Citations
- 816 F. Supp. 2d 693
Full opinion text
MEMORANDUM OPINION AND ORDER
JOHN A. JARVEY, District Judge.
I.Nature of the Case.........................................................696
II. Findings of Fact...........................................................697
A. Background and Notice of FPAA.........................................697
1. Principal Companies................................................697
2. Citibank...........................................................697
3. Pritired 1, LLC ....................................................698
4. French Banks......................................................698
5. Notice of FPAA....................................................698
B. Negotiations Forming Pritired Transaction................................699
C. Basic Structure and Performance of Pritired Transaction....................703
1. Basic Structure.....................................................703
2. Voting Rights and Expected Duration of the Pritired Transaction.........705
3. Calculation of Interest Rate..........................................707
4. Cash Flows, PC Swaps, and B Share Swaps............................707
5. Pritired Model Projections...........................................710
6. Actual Performance of Pritired Transaction............................712
D. Debt and Equity Attributes of Pritired Transaction.........................716
1. Expert............................................................716
a. Andrew S. Carrón ..............................................716
b. Joel Finard....................................................717
c. Michael Cragg..................................................719
2. Analysis of the Debt and Equity Characteristics........................720
a. Characterization................................................722
b. Market Risk ...................................................723
c. Credit Risk....................................................724
d. Voting Rights..................................................725
3. Expected Economic Benefit of the Pritired Transaction..................725
III. Background of Relevant Law................................................728
A. Partnerships and Foreign Tax Credits....................................728
B. Notice 98-5............................................................728
C. TEFRA...............................................................729
D. Burden of Proof........................................................731
IV. Analysis of the FPAA.............................................. 732
A. Whether the Pritired Transaction Should Be Characterized as a Loan 732
1. Intent to Form a Partnership............................... 732
2. Debt and Equity Characteristics............................. 733
B. Whether the Pritired Transaction Lacks Economic Substance....... 735
C. Whether the Pritired Transaction Violates the Anti-Abuse Rule..... 741
D. Whether the Pritired Transaction Lacks Substantial Economic Effect 741
V. Conclusion......................... 744
This matter comes before the Court pursuant to a bench trial held December 8-9, 13-15, and 17, 2010. The plaintiffs Pritired 1, LLC (“Pritired”) and Principal Life Insurance Company (“Principal”) were represented by Harold Schneebeck, Bruce Graves, and Varan Bhat. Defendant United States Government was represented by Stuart Gibson and James Strong. At the conclusion of the trial, the case was taken under advisement. The Court finds in favor of the United States.
The facts of this case are exceedingly complex. At the risk of oversimplification, the transaction at issue can be summarized as follows. American companies sent three hundred million dollars to French banks who combined the three hundred million dollars with nine hundred million dollars of their own. The money was used to earn income from low risk financial instruments. French income taxes were paid on the income from this approximately 1.2 billion dollar investment. The American companies received some cash from the income on the securities but, more importantly, were given the ability to claim foreign tax credits on the taxes paid on the entire 1.2 billion dollar pool. Through this transaction, the French banks were able to borrow three hundred million dollars at below market rates. The American companies received a very high return on an almost risk free investment. Only one thing could make such a transaction so favorable to everyone involved. United States taxpayers made it work.
I. Nature op the Case
This case is a dispute surrounding a complex set of transactions involving two United States companies and two French banks. It was commenced pursuant to a petition for readjustment of partnership item based on a Notice of Final Partnership Administrative Adjustment (“FPAA”) the Internal Revenue Service (“IRS”) issued to Principal on December 20, 2007. I.R.C. § 6226(a)(2) (“tax matters partner may file a petition for readjustment of the partnership items for such taxable year with ... the district court of the United States for the district in which the partnership’s principal place of business is located”). The partnership tax provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”), Pub.L. No. 970248, 96 Stat. 324 (1982) (codified as amended at 26 U.S.C. § 6221, et seq. (1997)), enable the IRS to examine income tax returns filed by partnerships and make adjustments through issuance of a FPAA pursuant to 26 U.S.C. § 6223(a)(2). Section 6226 of the Internal Revenue Code permits this Court to conduct judicial review of the FPAA. I.R.C. § 6226(f).
Principal is the Tax Matters Partner for a partnership known as Pritired 1, LLC (“Pritired”). Pritired entered into a transaction with two French Banks, Bred Banque Populaire (“Bred”) and Natexis Banque Populaire (“NBP”) (collectively, “French Banks”). Citibank North America (“Citibank”) designed the transaction. In this transaction, Pritired received $291 million of Perpetual Certificates (“PCs”) and $9 million in “B Shares” from entities of the French Banks, LFI 4 SAS and VAL A SAS (collectively “SAS”) in exchange for $300 million in cash. The parties executed the transaction on October 27, 2000, and exited (unwound) it on December 31, 2005. As a result of the transaction, Principal claimed approximately $21 million in foreign tax credits against its taxable income for the years 2002 and 2003.
The IRS alleges that the Pritired transaction was structured to accrue foreign tax credits for its partners, but earn little to no cash return from its French investments. In the FPAA, the IRS determined that Principal was not entitled to claim Pritired’s share of French foreign taxes paid or accrued for the years 2002 and 2003. Thus, the foreign tax credits for the partners of Pritired, including Principal were disallowed.
Principal disputes the FPAA’s adjustments to the partnership income and filed this action to obtain a refund of the taxes resulting from the FPAA adjustments. Principal deposited the funds allegedly due and owing by reason of such adjustments, approximately $21.2 million. This action is to obtain a refund of that deposit. In accordance with Federal Rule of Civil Procedure 52(a)(1), the Court makes the following findings of fact and conclusions of law.
II. Findings of Fact
A. Background and Notice of FPAA
1. Principal Companies
Principal Financial Group is a multinational insurance company that primarily engages in asset management and accumulation, including issuing insurance and annuity policies and guaranteed interest contracts. Principal Financial Group is a Delaware corporation with its principal place of business in Des Moines, Iowa. Final Pretrial Conference Order, Undisputed Facts ¶ A, Dkt. No. 57-1 (hereinafter “Undisputed Facts”).
Plaintiff Principal Life Insurance Company (“Principal”) is an Iowa insurance company with its primary office in Des Moines, Iowa. Id. ¶ A. Principal is a wholly-owned second-tier subsidiary of Principal Financial Group, Inc. Id. Principal sells, among other things, insurance, annuity, and guaranteed interest contracts. In order to meet the liabilities from these contracts, it invests the premiums and other consideration received in a variety of assets, including stocks, bonds, notes, and other assets. Principal is a “spread lender” because it generates income based on the difference (or “spread”) between what it pays out for capital and what it can earn by investing that capital.
Principal Capital Management, LLC, is a wholly-owned subsidiary of Principal Financial Group, Inc., and engages in asset management services. It provides investment management expertise and advice, and assists Principal in screening and exploring investment opportunities. Id. at 4, 15.
2. Citibank
Citibank is also a multi-national United States banking organization. Its Structured Products Group operates under the Global Corporate and Investment Bank division. Ex. 207 at 28. The Structured Products Group specializes in sophisticated financial market transactions and primarily serves clients that include large corporations, banks, or insurance companies.
Within the Structured Products Group is an organization headquartered in London, called the Citi Capital Structuring Group. Bruno Rovani and John Buckens were employees of the Citi Capital Structuring Group and were responsible for designing and creating sophisticated financial transactions. Rovani reported to Buckens and was a junior transactor responsible for developing models for the Pritired transaction. He also developed the Excel spreadsheets, the Pritired Model, which was of particular importance to this case. Rovani and Buckens believed that they had successfully structured transactions that would be viewed as upper-tier capital infusions for Europeans banks, with the capital infusions categorized as preferred stock for U.S. tax purposes for the U.S. investor.
3.Pritired 1, LLC
Plaintiff Pritired is a Delaware limited liability company with its primary office also in Des Moines, Iowa. Undisputed Facts ¶ B. For federal income tax purposes, Pritired filed an election under 26 U.S.C. § 6231(a)(1)(B)(ii) to have the partnership provisions of Subchapter C of Chapter 63 of the Internal Revenue Code (“IRC”) apply to it. Id. This means that Pritired elected to be a “pass-through” partner, meaning that money it earned would “pass-through” to its partners. Principal and Citibank were the sole and equal partners in Pritired. Id.
Principal is Tax Matters Partner of Pritired for the taxable years 2002 and 2003, within the meaning of I.R.C. § 6231(a)(7) and Treasury Regulations §§ 301.6231(a)(7)-l(a), 301.6231(a)(7)-l(a). Id. ¶ D.
4.French Banks
Bred Banque Populaire (“Bred”) and Natexis Banque Populaire (“NBP”) are French banks. In 1999, the Banque Populaire organization was the fifth largest banking group in France.
The French Banks formed the subsidiaries LFI 4 SAS and VAL A SAS (collectively “SAS”). Pritired invested in PCs and “Class B” shares that SAS issued to it.
5.Notice of FPAA
On December 20, 2007, the IRS issued to Principal as Tax Matters Partner of Pritired a Notice of Final Partnership Administrative Adjustment (“FPAA”) for the taxable years ended December 31, 2002, and 2003. Undisputed Facts ¶ E. The IRS alleged that the Pritired transaction was an abusive arrangement and its foreign tax credits were disallowed for five reasons: (1) the PCs and B Shares were considered to be debt instruments and not equity; (2) the transaction was a loan because Pritired was not a partner in the SAS; (3) pursuant to the anti-abuse rule in Treas. Reg. § 1.701-2, the transaction was re-characterized as a loan because the PCs and B Shares were debt instruments; (4) the special allocation of foreign tax credits to Pritired lacks economic effect; and (5) the transaction generating the foreign tax credits lacks economic substance.
As a result of these findings, the IRS determined that Pritired was not entitled to claim an allocation of foreign taxes and disallowed its claimed share of foreign taxes. In turn, Principal was disallowed its claimed share of foreign taxes.
On February 21, 2008, Principal deposited with the Secretary of the Treasury of the United States the amounts— $21,293,978.00 collectively — by which the tax liabilities of Principal would be increased if the Pritired partnership items in Principal’s tax returns were made consistent with the treatment of the partnership items as proposed in the FPAA. Id. ¶ C.
B. Negotiations Forming Pritired Transaction
Citibank sought out an investment partner when an investment opportunity emerged for the Citi Capital Structuring Group towards the end of 1999. A new transaction was proposed with the French Banks to involve $300 million. Citibank considered this transaction too large to do alone and approached Principal to form a partnership. Rovani testified that the “Pritired transaction was a transaction in which French banks refinanced a portfolio or portfolios of securities at an attractive funding rate and in which two U.S. investors invested in order to earn an enhanced yield.” Hybrid instruments would create a reduced rate of funding for the French Banks and an “enhanced return for the U.S. investors.” Rovani explained that the Pritired transaction was appealing to the French Banks because they “could acquire capital at a rate below market rates.” The investment would result in savings in the cost of borrowing to the French Banks because the investment was between 80 and 100 basis points lower than prevailing market rates. Rovani stated that “the return for U.S. investors was a combination of cash and a tax component which was made of credits.”
Principal and Citibank engaged in extensive and complex discussions about the proposed transaction from February 2000, to when the transaction closed on October 27, 2000. Exs. 10, 247, 248. Each company had its own internal approval procedures considering the size of the investment. Rovani testified about the procedure at Citibank, where the approval process began with an internal “mandate checklist” developed by Citibank. Exs. 66, 230. Citibank and the French Banks then signed a “mandate letter” on March 16, 2000, in which Citibank described the work it would undertake. Exs. 42, 5012, 5019. Because the investment purported to involve equity and subordinated debt, Citibank also approved a Major Expenditure Proposal for the transaction. Exs. 76, 5020, 5021. Finally, several managers approved a transactional approval memorandum (“TAM”) describing the transaction in detail. Exs. 216, 229, 5018. In Citibank’s TAM, it outlined the transaction overview and benefits to parties:
From [French Banks’] point of view, the purpose of the transaction is to:
—raise US$ BOO million of floating rate funding at LIBOR-50bps to LIBOR100bps for 5 years,
—refinance part of a US$ 1.2 billion portfolio of [asset-backed] securities,
—diversify sources of funding,
—raise financing which should quality as lower Tier II regulatory capital,
—raise financing which should qualify as Minority Interest for GAAP purposes. From the U.S. investors’ point of view, the purpose of the transaction is to invest in a structure which:
—provides, in substance, senior debt exposure with a built-in equity buffer of 15%,
—qualifies as equity from a U.S. tax point of view,
—provides unwinding flexibility according to capital accounts after 5 years, —provides partial compensation and unwinding probability in case of change of law,
—avoids exposure to interest rate movements, being a floating rate US$ transaction,
—is governed by UK law.
Exs. 5018, 5018.1. The present value of the expected return on the transaction was $36.6 million, and excluding the value of the tax credits, Citibank projected an expected return from 4.2% to 4.65%. Exs. 80, 5018.
In January 2000, Buckens and Rovani initiated communications with Principal regarding its level of interest in the proposed securities. Buckens sent Kurt Lettow an email on January 25, 2000, bringing the Pritired transaction to Principal’s attention. Lettow was a finance director at Principal Financial Group and his job was to analyze the company’s investment portfolio and assist in identifying the appropriate tax treatments for the company’s investments. In Buckens’ email, he outlined the proposed structure to Lettow and stated that one of the “key terms and conditions” of the proposal was that the “US investors must be in a Foreign Tax Credit excess limitation position ... in order to be able to absorb excess foreign tax credits generated by the investment.” Ex. 65.1.
Buckens and Rovani traveled to Des Moines in February 2000, to present the proposed transaction to a team at Principal. Ex. 65.2. Rovani testified that the PCs would be treated as debt for French and U.S. banking purposes, but treated as equity for U.S. tax purposes. Rovani was copied on emails where it was indicated that “one of the prerequisites” for the transaction was that the U.S. investors could use the foreign tax credits generated from the transaction.
At Principal, the negotiations and discussions with Citibank were conducted primarily by Jeff Fossell, an investment professional serving in Principal Capital Management’s portfolio management group. Exs. 84, 87, 88, 89. Fossell oversaw all the derivative trading and risk management for Principal and described himself as the “chief negotiator” with Citibank for the transaction. Numerous emails exchanged from April 2000, to October 2000, assisted in fleshing out the transaction details. For example, in an April 19, 2000, email addressed to several Principal employees, Buckens attached an updated description of the Pritired transaction and specifically referred to the PCs as “the subordinated debt portion.” Ex. 84. Fossell reiterated in emails on June 8 and 13, 2000, that Principal wanted restrictive investment guideline language for the assets in which the SAS could invest because he wanted “a high quality portfolio of supranationals, OECD and asset backeds____” Exs. 86, 87. Principal wanted SAS to invest in high quality assets because if the Pritired PCs received a rating from a rating agency, then the instrument could be treated as NAIC 1 debt in financial statements, which is a high quality debt rating. Ex. 164.
The transaction’s projected yield to investors included credits against U.S. taxes for the French taxes paid by the French entities. The IRS had issued Notice 98-5, 1998-3 I.R.B. 49 (hereinafter “Notice 98-5”) on December 27, 1997, and this notice provided guidance to taxpayers investing in foreign securities. Specifically, it “identified two classes of transactions that create potential for foreign tax credit abuse” and cautioned against structuring foreign transactions that would “yield little or no economic profit relative to the expected U.S. tax benefits.” Notice 98-5 at *1, *5. Buckens and Rovani referred to the ratio of the expected tax credits to the expected cash return as the “98-5 Ratio.”
In reviewing the transaction, Fossell and others analyzed the spreadsheets (hereinafter “Pritired Model”) that Rovani had prepared showing various projections. Ex. 80. Rovani helped develop the Pritired Model, which was a “cash flow model which recaps or describes the assumptions used in the transaction ... and then describes the expected return on the investment.” The Pritired Model was critical to the projections and expectations of the parties and was referred to repeatedly in testimony. It was a dynamic Excel spreadsheet and incorporated the essential financial features of the transaction. The parties relied heavily on the Pritired Model for deciding whether to participate in the Pritired transaction based on its projections; it was updated and exchanged among all participants during the negotiations. Rovani created the Pritired Model to allow the parties to run their own assumptions about, inter alia, future cash flows, interest rates, and tax rates. For example, one scenario in the Pritired Model projected that Principal would yield a 4.34% return in the form of cash distributions on its $150 million investment, and if the projected credits against its U.S. taxes for the French income taxes paid were included, then the total yield would jump to 12.62%. Ex. 80. Based on the projections in the Pritired Model, when interest rates dropped, tax credits would enhance the return despite a decrease in cash paid to the U.S. companies. The Pritired Model also detailed the anticipated cash flows with or without the tax credits and projected that the 98-5 Ratio would be 1.8:1. Id. According to the Pritired Model, expected total cash flows to Pritired from the SAS would be $65.57 million. Id.
The Pritired transaction was attractive to Principal. Fossell reported to Dennis Francis (at the time, the Chief Investment Officer and Senior Vice President of Principal Financial Group) throughout the negotiations and gave his opinion of the transaction: “we believe we can gain the higher yields associated with equity investments but without the onerous risk based capital treatment” and that “[t]he transaction provides access to supranational and OECD state debt issues which are more common to foreign regions of the world.” Exs. 101,102, 5059.
On May 26, 2000, Fossell made a presentation to Principal’s Investment Committee (“IC”) and recommended the transaction for approval. He recalled presenting the transaction as one that would be treated as equity for tax purposes. His memorandum to the IC outlined the structure of the transaction and stated that the projected effective rate of return would be 13.96%. Exs. 98, 99. An asterisk on the memorandum indicated it was contemplated that the investment’s floating rate could be exchanged (swapped) for a fixed rate.
The Pritired transaction also incorporated the use of derivatives and the IC was actively seeking greater use of derivatives in investments. Principal was seeking to “us[e] an increased amount of derivative contracts to manage investment duration.” Ex. 217. In a memo dated June 19, 1998, detailed that “duration needs can be delivered through other means,” such as through derivatives. Ex. 218. A derivative is a financial instrument whose characteristics and value depend upon an underlying security. Investors use derivatives to manage the risk associated with the underlying security, such as protecting against fluctuations in value.
The Court notes that it questioned Michael Gersie, Principal Financial Group’s Chief Financial Officer, whether the IC sought to use tax benefits as an enhanced return. The question was not answered to the Court’s satisfaction. Gersie responded that if tax benefits were included in the Pritired transaction, then the IC would have discussed whether there was a valid business purpose for the tax benefits/credits. When the Court observed that FTCs were not included on the memorandum deal sheets provided to the IC, Gersie explained that it was the IC’s policy not to include FTCs on deal sheets. Exs. 98, 99. The deal sheets were important in the IC’s decision-making, but did not have information such as return based on FTCs because the deal sheets were ultimately given to NAIC for rating purposes.
The IC approved Fossell’s recommendation on May 26, 2000, and a revised memorandum was later prepared when the final numbers were slightly different from the approved memorandum. Id. Fossell testified that even though the interest rates had decreased from when the IC had approved the transaction to closing (6.79% to 6.76%), Fossell viewed the “investment as a floating rate investment so what’s more critical there is that the spread margin that one can earn on an investment is still competitive with then current spreads of comparable risk securities.” Further, that the spread would be “sufficient to support the spread margins required on the issuance of guaranteed interest contract liabilities.” Even if the LIBOR interest rates decreased, the Pritired transaction was expected to return yields higher than market rates because of the returns tied to the FTCs.
The transaction between Principal, Citibank, Bred and Natexis that came to be known as Pritired finally closed on October 27, 2000, and consisted in all material respects of the following elements, which the Court explains in greater detail in the next section.
C. Basic Structure and Performance of Pritired Transaction
In this section, the Court first describes the basic structure of the Pritired transaction. Next, the Court explains the voting rights of the Class A and B Shares and the expected duration of the transaction. This is followed by a description of how the parties calculated the LIBOR interest rate for the Pritired Model and its projections. Next, the Court examines the various cash flows the transaction generated, including the important “PC Swaps.” An analysis of the Pritired Model’s projections explains how the transaction was expected to work. Finally, the Court broadly traces the actual performance of the Pritired transaction from after its closing on October 27, 2000, to when the transaction ended approximately five years later.
1. Basic Structure
The Pritired transaction consisted, at its core, of investments by two U.S. Taxpayers and two French Banks into entities created by the French Banks. The entities the French Banks created, the SAS, issued securities to the French Banks and the U.S. Taxpayers. The diagram below explains the transaction:
A. Pritired Funding — First, the U.S. Taxpayers, Principal and Citibank, joined to form Pritired as a Delaware LLC in 2000. Pritired was a partnership and Principal and Citibank were its partners. According to the Subscription Agreement dated October 27, 2000, Principal and Citibank each contributed $150 million to Pritired 1, for a total of $300 million. Pritired’s capital structure allocated $285 million to “144A debt” and $15 million to equity. Ex. 248 at 4, 10. Principal received $142.5 million back in a “144A” debt note, with the other $7.5 million as an equity interest. Ex. 163. An internal memo characterized the $142.5 million note as “fixed maturity on the GAAP balance sheet and as a preferred stock on the SAP balance sheet.” Ex. 209. Pritired now had $300 million to invest.
B. Pritired Investment — Second, Pritired transferred the entire $300 million to the SAS. Of the $300 million transferred, SAS issued $9 million of Class B shares to Pritired and $291 million of PCs to Pritired. Exs. 43, 43.1. Principal’s share of each of these investments was $4.5 million and $145.5 million, respectively. The PCs carried a floating interest rate of 3-month US$ LIBOR, plus a spread of 1 %. The PCs were “stapled” to the B Shares, meaning that neither the PCs or the B Shares could be sold, redeemed, or liquidated without the other. Ex. 108 at art. 9.3. Pritired’s return from the transaction consisted of the interest from the PCs and dividends from the B Shares.
C. French Banks Investment — The SAS was the French version of a limited liability company. The creation of the SAS by the French Banks was, in many respects, similar to how the U.S. Taxpayers had created Pritired as a subsidiary. The SAS executed the French equivalent to U.S. LLC Operating Agreements on the day the transaction closed. Exs. 43, 43.1. The SAS had no physical offices, no employees, and could not form any subsidiaries.
The French Banks then funded the SAS. In exchange for $930 million provided by the French Banks, SAS issued to the French Banks $475 million in 1 % Convertible Notes (Citibank referred to these as “Zeros” and the Court will also use this term) and $455 million in Class A Shares (common stock). Exs. 45, 46. From these investments, the French Banks’ rate of return on the transaction included the 1 % on the Zeros and also dividends from the A Shares.
D. SAS Securities Purchase — When stripped of its superficial complexity, the Pritired transaction simply provided $300 million of new funds to the French Banks. When added to the $930 million from the French Banks, SAS had $1.23 billion.
SAS used this to assume an existing portfolio of high quality debt securities from the French Banks, as well as other securities for which the French Banks were counterparties. SAS was to have purchased the majority of these securities outright from the French Banks, and also approximately $368 million of securities pursuant to sale and repurchase agreements (“repos”). Under these repo agreements, the French Banks transferred a portfolio of securities to SAS, and agreed to repurchase the transferred securities for their original purchase price after a fixed period. Because of the set repurchase price at the end of the fixed period, the French Banks would recoup 100% of its investment from the SAS. Principal wanted little to no credit exposure from the French Banks, while still having access to a “high quality portfolio with little risk.” See also Ex. 5045 (“We have been clear since last spring that we will take NO risk to BRED/NATEXIS.”)
The French Banks also provided interest rate floors to SAS which guaranteed a minimum level of income to SAS even if LIBOR rates dropped. The floors benefit-ted the French Banks by increasing the income of SAS, which in turn reduced the SAS payments to Pritired under the PC Swap (to be explained infra). Because the SAS were pass-through entities, the banks would not care if income were earned by the SAS or the banks themselves. However, income to the SAS was important to Pritired because it generated the tax credits that were valuable to Pritired and therefore Principal.
The French Banks themselves held the SAS portfolio for consolidated accounting and tax reporting purposes. They also managed the portfolio for SAS, but complied with very strict investment limitations and operations were designed to minimize risk of any loss to capital.
2. Voting Rights and Expected Duration of the Pritired Transaction
The Bylaws of the SAS set forth the voting rights and expected duration of the Pritired transaction. At the beginning of the Pritired transaction, October 27, 2000, the A Shares had 98% of the voting rights of SAS, while the B Shares had 2% of the voting rights. Ex. 108 at art. 10.2. Prior to March 31, 2006, the A Shares could only be transferred to Pritired, as holder of the B Shares. Id. at art. 9.2. The A Shares had a 99% interest in the “distributable profit” (or residual income) of SAS, while the B Shares had a 1% interest in the “distributable profit.” Id. at art. 18. Also, for as long as any of the PCs were outstanding, the B Shares could only be “transferred together with an amount of [PCs] stapled to them.” Id. at art. 9.3.
Before December 31, 2005, the SAS could only be liquidated by a unanimous vote of the shareholders. Id. at art. 20. On or after December 31, 2005, SAS could be liquidated, or the entire Pritired transaction unwound, by a simple majority vote of shares. Id. If the transaction did not unwind by December 31, 2005, the voting rights of the A Shares automatically fell to 50.1%, while the voting rights of the B Shares automatically increased to 49.9%. Id. at art. 10.2. The B Shares also gained the unrestricted right to buy .2% voting control from the A Shares, thus increasing the voting rights of the B Shares to 50.1%.
The Court finds that the provisions for change in voting rights reveals that the parties planned and expected the duration of the Pritired transaction to be five years. The internal approvals by Citibank, Principal, and the French Banks all suggested that the French Banks would unwind the transaction by the end of 2005. The change in voting rights on December 31, 2005, increasing the B Shares to 49.9% with the unrestricted right to buy .2% of voting control from the A Shares, also provided a measure for Pritired to force the transaction to unwind. With voting control, Pritired could end the transaction, liquidate SAS, and repay the PCs and B Shares.
Rovani testified that the French Banks had incentive to wind up the transaction because a loss in voting control would be “expensive” as “Pritired had the possibility of taking control of the French companies.” Internal documents at Bred reinforced that the change in voting control “will maintain Bred’s incentive to call the [PCs] and the Class B shares at the end of year 5.” Ex. 5007.1.
The transaction’s duration was virtually guaranteed to be five years. When the transaction closed on October 27, 2000, Rovani sent an email congratulating the participating parties on their work in creating the transaction with an “anticipated tenor of five years.” Ex. 83. Minton, Fossell, and Francis testified that, for asset-liability matching purposes, the Pritired transaction was presumed to unwind after five years. Fossell’s memorandum to the IC highlighted that the average life of the transaction would be 5 years, with a duration of 3.55 years. Ex. 98, 99. When the transaction closed, Fossell also stated in an email that the transaction “has a pui/call between December 31, 2005 and March 31, 2006 to create an effective maturity of 5.2 years.” Ex. 5037. Memoranda from Fossell on June 19, 2000, and October 4, 2000, corroborate that the transaction was expected to have a “5-year holding period.” Exs. 5043, 5044. Internal documents at the SAS also reinforced a 5-year expected duration. Exs. 5006, 5011.
3. Calculation of Interest Rate
The Pritired Model forecasted the LIBOR interest rate for the life of the transaction. Rovani testified that the Pritired Model assumed the French corporate tax rate would stay steady and that the LIBOR interest rate would stay at 6.79%. Ex. 80.
Although the transaction assumed LIBOR would stay around 6.79%, the actual interest rate for the transaction would “reset” every three months. This means, that although 6.79% was projected for the life of the transaction, the actual LIBOR interest rate used for the transaction would change once every three months.
A Cash Flows, PC Swaps, and B Share Swaps
Each of the four obligations issued by SAS carried a corresponding right to payment from SAS. The Zeros had the highest priority, followed by the PCs, A Shares, and B Shares. The French Banks held the Zeros (convertible notes) for their total face amount of US$ 475 million. The Zeros paid 1 % interest per annum and at redemption, the French Banks had the “option to request redemption either in cash (for 110% of the face amount) or in new voting Class-A shares of the SAS (with an implied value on day 0 equal to the face amount).” Exs. 5006, 5019. The SAS had a continuing obligation to pay 1% per year on the Zeros, or roughly $4.75 million, with the remaining obligations accruing and payable on maturity, either in the form of cash or in A Shares.
The PCs were next in priority and “senior only to the Class-A and Class-B shares, subordinated to the Zero-Coupon Convertible Note.” Ex. 5019. Some of the relevant Terms and Conditions of the PCs included the following: (1) the amount payable each year to Pritired, or interest, was calculated using a floating rate of 3-month LIBOR plus a margin of 1%, Ex. 47 ¶¶ 4.1.3, 4.1.4; (2) the PCs were subordinate to the claims of senior creditors (the claims of Bred and Natexis on the Convertible Notes), id. ¶ 3; (3) the SAS issuer had to pay the annual amount due each year on the PCs if the SAS had paid a dividend on the A or B Shares in the previous year, and if the SAS failed to pay a dividend on the A or B Shares, then the SAS could defer payment on the PCs, id. ¶¶ 3.3, 4.3.2, 4.7; (4) the PCs could only be redeemed by the SAS upon liquidation, with the consent of the holder, or if any interpretation of or change in law made it illegal for the SAS to carry out its obligations under the PCs, id. ¶ 5.1; and (5) the PCs could only be transferred in units comprised of 32 B Shares for each $145,500 face amount of PCs. Id. ¶2.7.
Last in priority for liquidation and receiving cash flows were the A Shares and the B Shares, each of which, in liquidation, ranked equally in proportion to their positive capital accounts. As explained previously, the A Shares were allocated 99% of the residual income from the portfolio of debt securities, but the Class A shareholders (French Banks) had discretion to make “special allocations” of residual income. In effect, throughout the transaction, the French Banks could allocate all of the residual income to themselves, and none to the holders of the B Shares (U.S. Taxpayers).
Along with the PCs, however, Pritired and SAS executed a “PC Swap.” Exs. 52, 5009. A swap is the exchange of streams of payments over time according to specified terms. A common type is an interest rate swap, when one party agrees to exchange an adjustable interest rate in return for a fixed interest rate from another party. The PC Swap, in this case, changed the formula for determining the money that Pritired received from SAS.
Here, SAS was contractually obligated to maké yearly payments of 3-month LIBOR plus a spread of 1 %. In the same transaction, the PC Swap exchanged a Pay Leg for a Receive Leg in which both Legs of the PC Swap were a function of floating interest rates, but generated different streams of cash flows. In the Receive Leg of the PC Swap, Pritired paid and SAS received LIBOR plus a spread of 1 %; this was the identical amount that SAS owed to Pritired on the PCs. In the Pay Leg of the PC Swap, SAS paid and Pritired received a payment flow based upon two components: (1) LIBOR plus an agreed upon spread (4.955% as to LFI 4 and 4.875% as to VAL A); minus (2) the French tax attributed to each SAS. Exs. 91, 92. Because the amounts due on the PCs equaled the amounts due on the Receive Leg of the PC Swap, Pritired and SAS would net these identical cash flows. These payments canceled each other out. As a result, SAS was only required to pay the amounts due on the Pay Leg of the PC Swap, or LIBOR plus the spread, minus the French taxes attributable to the SAS. The French taxes were based on the notional amount of the bond investment, or the total $1.23 billion portfolio. In essence, the parties simply traded LIBOR plus 1 % for LIBOR plus about 5%, less the French taxes.
Rovani testified that the PC Swap was a hybrid instrument and the objective of the PC Swap was to make a debt-like return of LIBOR plus one percent look like an after-tax equity-like return. Principal was very concerned as to whether the PC Swap had a legitimate business purpose. Lettow articulated in an email to Buckens on June 13, 2000, that
Lillian Chen, V.P. Corporate Tax, has requested that we identify/articulate the business purpose for the allocation of French taxes to the perpetual certificateholders. Her question concerns why the perpetual certificateholders (i.e. SPV 2) would agree to swap a return of LIBOR plus 100 for a return of LIBOR plus the SAS Spread minus the French Tax Amount. This is an excellent point in that even if the structure holds up otherwise, the allocation of taxes could still be challenged on the basis that there is no business purpose for the perpetual certificateholders to be allocated the entire tax burden.
Ex. 5111. The PC Swap was approved despite this internal concern about the business purpose of the PC Swap.
Lettow also testified that the SAS was responsible for the Pay Leg, but “if the French tax amount that was allocated under this agreement exceeded the ... floating amounts, the amount [paid] would be zero.” If the Pay Leg resulted in a negative amount, this scenario was termed a “clawback,” as Rovani explained in some detail:
[A clawback is] the situation in which there were more taxes paid by the companies than — that was a LIBOR plus spread amount in the PC Swap formula and so the question was how ... this additional amount of taxes allocated and what the legal documentation said is that this additional amount of taxes for the current year had to be allocated to the PC Swap for the previous years ... The effect was to increase the amount of taxes which were used in the LIBOR plus spread minus taxes paid calculation therefore [to] retroactively calculate an amount, a net amount to be paid by [the SAS] to Pritired of zero ... The amount of the clawback is going to be equal to the amount of cash which was received on the PC Swap and which will have to be repaid.
A clawback occurrence impacted the amounts the investors received when the transaction unwound. Principal, for example, would receive “$150 million less the amount of cash they had received as distributions under the Perpetual Certificates” for years when the PC Swap resulted in a positive net payment to Pritired. Rovani testified that the Pritired Model did not show the clawback because the Model assumed that there would be a yearly cash payment on the PC Swaps and that “LIBOR plus spread would be higher than the amount of taxes allocated.”
The impact of the PC Swap was to improve the value of the Pritired transaction for the French Banks. Rovani explained that if the French tax rate increased (although it was projected in the Pritired Model to stay constant), then the French Banks would pay more taxes, but less cash on the “PCs and PC Swap which was favorable to the French Bank.” In fact, Rovani testified that there were no amounts to pay on the PC Swaps in 2002, 2003, 2004, and 2005, because “the amount of taxes was equal or higher than the amount calculated in the LIBOR plus spread.” However, if the French tax rates decreased, the French Banks would pay more cash on the PCs and PC Swap. Through the PC Swap, Pritired was also able to claim credit for substantially all of the French taxes owed on the income of SAS.
At no point during the negotiation of the transaction did Citibank or Principal articulate a business purpose for entering into the PC Swaps. Lettow testified that because the transaction was approved by the Investment Committee, the committee must have been “satisfied that it had business purpose and economic substance.” But no one explained what this business purpose and economic substance was thought to be. Rovani did not explain the purpose of the PC Swaps, other than to shift the French tax obligations to Pritired to create an equity-like return. Indeed, the only perceived purpose for entering into the PC Swaps was to generate foreign tax credits by the deemed transfer of the French tax obligations to Pritired. The Court finds that Principal did not sufficiently articulate a business purpose for the PC Swaps. The Court can identify no other non-tax business purpose for the PC Swaps arrangement, other than to make the cash flows from the PCs appear more equity-like.
Along with the PC Swaps, the parties engaged in a B Share Swap. Exs. 51, 5010. This transaction was much simpler, as Rovani explained:
The B Share swaps relate to the B Shares which were the common shares issued by [SAS] and described by [Pritired]. This transaction was a dollar denominated transaction; but because the French entities are in France, they have to issue capital in euros so in order not to have exposure to euros, we put in place a B Share swap so to transform the euro denominated B Shares into effectively dollar denominated shares.
In essence, the B Share Swap merely exchanged the euro denominated cash flows to dollar denominated cash flows. Also, Fossell testified that for foreign currency transactions, it was common for Principal to swap the currency to a fixed-rate equivalent.
Another component of the Pritired transaction’s cash flows were the interest rate floors. The interest rate floors were contracts between each French bank and its respective subsidiary; the floors were set at 6.80% and the SAS “paid” a premium to the French Banks for the floors. Exs. 80, 5106. The floors operated as an insurance policy for the SAS in the event LIBOR interest rates declined below 6.80%. These floors were not required by Pritired or the U.S. Taxpayers and did not require the consent of any of the U.S. parties. Rovani testified that “if the [interest] rates drop below the reference rate [the subsidiary] will receive a payment equal to the difference between the actual rate and the reference rate in the contract and that is done in exchange for a premium.” The Pritired Model did not project that the rates would be at levels which would require payments on the floors.
5. Pritired Model Projections
The Pritired Model developed by Rovani was crucially important in the parties’ discussion, negotiation, and eventual decision to invest in the Pritired transaction. Rovani testified how he developed the Pritired Model and Lettow explained Principal’s investment decision based on the projections. As relevant to Principal, the projections were all based on Principal’s initial investment amount of $150 million.
When the Pritired Model was made, the US$ LIBOR interest rate for the Pritired Model was set at 6.79%. Ex. 80 at 3, 12. The Pritired Model assumed that the LIBOR interest rate would stay very close to 6.79% for the entire period. Rovani testified the Pritired Model did not show any outcomes based on lower or higher interest rate scenarios because the then-market expectation was that the rate would stay around 6.79%.
Specifically as to Pritired’s cash earnings, the Pritired Model projected the net present value (“NPV”) of the total cash income to equal $26.58 million. Id. at 23. This was an after-tax return. NPV is the difference between the present value of cash inflows and the present value of cash outflows, and is useful in analyzing the profitability of a given investment. NPV represents the amount of cash Pritired expected to receive, adjusted for the time value of money. Here, the total cash income was comprised mainly of the PC Swaps, the Class B Swaps, and Class B share dividend income. The NPV of the Foreign Tax Credits (“FTC”) was projected to be $48.50 million. Id. Lettow and Rovani then took $48.50 million divided by $26.58 million to equal 1.8, or the 98-5 Ratio. Id. at 24. Lettow testified that the 98-5 Ratio was calculated because it was “a touchstone in terms of reasonable— expected reasonable amount[s] of after-tax cash flow that we would receive from the transaction.”
The Pritired Model also calculated the internal rate of return (“IRR”) of the investment. IRR is the discount rate that makes the net present value of all cash flows from a particular investment equal to zero. IRR can be used to rank investments because the higher an investment’s IRR, the more desirable it is to undertake the investment. At the time the Pritired Model was developed, the tax exempt yields for AAA-rated general obligation municipal bonds and AA1 general obligation municipal bonds, were 4.58% and 4.55%, respectively. Ex. 111. In comparison, the after-tax cash-only IRR of the Pritired transaction was estimated to be 4.32%. (Ex. 80 at 24) The after-tax cash only IRR was less than the tax exempt yields for AAA and AAl-rated municipal bonds. When FTCs were added in, the IRR increased to 12.41%. Id. The IRR with FTCs was 5.62% over the US$ LIBOR interest rate of 6.79%. Id.
In sum, the Pritired Model projected positive returns to Pritired in its SAS investments. It demonstrated that a large proportion of expected cash flows would be derived from the PC Swaps. The parties knew that the interest rate could fluctuate and indeed, planned to reset the interest rate every three months. The parties also knew that changes in LIBOR would impact the return. Additionally, the parties were aware that SAS had hedged against interest rate drops by purchasing interest rate floors. Rovani conceded that the Pritired Model did not incorporate income from the interest rate floors, but this floor income could keep income high or consistent even if interest rates dropped. The following diagram demonstrates the relative return to Pritired from cash distributions and FTCs, depending on the LIBOR rate.
6. Actual Performance of Pritired Transaction
Although the Pritired Model projected the transaction would generate a positive return without the foreign tax credits, this projection was only because of the assumption that LIBOR would remain constant, when it was actually falling both before the transaction closed and during the transaction. The transaction’s return was sharply skewed by the abrupt and sustained decrease in LIBOR interest rates that had begun before the transaction was executed. The decline in rates immediately impacted the cash flow.
Principal suggested that was the result of the events of 9-11 but LIBOR rates had been falling for some time prior to 9-11. Between October 2000 and August 2001, before the events of September 11, 2001, the 3-month US$ LIBOR fell by 3.3%, from 6.8% to 3.5%. As a result of this decline in interest rates, the Court finds that the U.S. Taxpayers would receive virtually all of their economic return from the transaction in the form of claimed tax credits, versus actual cash distributions. But LIBOR fell further still. Between September 2001 (3.5%) and March 2004(1%), 3-month US$ LIBOR fell by 2.5 percentage points, or 71 %.
The actual US$ LIBOR rates used in the Pritired transaction, reset once every three months, are shown below:
Year Date Begin Rate
2000 10/27/2000 6.76000%
12/29/2000 6.44000%
2001 3/30/2001_4.90250%
6/29/2001_3.71000%
9/28/2001 2.59156%
12/31/2001_1.90875%
2002 3/28/2002_2.04813%
6/28/2002 1.85375%
_9/30/2002_1.79594%
12/31/2002 1.40000%
2003 3/31/2003 1.28875%
6/30/2003_1.10438%
9/30/2003 1.14125%
12/31/2003_1.16313%
2004 3/31/2004_1.10938%
6/30/2004_1.58625%
9/30/2004 1.97500%
12/31/2004_2.55813%
2005 3/31/2005 . 3.09313%
6/30/2005 3.48938%
9/30/2005 4.02113%
Exs. 94.1,147.
For each of the years 2000 through 2005, Rovani prepared electronic spreadsheets from the financial statements of the SAS documenting the actual outcome of the transaction based on US$ LIBOR. Exs. 60, 61, 63. He then forwarded the spreadsheets to Pritired’s accountants and tax counsel in the U.S. to enable them to prepare Pritired’s income tax returns. These spreadsheets constituted Pritired’s financial records for U.S. tax purposes. Exs. 152-57. Peter Gutshall, the accountant at Kaiser Scherer Schlegel, PLLC who prepared Pritired’s tax returns, testified about preparing the tax returns. Rovani also prepared a final spreadsheet (the “Pritired Actuals”) on December 28, 2005, which contained all the cash flows and allocations for the entire Pritired transaction. Ex. 94.1.
Rovani testified about the results of the Pritired transaction. The Pritired Actuals set forth the financial results for the SAS and Pritired. It included the profit and loss (“P & L”) statements for each SAS, and the “calculation of taxes” relative to the income. Id. at 4, 18, 19. A P & L statement summarizes the revenue and expenses incurred during a specific period of time. The SAS paid taxes on all the income and most of these taxes were allocated to Pritired. Ex. 144. Gutshall testified that cash distributions on PCs from SAS were taken as deductions in calculating French taxes for each SAS. Then, from the overall taxes paid, Pritired could claim a portion of taxes and a corresponding amount as foreign tax credits. Exs. 144, 145.
Additionally, the French taxes were tied to the total income of each SAS. Although the portfolio return decreased, see supra, the interest rate floors kept the total income relatively consistent. The French taxes were based on the total income of the bond portfolio at $1.23 billion. Again looking at LFI 4 SAS, the French taxes for 2001 through 2005 were $13.5 million, $11.7 million, $11.3 million, $13.1 million, and $14.4 million, respectively. Exs. 60, 94.1 at 4. As Rovani explained, the French taxes affected Pritired’s return because the PC Swap formula was LIBOR plus a spread minus the French taxes.
Lettow testified to the amounts Pritired paid SAS and SAS paid Pritired pursuant to the PC Swaps. Exs. 148, 149, 151. Because LIBOR had decreased, Rovani and Lettow testified that there were no payments made on the PC Swaps for 2002, 2003, 2004, and 2005, “because the amount of [French] taxes was equal or higher than the amount calculated on the LIBOR plus spread.” Exs. 81, 94.1 at 3, 149. Further, the clawback provision operated to recoup income the PC Swaps had paid in prior years, when French taxes exceeded LIBOR plus spread. Lettow testified that for VAL A, the clawback was “triggered” for issuer earnings of 2001 in the amounts of $198,761 and $588,128 for issuer earnings of 2002. Ex. 140 at 4. LFI 4 also had clawbacks in 2002 and 2003 of $1,270,345 and $348,452, respectively. Id. at 5. In total, the actual cash flow to Pritired under the PCs and B Shares, including their swaps and payment period interest, was as follows:
Exs. 94.1 at 3, 17, 18; 150. This actual cash flow is significantly lower than projected. For example, Lettow testified that Principal expected net cash flow to equal $6,036,304 in 2001. Ex. 177. Instead, the net cash flow was only $1,569,542.
The marked decrease in income raised more red flags throughout the rest of the transaction. Lettow stated in an email on October 11, 2001, that “[t]he projections appear skewed in regard to the ratio of credits to cash. LIBOR has declined precipitously and so has our projected cash return. However, French taxes have not declined by the same percentage ... I’m concerned about our 98-5 ratio.” Ex. 179. Holly Henning, in the Investment Accounting and Reporting division, emailed Rovani on February 3, 2002, with her concerns that, for 2001, the income estimate “was $1 million lower than what we had been accruing for during the year resulting in a negative income accrual in January for this asset.” Ex. 183 at 2. Rovani responded that the lower income was a product of “less cash income [being] offset by more taxes.” Id. at 1. Fossell noted that “Bruno’s assessment is accurate.” Id. Principal knew the Pritired transaction could have more “slippage” and actual cash income could be severely reduced from the projections.
It was clear from testimony that Principal was very concerned with the performance of the Pritired transaction. Fossell testified that after September 11, 2001, LIBOR rates declined precipitously and that made cash returns decline significantly. He testified that although the French taxes had not declined by the same percentage of LIBOR or the projected cash return, the tax credits did not decline because the built-in interest rate floors “kept the investment income of the SAS at or higher than cash or LIBOR rates.” Let-tow also testified that Principal became concerned when Rovani presented updated projections because “the 98-5 ratio or the ratio of foreign tax credits allocated to after-tax cash flow appeared skewed from what we had expected it to be.” This was because the SAS income was artificially inflated due to the interest rate floors, so “even though LIBOR had fallen, and with it our after-tax return and our allocation of gross income from the SAS, the taxes had not fallen by the same percentage.” Ex. 179.
Principal asserts that the events of September 11, 2001, affected the transaction in ways that the parties could not have foreseen when the transaction closed on October 27, 2000. It alleges that the decline in interest rates and the weak financial markets were completely unexpected. The Court disagrees. Using the Pritired Model, Principal simulated the outcome of a wide array of interest rates, whether higher or lower than 6.79%, and predicted how interest rates would impact the actual cash return. The Model forecasted the result of actual cash return and return in the form of foreign tax credits based on different interest rates. The predominant cash flow to be received by Pritired, the PC Swaps, were tied to the floating rate US$ LIBOR. The parties knew that even small fluctuations in interest rates would impact the transaction’s returns. In his testimony about the Pritired Model, Rovani testified that instead of assuming the LIBOR rate would stay at 6.79%, he would have varied the rates and run “catastrophic scenarios.”
Indeed, the transaction included a “claw-back” provision, requiring the U.S. Taxpayers to reimburse SAS for any amounts previously distributed if the tax credits later generated more than 100% of the return on investment. Although Rovani testified the parties never expected to use the clawback provision, incorporating the clawback into the Pritired Model demonstrates that the parties had a contingency mechanism in place. Lettow also testified that if interest rates had stayed at the rate assumed in the spreadsheet, then the claw-back would not have been triggered.
Moreover, despite the pronounced decline in actual cash returns, Fossell explained that the Pritired transaction “performed as one would have expected that structure to perform. It returned floating rate cash flows and it returned the investors’ share of tax credits.” The Pritired transaction performed as expected when interest rates bottomed out; with low interest rates, the structure of the transaction was designed to churn out returns to Pritired based on tax credits, rather than actual cash. Fossell testified that if the return had only consisted of foreign tax credits, he would not have recommended the transaction because it would have lacked a business purpose.
In an email dated January 25, 2001, Lettow stated that “Principal’s overall return comes from a combination of cash and foreign tax credits.” Ex. 175. Lettow admitted that these all-tax credit returns disappointed Principal because it meant the Pritired transaction did not yield the expected amount of after-tax cash flow. The Pritired transaction was also internally referred to as “a foreign tax credit transaction.” Ex. 181. In point of fact, the projected tax adjustments for 2001 predicted pre-tax investment income to be $6,093,304, with a tax adjustment for foreign taxes paid of $12,093,887. Ex. 232.
In short, before the transaction closed on October 27, 2000, Principal and Citibank knew that whichever way the LIBOR rate moved over the next approximately five years, the undisputed majority of their return would come from FTCs. Principal asserts that it could not have anticipated the decline in interest rates, but it also conceded that it had the dynamic Pritired Model to run projections and make predictions on future cash flows. The Court finds that the Pritired transaction was designed to generate FTCs and FTCs were designed to be a large portion of the return if the LIBOR interest rate moved either up or down.
D. Debt and Equity Attributes of Pritired Transaction
Also at issue is the characterization of the Pritired PCs and B Shares as equity or whether the instruments should be characterized as debt, or a loan to the French Banks. This is important in determining the economics of the transaction, such as if there was a business purpose to the transaction, whether the transaction had economic substance, and the risk and return the U.S. Taxpayers expected from the transaction.
In making its findings on the categorization of the PCs and B Shares, the Court considered the testimony of persons involved in the Pritired transaction, three experts offered by the parties, and reviewed five expert reports submitted by the parties. The Court briefly summarizes the expert opinions from the three experts and their reports admitted into evidence.
1. Experts
a. Andrew S. Carrón
Andrew S. Carrón testified for Principal about: (1) whether the PCs and B Shares were more debt or equity-like; (2) the economics of the transaction; and (3) an analysis of the government’s position on the appropriate tax. He submitted two reports as well as several graphs prepared in conjunction with his testimony. Andrew S. Carrón Expert Rep., Ex. 212; Rebuttal Expert Rep. of Andrew S. Carrón, Ex. 213; Ex. 250; Ex. 251. Carrón is the President of NERA Economic