidavit of Scott Payseur dated April 26, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B Declaration of Anthony Eric Scott dated April 29, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C Declaration of Kevin D. Bandoian dated April 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D Affidavit of Robert T. Clair dated May 2, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E Declaration of Edward Jukes dated May 2, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F Affidavit of Mario J. Verdolini, Jr. dated May 5, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G Plaintiff s Complaint dated November 17, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Defendant s Answer to Plaintiff s Complaint dated March 18, 1996 . . . . . . . . . . . . . . . . . . . 2 Plaintiff s First Amended Complaint dated August 28, 1997. . . . . . . . . . . . . . . . . . . . . . . . . 3 Defendant s Answer to Plaintiff s First Amended Complaint dated October 20, 1997 . . . . . 4 Plaintiff s Form 1120F original tax return for tax year 1981 . . . . . . . . . . . . . . . . . . . . . . . . . 5 Plaintiff s Form 1120F original tax return for tax year 1982 . . . . . . . . . . . . . . . . . . . . . . . . . 6 Plaintiff s Form 1120F original tax return for tax year 1983 . . . . . . . . . . . . . . . . . . . . . . . . . 7 Plaintiff s Form 1120F original tax return for tax year 1984 . . . . . . . . . . . . . . . . . . . . . . . . . 8 Plaintiff s Form 1120F original tax return for tax year 1985 . . . . . . . . . . . . . . . . . . . . . . . . . 9 Plaintiff s Form 1120F original tax return for tax year 1986 . . . . . . . . . . . . . . . . . . . . . . . . 10 Plaintiff s Form 1120F original tax return for tax year 1987 . . . . . . . . . . . . . . . . . . . . . . . . 11 Plaintiff s Form 1120F first amended tax return for tax year 1981 . . . . . . . . . . . . . . . . . . . . 12 Plaintiff s Form 1120F first amended tax return for tax year 1982 . . . . . . . . . . . . . . . . . . . . 13 Plaintiff s Form 1120F first amended tax return for tax year 1983 . . . . . . . . . . . . . . . . . . . . 14 Plaintiff s Form 1120F first amended tax return for tax year 1984 . . . . . . . . . . . . . . . . . . . . 15 Plaintiff s Form 1120F first amended tax return for tax year 1985 . . . . . . . . . . . . . . . . . . . . 16 Plaintiff s Form 1120F first amended tax return for tax year 1986 . . . . . . . . . . . . . . . . . . . . 17 iv

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Plaintiff s Form 1120F first amended tax return for tax year 1987 . . . . . . . . . . . . . . . . . . . . 18 Plaintiff s Form 1120F second amended tax return for tax year 1981 . . . . . . . . . . . . . . . . . 19 Plaintiff s Form 1120F second amended tax return for tax year 1982 . . . . . . . . . . . . . . . . . 20 Plaintiff s Form 1120F second amended tax return for tax year 1983 . . . . . . . . . . . . . . . . . 21 Plaintiff s Form 1120F second amended tax return for tax year 1984 . . . . . . . . . . . . . . . . . 22 Plaintiff s Form 1120F second amended tax return for tax year 1985 . . . . . . . . . . . . . . . . . 23 Plaintiff s Form 1120F second amended tax return for tax year 1986 . . . . . . . . . . . . . . . . . 24 Plaintiff s Form 1120F second amended tax return for tax year 1987 . . . . . . . . . . . . . . . . . 25 Revenue Agent Reports dated May 3, 1995 for tax years 1981-1984 and 1985-1987 . . . . . 26 Letter and the exhibits thereto from M. Carr Ferguson (counsel for the Plaintiff) to Steven I. Frahm (counsel for the Defendant) dated June 5, 2001 prepared pursuant to the Court s Order dated April 9, 2001 and setting forth Plaintiff s definitive statement of its refund claim ( Plaintiff s Revised Refund Claim ) . . . . . . . . . . . . . . . . . 27 Certified profit and loss statements of Plaintiff s U.S. branch operations for the periods January 1, 1981 through June 30, 1981 and July 1, 1981 through December 31, 1981 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Year-end certified profit and loss statements of Plaintiff s U.S. branch operations for the year 1982 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Year-end certified profit and loss statements of Plaintiff s U.S. branch operations for the year 1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Year-end certified profit and loss statements of Plaintiff s U.S. branch operations for the year 1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Year-end certified profit and loss statements of Plaintiff s U.S. branch operations for the year 1985 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Year-end certified profit and loss statements of Plaintiff s U.S. branch operations for the year 1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Year-end certified profit and loss statements of Plaintiff s U.S. branch operations for the year 1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

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Year-end B126 or certified balance sheets of Plaintiff s U.S. branch operations for the year 1980 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Year-end certified balance sheets of Plaintiff s U.S. branch operations for the year 1981 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Year-end certified balance sheets of Plaintiff s U.S. branch operations for the year 1982 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Year-end certified balance sheets of Plaintiff s U.S. branch operations for the year 1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Year-end certified balance sheets of Plaintiff s U.S. branch operations for the year 1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Year-end certified balance sheets of Plaintiff s U.S. branch operations for the year 1985 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Year-end certified balance sheets of Plaintiff s U.S. branch operations for the year 1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Year-end certified balance sheets of Plaintiff s U.S. branch operations for the year 1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Balance sheet of Plaintiff s New York branch dated October 30, 1974 . . . . . . . . . . . . . . . . 43 Balance sheet dated September 30, 1977 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Certified balance sheet of Plaintiff s New York branch dated March 31, 1978 . . . . . . . . . . 45 Report B133 Limits and Utilizations by L.A. and S.I.C., for December 31, 1986 . . . . . . 46 Notes to a balance sheet of New York, Chicago, and San Francisco and an excerpt from a balance sheet of New York, Chicago and San Francisco dated 1977 . . . . . . . . . . 47 RET 9 Reports for the U.S. branch operations for the years 1981-1987 . . . . . . . . . . . . . . . . 48 Letter from Mildred Seidman (counsel for the Defendant) to M. Carr Ferguson (counsel for the Plaintiff) dated August 10, 2000 acknowledging Defendant s partial concessions relating to tax years 1986 and 1987 . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Excerpt from Plaintiff s FRE 1006 Summaries With Respect to 1981 Interbranch Interest Expense of Attachment 1981F: Analysis of Interest paid by Chicago branch to NatWest Moneybook dated June 8, 2001, and supporting documentation . . . . . . . . . . 50

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Microfiche Index Reports prepared by Plaintiff s counsel identifying microfiche records available for the years 1981-1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Report by Marcia L. Stigum, Ph.D. dated November 15, 2001 . . . . . . . . . . . . . . . . . . . . . . . 52 Report of Robert R. Bench, PricewaterhouseCoopers LLP, dated November 15, 2001, and appendices thereto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Supplemental Report of Robert R. Bench, PricewaterhouseCoopers LLP, dated January 14, 2002 and the exhibits thereto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Report of Kevin D. Bandoian, Partner, PricewaterhouseCoopers LLP, dated January 14, 2002, and the exhibits thereto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Plaintiff s Report on the Capital Issue dated October 29, 2004 and the exhibits thereto . . . 56 Exhibit 2, Documents Supporting the Hypothetical Computations of Capital Loan Charges (Binders 1-5), to Exhibit C, Report of PricewaterhouseCoopers LLP: Analysis of Capital Loan Charges, to Plaintiff s Report on the Capital Issue dated October 29, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Report of Kevin D. Bandoian, PricewaterhouseCoopers LLP, dated March 4, 2005, and the exhibits thereto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Report of Robert T. Clair, Ph.D. on The Arm s-Length Nature of National Westminster Bank PLC s Money Market Transactions dated March 4, 2005, and the exhibits thereto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Report by Edward Jukes dated March 4, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Defendant s Expert Report of A. Lawrence Kolbe on the Capital Issue dated March 4, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Defendant s Expert Report of James Read on the Interest Rate Issue dated March 4, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Plaintiff s Status Report dated Dec. 12, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Ex. A to Plaintiff s supplemental response to Defendant s Interrogatory 1.03 . . . . . . . . . . . 64 Exhibit B to Plaintiff s Response to Defendant s Interrogatory 1.04 . . . . . . . . . . . . . . . . . . 65 Exhibit F to Plaintiff s Response to Defendant s Interrogatory 1.12 . . . . . . . . . . . . . . . . . . 66

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Defendant s Responses to Plaintiff s Second Set of Requests for Admission dated January 7, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Defendant s Responses to Plaintiff s Fourth Set of Interrogatories dated January 7, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Excerpts from the transcript of the status conference with the Court dated March 9, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Convention for the Avoidance of Double Taxation, Dec. 31, 1975, U.S.-U.K., 31 U.S.T. 5668, T.I.A.S. No. 9682 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Excerpts from U.K. DEP T OF INLAND REVENUE BANKING MANUAL, Guidance for Staff (1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 United States Internal Revenue Code §§ 59A, 164(a)(5) (1987) . . . . . . . . . . . . . . . . . . . . . 72 United States Internal Revenue Code § 11(b) (1981-1987) (for explanation of 1987 blended rate, see H.R. Rep. No. 99-841, at II-159 (1986)) . . . . . . . . . . . . . . . . . . . . . . . . 73 United States Treasury regulation § 1.6012-2(g) (C.C.H.), effective date March 15, 1981, and United States Treasury regulation § 1.6012-2(g) (C.C.H.), effective date March 7, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Reserve Requirements for Depository Institutions, 12 C.F.R. §§ 204.1-204.9 (1984) . . . . . 75 Interest on Deposits, 12 C.F.R. §§ 217.1-217.7 (1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 1978 N.Y. Laws 288 (permitting the establishment of New York-based International Banking Facilities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Excerpts from the Deposition of Reuben S. Tatz on October 8, 1996 . . . . . . . . . . . . . . . . . 78 Excerpts from the Deposition of Marcia L. Stigum on February 13, 2002 . . . . . . . . . . . . . . 79 Excerpts from the Deposition of Reuben S. Tatz on January 23, 2002 . . . . . . . . . . . . . . . . . 80 Excerpts from the Deposition of Harrylall Samaroo on January 23, 2002 . . . . . . . . . . . . . . 81 Excerpts from the Deposition of Scott Payseur on May 13, 2002 . . . . . . . . . . . . . . . . . . . . . 82 Excerpts from the Deposition of Timothy Harasek on May 13, 2002 . . . . . . . . . . . . . . . . . . 83 Excerpts from the Deposition of Reuben S. Tatz on May 14, 2002 . . . . . . . . . . . . . . . . . . . 84

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Excerpts from the Deposition of Anthony Eric Scott on May 15, 2002 . . . . . . . . . . . . . . . . 85 Excerpts from the Deposition of Andrew Blessley on May 17, 2002 . . . . . . . . . . . . . . . . . . 86 Excerpts from the Deposition of John Tugwell on May 17, 2002 . . . . . . . . . . . . . . . . . . . . . 87 Excerpts from the 30(b)(6) Deposition of Roger Walmsley on January 31 - February 1, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Form 870AD dated June 26, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS _______________ No. 95-758T (Judge Nancy B. Firestone) _______________ NATIONAL WESTMINSTER BANK PLC, Plaintiff v. THE UNITED STATES, Defendant _______________ PLAINTIFF S MOTION FOR SUMMARY JUDGMENT ________________

Plaintiff respectfully submits this Motion for Summary Judgment pursuant to Rule 56 of the Rules of the United States Court of Federal Claims. PRELIMINARY STATEMENT This case concerns the amount of profits that should be attributed to the U.S. branch operations of National Westminster Bank PLC ( NatWest ) during the years 1981 through 1987 under Article 7 of the U.S.-U.K. income tax treaty1 (the Treaty ) and whether NatWest overpaid its U.S. federal income taxes on those profits. In view of this Court s prior rulings granting partial summary judgment in favor of NatWest, National Westminster Bank PLC v. U.S., 40 Fed.

See Article 7, Convention for the Avoidance of Double Taxation, Dec. 31, 1975, U.S.U.K., 31 U.S.T. 5668, T.I.A.S. No. 9682 (Affidavit of Mario J. Verdolini, Jr. dated May 5, 2005 ( Verdolini Aff. ), Ex. 70). 1

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C1. 120 (1999) ( NatWest I ) and National Westminster Bank PLC v. U.S., 58 Fed. C1. 491 (2003) ( NatWest II ), the only issues that remain to be resolved are: whether the interest income and expense reflected in NatWest s U.S. branch profits that are attributable to transactions with non-U.S. branches of NatWest or other NatWest affiliates were incurred on arm s-length terms; and whether the interest expense NatWest seeks to deduct in determining its U.S. branch profits was incurred in the ordinary course of NatWest s banking business and not for capital purposes. As discussed below, the record in this case establishes that NatWest is entitled to the full refund it seeks. The record confirms that the interest paid and received on interbranch and intercompany borrowings and lendings was at arm s-length market rates. In addition, Plaintiff has established that the interest expense deducted from NatWest s profits (as reduced by concessions NatWest has made in this case) was incurred in the ordinary course of NatWest s banking business and was not deducted on amounts designated as capital or in fact allotted to the branch for capital purposes. Defendant cannot point to evidence to controvert any of these facts, or to support any proposed adjustment to NatWest s profits. Instead, Defendant asserts that, despite the fact that this case has been pending for nearly ten years, it cannot reach a conclusion as to whether NatWest s interbranch money market transactions were arm s-length or as to whether the U.S. branches paid interest to NatWest s head office in respect of capital advances. Moreover, although Defendant raises three specific assertions with respect to interest accrued on clearing accounts, these assertions are completely without merit and do not withstand scrutiny. Simply put, because Plaintiff has put forward facts sufficient to establish its claim and Defendant can offer nothing but unsupported speculation in response, there is no genuine dispute as to any material fact, and Plaintiff is entitled to summary judgment for a refund of United 2

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States federal income taxes for the taxable years 1981 through 1987 in the aggregate amount of $66,234,336, plus interest. BACKGROUND During the years at issue, NatWest was one of the largest banks in the world and one of the few that had a triple-A credit rating.2 It conducted international wholesale money center operations in the United States through branches located in New York, Chicago and San Francisco.3 The U.S. operations dealt in wholesale transactions involving low risk and narrow spreads. They made short-term, high denomination loans to large corporations and funded those loans by selling money market instruments in U.S. and international markets, by borrowing inter-bank money, and by using funds on deposit in dollar clearing accounts, mainly those maintained for members of NatWest s worldwide group and several foreign central banks, including the Bank of England. (See Walmsley Decl. at ¶¶6, 36, 39; Affidavit of Robert T. Clair dated May 2, 2005 ( Clair Aff. ), App. 1). The U.S. branches also traded in domestic and international money markets to manage their interest rate and liquidity risk and, in the case of the New York operations, to make a trading profit. (See Walmsley Decl. at ¶7). The aggregate assets of the U.S. operations were in the range of three to eight billion dollars during the years at issue, and the daily turnover of funds often exceeded $10 billion. (Id. at ¶8 (turnover); see

Report by Marcia L. Stigum, Ph.D. dated Nov. 15, 2001 ( Stigum Rep. ) at 6 (Verdolini Aff., Ex. 52); see also Declaration of Anthony Eric Scott dated April 26, 2005 ( Scott Decl. ) at ¶5; Transcript of Deposition of Scott Payseur on May 13, 2002 ( Payseur Tr. ) 111:15-23 (Verdolini Aff., Ex. 82). Declaration of Roger Walmsley dated April 28, 2005 ( Walmsley Decl. ) at ¶4; Stigum Rep. at 7-8 (Verdolini Aff., Ex. 52); see also Payseur Tr. 31:3-20 (wholesale) (Verdolini Aff., Ex. 82). 3
3

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Balance Sheets (line AZD Aff., Exs.35-42)).

Total Assets

for each of the years at issue) (assets) (Verdolini

NatWest s U.S. operations generated substantial profits during the years at issue. (Walmsley Decl. at ¶8). NatWest reported over $140 million of taxable income, an amount that was more than sufficient to enable the U.S. branch operations to pay $62 million in federal income taxes,4 purchase approximately $42 million in premises and equipment and repay approximately $12 million in balances due to the head office with respect to fixed assets and capital loans from prior years.5 NatWest conducted its U.S. branch operations pursuant to a number of banking licenses. NatWest operated an agency in San Francisco which was licensed by the State of California to make loans and take deposits (other than certain domestic deposits), a branch in Chicago which was licensed by the State of Illinois to make loans and take deposits, and a branch in New York, which was licensed by the State of New York to make loans and take deposits. (Walmsley Decl. at ¶4). The New York branch, like many other U.S. banks and U.S. branches of foreign banks, established an International Banking Facility, or IBF, in 1981 as a segregated set of asset and liability accounts on [its] books pursuant to Federal banking regulations. (See 12 C.F.R. § 204.8(a)(1) and (d) (Verdolini Aff., Ex. 75); Walmsley Decl. at ¶4). In its offices, the New York
4

See Revenue Agent Reports for tax years 1981-1984 and 1985-1987, dated May 3, 1995 ( Revenue Agent Reports ) (for taxable income and taxes paid) (Verdolini Aff., Ex. 26); Plaintiff s Proposed Findings of Uncontroverted Fact dated May 5, 2005 ( Pl. s Find. Unc. Fact ) 157 ($62 million equals sum of rows 1 (Prior Year Overpayment) through 6 (Amount Credited)). Declaration of Kevin D. Bandoian, Partner, PricewaterhouseCoopers, LLP dated April 30, 2005 ( Bandoian Decl. ), Ex. C (purchases of fixed assets and repayments of balances due to head office). 4
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branch also managed and controlled branches licensed by the Bahamas (Nassau) and the Cayman Islands, neither of which had any employees, premises or equipment of their own. (Walmsley Decl. at ¶¶4, 17). For management and operational purposes, NatWest viewed the New York branch operations (including the IBF and New York, Nassau and Cayman branches) as a single unit. (Walmsley Decl. at ¶17; Scott Decl. at ¶14; Affidavit of Scott Payseur dated April 26, 2005 ( Payseur Aff. ) at ¶11). The New York office maintained separate accounts for the IBF and New York, Nassau and Cayman branches in order to record transactions that were subject to different bank regulatory rules and, in the case of the IBF, state and local tax treatment. (Scott Decl. at ¶14; see also Transcript of Deposition of Andrew Blessley on May 17, 2002 ( Blessley Tr. ) at 50-3-51:13, 60:10-61:14 (Verdolini Aff., Ex. 86)). NatWest s management in London did not evaluate the profitability of the Nassau or Cayman branches or the IBF separately from the profitability of the New York branch. (Scott Decl. at ¶14). The managers of each of the New York, Chicago and San Francisco branch operations reported to NatWest s Regional General Manager, North America, in New York. (Transcript of Deposition of John Tugwell on May 17, 2002 ( Tugwell Tr. ) at 42:11-44:6 (Verdolini Aff., Ex. 87); Blessley Tr. at 105:11-105:18 (Verdolini Aff., Ex. 86)). The Treasurer in New York was responsible for all Treasury activities conducted in the United States. (Blessley Tr. at 106:3106:7) (Verdolini Aff., Ex. 86). For each of the years at issue, NatWest was required to and did file a single U.S. federal income tax return for its U.S. branch operations,6 and the items of taxable income reported on Treas. Reg. §1.6012-2(g)(1) ( every foreign corporation which is engaged in a trade or business in the United States . . . shall make a return on From 1120-F ) (Verdolini Aff., Ex. 74); (continued...) 5
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those returns were derived from the separate accounts of NatWest s U.S. branch operations.7 NatWest s U.S. branch operations maintained those separate accounts, including profit and loss statements and balance sheets, in the ordinary course of their banking business as a matter of good business practice and banking custom and as required under U.S. bank regulatory law.8 The U.S. branches had extensive procedures to ensure the integrity of their records. (Walmsley Decl. at ¶14). Further, U.S. bank regulators and internal inspectors conducted regular audits of the books and records of the U.S. branches and found them satisfactory. (Walmsley Decl. at ¶¶20-21; Transcript of Deposition of Reuben Tatz on Jan. 23, 2002 ( Tatz Tr. (1/23/02) ) at 26:15-26:18 (internal inspectors), 27:22-29:12 (bank regulators) (Verdolini Aff., Ex. 80)). On audit, the Internal Revenue Service asserted that NatWest s profits should be determined using the formulary apportionment in Treasury Regulations section 1.882-5 rather than on the basis of NatWest s separate accounts. (See Revenue Agent Reports at 45 (1981-85), 25 (1986-87)) (Verdolini Aff., Ex. 26). Applying this formula, the Service asserted that NatWest owed approximately $72 million of additional federal income taxes. (See id.). NatWest paid that amount, with interest, and brought this suit for refund. (See Pl. s Prop. Find Unc. Fact 156157). Although the Court determined that the application of 1.882-5 violated the Treaty
6

(...continued) see Form 1120-F for each of the years at issue (Verdolini Aff., Exs. 5-11); see also Def. s Res. Pl. s Req. Adm. 2.43 (NatWest timely filed its returns) (Verdolini Aff., Ex. 67). Report of Kevin D. Bandoian, PricewaterhouseCoopers LLP dated March 4, 2005 ( Bandoian Rep. (3/4/2005) ), Ex. 4 (reconciliation of tax returns with profit and loss statements) (Verdolini Aff., Ex. 58). The differences between the taxable income shown on the tax returns and the profit and loss statements of the U.S. branch operations were identified in schedule M-1 of those tax returns. See Report of Robert R. Bench, PricewaterhouseCoopers LLP, dated Jan. 14, 2002 ( Bench Supp. Rep ) at ¶13 (U.S. bank regulations require separate books and records) (Verdolini Aff., Ex. 54);Walmsley Decl. ¶¶12, 15, 17; Tatz Tr. (1/23/02) at 14:18-14:19 (separate books and records maintained) (Verdolini Aff., Ex. 80). 6
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(NatWest I), Defendant has continued to oppose Plaintiff s claim for refund, and after concessions by the parties, the amount of tax now at issue is $66,234,336. (See Pl. s Prop. Find. Unc. Fact 193) (regarding concessions).9 STANDARD OF REVIEW It is well settled that summary judgment is appropriate when there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law. RCFC 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986). Under this standard, the mere existence of some alleged factual dispute . . . will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact. Liberty Lobby, Inc., 477 U.S. at 247-48 (emphasis in original); NatWest II at 496 (quoting Liberty Lobby, Inc.). A fact is material only if it could affect the outcome of the case, see Liberty Lobby, Inc., 477 U.S. at 248, and a factual dispute is genuine only if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Id. The movant always bears the initial burden of establishing the absence of any genuine issue of material facts. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). But once the moving party has carried its burden, its opponent must do more than simply show that there is

As noted in its First Amended Tax Returns, attached as Exhibits 8 and 9 to its Amended Complaint, Plaintiff also contends that Defendant committed several errors in the way in which it applied section 1.882-5 to calculate Plaintiff s deductible interest expense. (See Plaintiff s Form 1120F First Amended Tax Returns for tax years 1986 and 1987 (asserting as an alternate ground for refund the fact that the examiner erroneously reduced taxpayer s U.S.connected assets in the section 1.882-5 computation) (Verdolini Aff., Exs. 17 and 18)). These contentions were identified by the Court as being part of the Interest Rate Issue in this case. (Order Memorializing General Status Conference and Setting Dates for Discovery and Exchange of Expert Reports, dated June 27, 2001, at 1). Plaintiff has not addressed Defendant s errors in this summary judgment motion because the refund Plaintiff would claim under a corrected application of section 1.882-5 is not greater than the refund Plaintiff is seeking under the Treaty. However, if Plaintiff does not finally obtain the relief sought in this motion, Plaintiff reserves the right to advance its claims that Defendant did not apply section 1.882-5 correctly. 7

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some metaphysical doubt as to the material facts. Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986) (citations omitted). To counter a properly supported motion, the non-movant may not rest on its conclusory pleadings but, under Rule 56, must set out . . . what specific evidence could be offered at trial. Sweats Fashions, Inc. v. Pannill Knitting Co., 833 F.2d 1560, 1562-63 (Fed. Cir. 1987). Rule 56(e) . . . requires the nonmoving party to go beyond the pleadings and . . . designate specific facts showing that there is a genuine issue for trial. Celotex Corp., 477 U.S. at 324 (quoting Fed. R. Civ. Pro. 56(e), which is

identical to RCFC 56(e)). [T]he motion will not be defeated merely . . . on the basis of conjecture or surmise. LNC Investments, Inc. v. Republic of Nicaragua, 1999 U.S. Dist. LEXIS 1846, *15 (S.D.N.Y. 1999) quoting Trans Sport, Inc. v. Starter Sportswear, 964 F.2d 186, 188 (2d Cir. 1992). The fact that this is a tax refund claim does not affect the standard of review at this point in the case. A taxpayer in a refund case has the dual burden of first going forward to establish that the Commissioner s assessment is either erroneous or wrongful and then to establish by a preponderance of the evidence that it has overpaid its taxes. See, e.g., Lewis v. Reynolds, 284 U.S. 281, 283, modified, 284 U.S. 599 (1932). Plaintiff already has met its first burden by establishing that the Commissioner s assessment was erroneous or wrongful. This Court ruled in NatWest I that Treasury Regulation § 1.882-5 is inconsistent with the Treaty, and the Commissioner had no other basis for the assessment. Having established that the Commissioner s assessment is erroneous, Plaintiff now must establish by a preponderance of the evidence that it overpaid its taxes. Cook v. United States, 46 Fed. Cl. 110, 117 (2000). It is clear that Plaintiff is entitled to summary judgment under this standard. First, the record firmly establishes that NatWest s branch profits were based on the 8

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properly maintained books and records of its U.S. branch operations. Second, the evidence demonstrates that the borrowing and lending transactions between NatWest s U.S. branches and affiliates and non-U.S. branches of NatWest were on arm s-length terms. Third, the record demonstrates that Plaintiff has identified and conceded any amounts of interest expense deducted on amounts designated as capital or advanced to the U.S. branches for capital purposes, and that no additional adjustments should be made. For its response, Defendant offers only the reports of its experts who express an inability to reach conclusions and raise no genuine issue of fact. Accordingly, Plaintiff has met its burden and is entitled to judgment as a matter of law that it overpaid its United States federal income taxes for the taxable years 1981 through 1987 in the aggregate amount of $66,234,336, plus interest. I. NATWEST S PROFITS ON ITS TAX RETURNS WERE BASED UPON SEPARATE ACCOUNTS THAT WERE PROPERLY MAINTAINED BY THE U.S. BRANCHES Article 7(1) of the Treaty permits the United States to tax [t]he business profits of [a U.K.] enterprise . . . but only so much of them as is attributable to [a U.S.] permanent establishment. (Verdolini Aff., Ex. 70). Article 7(2) further provides that the business profits to be attributed to a permanent establishment in the U.S. are: the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. The OECD Model Treaty Commentary to Article 7(2) states that [n]ormally, this would be the same profit that one would expect to be reached by the ordinary processes of good business accountancy. (NatWest I at 126) (quoting 1963 OECD Model Treaty at 82, Commentary on Art. 7(2), ¶10). This Court previously has ruled that under Article 7(2) the profits of the U.S. 9

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branch of a U.K. bank should be based on the branch s properly maintained separate accounts. (NatWest II). The profits reported by NatWest easily satisfy this standard: the separate accounts maintained by NatWest s U.S. branch operations during the years at issue reflected good business accountancy and were properly maintained in the ordinary course of their banking business. Specifically, the record establishes the following uncontroverted facts: As required by bank regulation, the branches had extensive internal controls to ensure accurate records. (Walmsley Decl. at ¶¶12, 14). The daily activity of the U.S. branch operations was captured on a computer system, which automatically generated numerous reports each day, including profit and loss statements and balance sheets. There were daily procedures for confirming the accuracy of entries into the computer system. (See Transcript of Deposition Timothy Harasek on May 13, 2002 at 13:22-14:14, 15:15-17:10, 20:8-23:21, 67:14-68:19, 69:1670:7 (Verdolini Aff., Ex. 83); Transcript of Deposition of Harrylall Samaroo on Jan. 23, 2002 ( Samaroo Tr. ) at 26:8-28:21 (Verdolini Aff., Ex. 81); Walmsley Decl. at ¶14). Consistent with common banking practice, the U.S. operations performed ongoing reconciliations of account differences resulting from misdirected payments or from items in transit, in clearing, or awaiting settlement, as was typical in a banking operation of NatWest s size and scope. (Scott Decl. at ¶15; Bench Supp. Rep. at ¶¶5, 12 (Verdolini Aff., Ex. 54); see Tatz Tr. (1/23/02) at 17:2-18:22, 59:6-17 (Verdolini Aff., Ex. 80); Samaroo Tr. at 36:2-51:2 (Verdolini Aff., Ex. 81); see also Tatz Tr. (1/23/02) at 49:18-51:4 (regulators reviewed the reconciliation procedures) (Verdolini Aff., Ex. 80)). NatWest s U.S. branches prepared profit and loss statements, balance sheets and other reports for each branch using data from the computer-generated reports in accordance with detailed internal verification procedures. (See Walmsley Decl. at ¶15 (detailed verification procedures); Tatz Tr. (1/23/02) at 16:19-17:17 (balance sheets and income statements derived from computer reports) (Verdolini Aff., Ex. 80); Samaroo Tr. at 33:2-44:25, 54:17-54:22 (Verdolini Aff., Ex. 81)). NatWest s U.S. branches regularly submitted those financial statements and reports for each branch to the head office and certified them to be in accordance with the books, and to the best of their knowledge and belief, to be true and accurate. (See Walmsley Decl. at ¶15). NatWest s head office regularly inspected the U.S. books and records, without advance notice, in order ensure their compliance with the bank s internal 10

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standards, as well as those of the Bank of England, which supervised the bank as a whole. (Walmsley Decl. at ¶¶20-21; Tatz Tr. (1/23/02) at 26:15-26:18) (Verdolini Aff., Ex. 80)). U.S. bank regulators conducted regular examinations of the books and records of the U.S. branches and consistently found them to be satisfactory. (Walmsley Decl. at ¶¶20-21; Tatz Tr. (1/23/02) at 27:22-29:12 (Verdolini Aff., Ex. 80)). The Bank of England cited NatWest s internal controls, which were established on a bankwide basis and therefore applied in the United States as well as in the United Kingdom, as a model for U.K. branches of foreign banks to follow. (Walmsley Decl. at ¶21). For each of the years at issue, the U.S. federal income tax return NatWest filed in respect of its U.S. branch operations reported taxable income derived from the separate accounts maintained in the ordinary course of NatWest s U.S. branch operations. (Bandoian Rep. (3/4/2005), Ex. 4 (tax returns tied out to profit and loss statements with the exception of $701 in 1986) (Verdolini Aff., Ex. 58). Defendant cannot seriously dispute these facts. Instead, Defendant has resorted to speculating without any evidentiary basis that the books and records underlying NatWest s

tax returns were inaccurate or unreliable simply because certified profit and loss statements on which NatWest s tax returns were based reflected a quick close that was subject to subsequent reconciliation. (See, e.g., Def. s Res. Pl. s Req. Adm. 2.26, 2.28, 2.33, 2.34) (Verdolini Aff., Ex. 67). Defendant s speculation is both misleading and plainly insufficient to create a genuine issue of fact. Indeed, there can be no dispute that reconciliation processes are a normal and important aspect of reliable record-keeping in the banking business. When an individual writes a check and balances her checkbook there is a discrepancy between the checkbook and the bank s records as to the amount in the checking account until the check clears. This happens on a larger scale throughout the banking system. NatWest s reconciliation procedures are evidence of its good business practices, not of unreliable or inaccurate records. (See Bench Supp. Rep. at ¶¶5, 12 (Verdolini Aff., Ex. 54); Scott Decl. at ¶15).

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In sum, Plaintiff has met its burden of establishing that NatWest s profits were based on separate accounts that were properly maintained; Defendant cannot point to any evidence to contradict these facts. Plaintiff is entitled to summary judgment on this issue. II. ALL OF NATWEST S U.S. INTERBRANCH AND INTERCOMPANY INTEREST INCOME AND EXPENSE WAS AT ARM S-LENGTH MARKET RATES The interbranch and intercompany interest income and interest expense of NatWest s U.S. branch operations at issue in this proceeding fall into two categories: (i) interest on money market transactions and (ii) interest on credit and debit balances in clearing accounts. Fact and expert testimony establish that both of these categories were at arm s-length market rates. As to the money market transactions, the only position Defendant has offered is the report of an expert who concluded that he is unable at this time to render an opinion as to whether the interest income and interest expense reported by NatWest with respect to money market transactions by its U.S. branches with related parties reflect arm s-length interest rates. (Expert Report of James Read on The Interest Rate Issue dated March 4, 2005 ( Read Rep. ) at ¶14) (Verdolini Aff., Ex. 62). As to the clearing accounts, Defendant s expert makes superficial observations to suggest the possibility of non-arm s-length terms. (See, e.g., Read Rep. at ¶38) (Verdolini Aff., Ex. 62). His observations are readily explained by an examination of the uncontroverted facts and do not suffice to create a genuine issue of fact. A. NatWest s Money Market Dealings Were at Arm s-Length Market Rates

NatWest s U.S. money market desks engaged in a variety of business activities that were typical of banks of its size and scope. For example, the money market desks took and placed Euro time deposits, bought and sold Fed funds, traded government securities subject to 12

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repurchase agreements ( repos and reverse repos ), bought and sold negotiable certificates of deposit ( CDs ), and sold commercial paper of NatWest PLC. (Payseur Aff. at ¶15). Most of these transactions were with third parties, and thus by definition were at arm s-length rates. (Payseur Aff. at ¶16). A minority of the transactions occurred with non-U.S. NatWest branches and other NatWest affiliates. These transactions generally arose as a result of a transaction between the non-U.S. NatWest branch or affiliate and one of its own third party customers that desired to deposit or borrow dollars. (Walmsley Decl. at ¶9). The non-U.S. NatWest branch or affiliate would accept a dollar deposit from its customer and advance the dollars to a NatWest U.S. branch or, conversely, would make a dollar loan to its customer and borrow the needed dollar funds from a NatWest U.S. branch. (Id.). The record in this case contains unrefuted evidence that when NatWest s U.S. money market operations entered into transactions with non-U.S. branches and affiliates, those dealings were at arm s-length market rates, like all other such transactions. Roger Walmsley, who served in the U.S. branch operations for 11 years, testified that no favors [were] given by any of the units to another unit and that all rates that we used at all times . . . were commercial rates . . . . (Transcript of Deposition of Roger Walmsley on Jan. 31 to Feb. 1, 2005 ( Walmsley Tr. ) 262:25-263:3 (Verdolini Aff., Ex. 88); Walmsley Decl. at ¶11). Mr. Walmsley, who was employed in NatWest s San Francisco branch for several years in the 1970s, was Deputy Manager of the New York branch from 1982 through 1984, and was Manager of the New York branch from 1984 through 1987 (see Walmsley Decl. at ¶1), further testified that, in all his years with the U.S. branch operations, he had never heard of money market transactions undertaken with other than market rates of interest. (Walmsley Tr. 263:5-263:9 (Verdolini Aff., Ex. 88); Walmsley Decl. at ¶47). 13

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Scott Payseur, a trader on the money market desks of the U.S. branch operations throughout the years at issue,10 also testified that the U.S. branch operations were run as independent professional operations. (Payseur Tr. 31:3-31:8) (Verdolini Aff., Ex. 82). He testified that transactions entered into between the U.S. branches and foreign affiliates and foreign offices were normal transactions, like any other counterparty might ask. (Payseur Tr. 90:19-90:24, 47:9-14) (Verdolini Aff., Ex. 82). Additionally, Mr. Payseur is unaware of any instance where money market transactions between the U.S. operations and another NatWest branch or affiliate reflected anything other than arm s-length market interest rates. (Payseur Aff. at ¶22). The analysis of Plaintiff s expert, Dr. Robert T. Clair, also confirms the arm s-length nature of the money market dealings of the U.S. branches with related parties. (See Report of Robert T. Clair on the Arm s-Length Nature of National Westminster Bank PLC s Money Market Transactions dated Mar. 4, 2005 ( Clair Rep. ) (Verdolini Aff., Ex. 59)). Dr. Clair, a former senior economist and policy adviser at the Federal Reserve Bank of Dallas who has extensive experience in arm s-length pricing matters affecting U.S. and foreign banks (including U.S. branches of foreign banks), took a statistically random sample of days in the years at issue and examined NatWest s records for all of the money market transactions entered into on those days. After making a direct comparison of related and unrelated party U.S. dollar deposits and placements, Dr. Clair concluded that the related party transactions were conducted at prices consistent with the arm s-length standard. (Clair Rep. at 35) (Verdolini Aff., Ex. 59). Dr. Clair performed a regression analysis of these transactions which indicated that there is no

Mr. Payseur is currently Chief Trader and Senior Vice President, Money Markets at the Royal Bank of Scotland, New York branch. 14

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statistically significant association between the interest rates on deposits or placements with the identity of the customer as a related or unrelated party. (Clair Rep. at 41) (Verdolini Aff., Ex. 59). Finally, Dr. Clair also concluded that the relatively few related party transactions in categories other than U.S. dollar deposits and placements do not provide any evidence of non-arm s-length pricing. (Clair Rep. at 37) (Verdolini Aff., Ex. 59). In sum, the record contains uncontradicted evidence that NatWest s money market transactions with related parties bore arm s-length interest rates. Defendant cannot seriously challenge this conclusion and, not surprisingly, has never attempted to do so. Defendant s expert, James Read, has taken the position that testing Plaintiff s business records to determine if related party transactions were done at arm s-length rates would entail substantial time and effort. (See Read Rep. at ¶14) (Verdolini Aff., Ex. 62). For that reason, Mr. Read did not develop a sampling methodology to test Plaintiff s business records. (Id.). As noted above, however, Dr. Clair was able to develop and apply a sampling methodology, using the same information made available to the Defendant, in the time allotted by the Court. Defendant s decision not to present an appropriate analysis of Plaintiff s business records with respect to interest rates cannot create an issue of fact. The record stands uncontradicted, with both testimony from fact witnesses and confirmation by an independent expert, that NatWest used arm s-length market interest rates in its related party transactions. Moreover, the issues raised by Mr. Read s report are plainly insufficient to defeat summary judgment. As the Court is aware, Mr. Read, who has extensive experience in matters involving public utilities but no apparent experience with banks, stated that his work was insufficient to support a conclusion one way or the other as to whether the interest income and interest expense reported by Nat West with respect to money market transactions by its U.S. 15

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branches with related parties reflect arm s-length interest rates. (Read Rep. at ¶14) (Verdolini Aff., Ex. 62). He nevertheless offered limited observations 5 of the 23 days for which he had obtained records based on records he selected from

about the average interest rates on related

party and third party transactions without even considering how the related party rates compared with the range of unrelated party rates in the records he used. (See Read Rep. at ¶¶54-55) (Verdolini Aff., Ex. 62). Mr. Read attempted to excuse the superficiality of his analysis by claiming that the same approach was used in a letter from Plaintiff s counsel dated September 19, 2000. (Read Rep. at ¶53) (Verdolini Aff., Ex. 62). However, that letter that is inadmissible under Fed. Rul. Evid. 408 a confidential settlement communication

did not purport to present a comprehensive

analysis of interbranch pricing or to represent the only method of testing interbranch prices, and Mr. Read did not even follow the approach described in that letter. (See Clair Aff. at ¶¶28-29). Finally, the few discrepancies Mr. Read purported to observe in the average interest rates vanish once the individual related party transactions are compared directly to unrelated party transactions on the same dates. (See Clair Aff. at ¶39). Indeed, a direct comparison analysis of Mr. Read s data provides strong evidence of arms-length pricing. (Id.). Thus, what questions he has raised have been definitively answered, and there is no genuine issue of fact on this issue. B. NatWest s Clearing Accounts Were at Arm s-Length Market Rates

As with NatWest s money market transactions, the record is uncontroverted that the terms of NatWest s clearing accounts were at arm s-length rates. The U.S. branches maintained dollar clearing accounts in the ordinary course of their banking business for (i) unrelated non-U.S. banks and (ii) non-U.S. branches of NatWest, NatWest s subsidiary International Westminster Bank ( IWB ) and other NatWest affiliates. 16

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(Walmsley Decl. ¶22; see also id. at ¶25). These non-U.S. banks or branches needed dollar clearing accounts in the United States because transactions in dollars outside the United States (other than those conducted in coins or paper currency) generally had to be effected by transferring funds within the United States between U.S. banks (or U.S. branches of foreign banks) that have access to accounts at the Federal Reserve. (Walmsley Decl. at ¶23; see also Clair Aff. at ¶56). The clearing accounts worked like checking accounts in that they were accounts into which the U.S. branch s customer could deposit funds and through which it could make and receive payments to or from other parties. (Walmsley Decl. at ¶24).11 The U.S. branches charged customers both related and unrelated the same fixed

per-item commission for processing payments into and out of the accounts.12 Thus, the greater the number of payments in and out of an account, the greater the commission income generated. The U.S. branches also charged interest ( debit interest ) on negative overnight balances in the accounts (i.e., overdrafts). Finally, the U.S. branches calculated interest ( credit interest ) on positive overnight balances in the accounts. As explained below, depending on the circumstances, credit interest was either paid to the customer or used to offset charges on the account. In addition to commission income, the U.S. branches derived profits from the clearing accounts by investing the funds left on deposit in the accounts in interest-bearing assets.

In NatWest s records, the clearing accounts were often referred to as current accounts, the U.K. term for a checking account, because even though use of the accounts differed, the basic function of and record keeping for a clearing account is the same as in the case of a checking account. (Walmsley Decl. at ¶24). The standard per-item commission was $2 at the beginning of the years at issue and increased to $3 during the years at issue. (Walmsley Decl. at ¶27). 17
12

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(Walmsley Decl. at ¶27; see also Clair Aff. at ¶58).13 Even though the clearing accounts were primarily used by accountholders to make and receive dollar payments in matching amounts, in many cases there was a time lag between the receipt of funds in the clearing account and the corresponding payment of funds out of the clearing account. (Walmsley Decl. at ¶27). Banks refer to the positive balance in the account during this time lag as a float. (Id.). The U.S. branches could use the float, particularly the large float from very active accounts, to fund short-term assets on which the branches received income. (See id.; Clair Aff. at ¶58). As noted above, Roger Walmsley, the Deputy Manager of the New York branch from 1982 through 1984 and Manager of the New York branch from 1984 through 1987, testified that no favors [were] given by any of the units to another unit, and that all rates that we used at all times . . . were commercial rates . . . (Walmsley Tr. 262:25-263:3 (Verdolini Aff., Ex. 88); Walmsley Decl. at ¶11), and that, in all his years with the U.S. branch operations, he had never heard of transactions undertaken with other than a market rate of interest. (Walmsley Tr. 263:5263:9 (Verdolini Aff., Ex. 88); Walmsley Decl. at ¶47). In addition, Mr. Walmsley confirmed that the clearing accounts maintained by the U.S. branches bore a range of terms that correlated with the level of activity in the accounts; that he always insisted on terms that would yield a commercially reasonable profit to the U.S. branch operations for their services; and that these terms reflected commercial interest rates. (Walmsley Decl. at ¶29). Defendant cannot cite any evidence in the record to controvert Mr. Walmsley s statements. Moreover, as explained below, the assertions made by Defendant s expert, Mr.

Overdrafts were generally discouraged and were not sought after as a source of profit. (Walmsley Decl. at ¶28). 18

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Read, regarding the clearing accounts are erroneous and plainly insufficient to create a triable issue of fact. First, Mr. Read s assertion that the New York branch was not acting at arm s length when it paid $33 million of interest on the clearing accounts of NatWest London Overseas and IWB London branch, because it allegedly did not pay interest on the clearing accounts of unrelated counterparties, is plainly and simply wrong. (See Read Rep. at ¶38) (Verdolini Aff., Ex. 62). Mr. Read completely fails to acknowledge that the U.S. branches did pay interest indeed, at comparable rates and without commission charges to the Bank of England, National

Bank of Dubai and several other unrelated parties by cash managing their accounts. (See Walmsley Decl. at ¶¶32-34; Clair Aff. at ¶¶72-81; Payseur Aff. at ¶12).14 This cash management process, which entailed transferring overnight balances to the IBF or Nassau branch, was necessary because Federal Reserve Regulation Q prohibited the New York branch, but not the IBF or the Nassau branch, from paying interest to those parties on short-term balances. (See 12 C.F.R. § 217.2) (Verdolini Aff., Ex 76)). Because this regulation did not preclude the New York branch from paying interest directly to London Overseas (Walmsley Decl. at ¶40; see also Clair Aff. at ¶82), there was no reason to cash manage the London Overseas account. Regardless of whether the New York branch cash managed accounts or paid interest directly, the record is clear that NatWest did pay interest with respect to clearing account balances of third parties whose accounts were substantial enough to warrant such treatment. The smaller clearing accounts of related and unrelated parties also were treated comparably in that

In any event, Mr. Read s bizarre suggestion that London Overseas should have advanced very large sums to New York without asking for any interest could not possibly be an arm s-length result. (See Walmsley Decl. at ¶¶35, 39) ( the London Overseas account at the New York branch generally had a very large positive balance ). 19

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they neither received interest nor were cash managed. (See Walmsley Decl. at ¶30 (interest not paid on positive balances in small accounts); Clair Aff. at ¶¶87, 91-93 (describing pricing terms for low-volume customers)). These smaller accounts were not comparable to the high-turnover accounts that received interest directly or through cash management. In some of them, the interest rate terms were so unimportant that the customer never asked what the debit rate terms were. (Walmsley Decl. at ¶30). Mr. Read s analysis of IWB London s clearing account is also flawed in that a large portion of the interest Mr. Read asserted was paid on the clearing account was in fact paid on money market transactions. (Bandoian Decl. at ¶¶27-28) ($1.3 million of the $2.2 million Mr. Read identified is attributable to money market transactions). The remaining interest paid to IWB London in connection with its clearing account was less, on an aggregate basis, than the commissions the New York branch received from IWB on the account. (Id.). Mr. Read concedes that this is equivalent to an offset of notional interest against commissions, which NatWest generally applied even to accounts much smaller than the IWB account. (See Read Rep. at ¶42) (Verdolini Aff., Ex. 62). Thus, the payment of interest to IWB London confirms, rather than contradicts, the fact that it was treated comparably to similarly situated unrelated parties. Mr. Read s claim that NatWest should have decreased the credit interest rate on certain related party accounts similarly misses the mark. This claim is based on the erroneous assertion that roughly half of the accounts with related customers were credited interest at the federal funds rate, whereas the other related-party accounts and all third-party accounts were credited interest at a rate substantially less than the federal funds rate. (Read Rep. at ¶43) (Verdolini Aff., Ex. 62). It is simply not true that all third-party accounts were credited interest at a rate 20

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substantially less than the Federal funds rate. Crédit du Nord, a state-owned French bank, was credited interest at the Federal funds rate. (Clair Aff. at ¶100). Moreover, Mr. Read failed to recognize that a number of other unrelated banks, including the National Bank of Dubai and the Bank of England, received interest at rates at or close to a Federal funds rate through cash management. (Clair Aff. at ¶101). The common characteristic of the accounts that were credited or paid interest at Federal funds rates was that they had a higher turnover and a larger number of payments running through them. (See Clair Aff. at ¶91). The common characteristic of the accounts that were credited interest at substantially lower rates was that they had a much lower turnover and fewer payments. (See id.). These differences are evident in the records Mr. Read cites in his report. (See Read Rep. at App. B-2 (citing 12/31/86 A220 reports bearing Doc. Control Nos INT 537001191 to INT 537-1271) (Verdolini Aff., Ex. 62). It should have been no surprise to Mr. Read that a clearing account having an annual turnover of more than $31 billion (NatWest Singapore) should have different terms than an account