The opinion
OPINION, FINDINGS OF FACT AND CONCLUSIONS OF LAW
PAUL L. FRIEDMAN, District Judge.
TABLE OF CONTENTS
INTRODUCTION 302
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4. Allocation of Installment Sale Gain under Section 704(b) .386
5. Conclusions of Law Regarding the Commissioner’s Alternative Determinations .387
III. CONCLUSION. .388
INTRODUCTION
Plaintiffs Boca Investerings Partnership (“Boca” or the “Partnership”) and its tax matters partner, American Home Products Corporation (“AHP” or the “Company”), brought this action under Section 6226(a) of the Internal Revenue Code of 1986, as amended, 26 U.S.C. § 6226 (a) (1994), seeking a judicial readjustment of certain partnership items affected by the Commissioner of Internal Revenue’s Notice of Final Partnership Administrative Adjustment (“FPAA”), dated December 30, 1996. As a result of financial transactions entered by the Boca partnership, AHP — one of the partners — enjoyed a significant tax benefit: the ability to declare substantial capital losses on its tax returns for fiscal years ending May 31, 1990, 1991, 1992 and 1993, which in turn would offset a large capital gain it incurred in 1990.
In the FPAA the Commissioner reallocated to AHP much of the capital gain accrued by Boca through the transactions after finding that Boca was a sham partnership created by AHP for the sole purpose of creating the capital loss. Plaintiffs argue that the adjustments made by the Commissioner should be readjusted to the amounts originally reported by Boca on its partnership federal income tax returns because Boca was a bona fide partnership for federal income tax purposes and because the financial transactions entered by Boca that created the capital loss had sufficient economic substance to be recognized for federal income tax purposes. Defendant asserts that the Commissioner’s determination must be upheld and judgment must be entered for defendant because plaintiffs failed at trial to show by a preponderance of the evidence that the Commissioner’s findings were erroneous.
The case was tried before the Court without a jury over a period of 17 days in June, September and November 2000, and in January and April 2001. At trial, plaintiffs called as witnesses Thomas M. Nee, AHP Vice President, Taxes; Milan Kofol, AHP Deputy Treasurer; Richard J. Walsh, AHP Assistant Vice Presidént, Taxes; John R. Considine, AHP Vice President and Treasurer; E.S. Purander Das, Merrill Lynch Managing Director and then Vice Chairman, Investment Banking; Elizabeth A. Case, an expert in tax accounting with an emphasis on partnership tax accounting; and Leslie Rahl, an expert in risk management, financial engineering, valuation of complex instruments and new securities, and market practices.
Defendant called as witnesses in its case-in-chief David J. Ross an expert in financial economics, corporate finance, and valuation; Alan Tucker, an expert in corporate finance and financial engineering; and Warren D. Matthei, a Merrill Lynch relationship manager at the time of the events at issue.
Plaintiffs called as rebuttal witnesses Harry Gifford Fong, an expert in the areas of corporate finance, valuation, financial engineering, and risk management; Richard Luciano, Merrill Lynch Associate and then Vice President; Mr. Kofol; Mr. Nee; and John DeVora, an AHP administrative assistant in the Payroll Department and later Payroll Manager. Defendant called as a rebuttal witness Richard Leftwich, an expert in finance, financial instruments, corporate finance and investment analysis.
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The parties also submitted the deposition testimony of Mr. Das, Mr. Considine, Mr. Nee and Mr. Walsh, as well as the deposition testimony of the following individuals who did not testify at trial: Hans den Baas, Vice President, Derivatives and then Vice President, Financial Engineering at the New York branch of ABN Bank (“ABN”); Robert G. Blount, Executive Vice President and Chief Financial Officer of AHP; John Clark, Comptroller at Sumi-tomo Bank Capital Markets; Parker Douglas, Vice President, Risk Management at the New York branch of ABN; Claudia Morf, Vice President and Assistant Treasurer at PepsiCo, Inc.; David Oston, Vice President and Manager of the Structured Finance Department at the New York Branch of Banque Fancaise du Commerce Exterieur (“BFCE”); Paul Pepe, Associate and then Vice President of Merrill Lynch Capital Services, Inc.; Mark Rosenbaum, Senior Tax Accountant at Arthur Andersen; John Stafford, Chairman, CEO and President of AHP; Macau-ley R. Taylor, Merrill Lynch Managing Director; Joel Van Dusen, Financial Analyst and then Associate at Merrill Lynch; and Arshad Zakaria, Merrill Lynch Associate Vice President and then Managing Director.
For reasons expanded upon in the Findings of Fact section, the Court credits the testimony of most of plaintiffs’ witnesses, both because of their believability and demeanor as witnesses at trial and the logic of their testimony, and because the exhibits and testimony of other credible witnesses in this case support their testimony. In most instances, and particularly with respect to some of the larger linchpin issues, the only exhibits that contradict plaintiffs’ witnesses are ones that were only provisionally admitted at trial, that lack any reference to either of the plaintiffs in this case, and/or were obtained by defendant through discovery in cases unrelated to this one. In most instances, the only testimony offered by defendant to contradict the critical testimony of plaintiffs’ witnesses was that of Walter Matthei, to whose testimony the Court gives virtually no weight because of his lack of knowledge of relevant events, the inconsistencies in his testimony, and the fact that much of it was contradicted by other, more credible witnesses, as well as because of Mr. Mat-thei’s general untrustworthiness (including his history of lying and/or making false statements in previous court proceedings), and his bias and animosity towards Merrill Lynch.
I. FINDINGS OF FACT
Upon a careful consideration and evaluation of the stipulation of facts agreed upon by the parties, the testimony of all the witnesses, the documentary evidence admitted at trial, the post-trial written submissions of counsel and the relevant case law, and making credibility findings as necessary and appropriate to resolve any material discrepancies in the testimony, the Court makes the following findings of fact. On the basis of these findings, the Court concludes that plaintiffs have proven by a preponderance of the evidence that the Commissioner erred. The Court therefore will enter judgment for plaintiffs and reverse the determinations of the Commissioner.
A American Home Products
1.
AHP Generally
1. AHP, headquartered in Madison, New Jersey, is a large, publicly traded pharmaceutical company whose products include,
inter alia,
Robitussin, Advil, and Premarin. In the late 1980’s and early 1990’s, AHP’s primary lines of business were prescription pharmaceuticals, over-the-counter medicines, medical instruments, foods, and household products.
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During this time frame, AHP typically invested excess funds in interest-bearing instruments. Stip. ¶ 7.
1
2. AHP is the tax matters partner of Boca under Section 6237(a)(7) of the Internal Revenue Code. Stip. ¶ 8.
8. During all relevant times, the following individuals held positions at AHP: John R. Stafford was Chief Executive Officer, Chairman and President; Robert Blount was Executive Vice President and Chief Financial Officer; John R. Considine was Vice President and Treasurer; Thomas M. Nee was Vice President, Taxes; Milan Kofol was Deputy Treasurer; and Richard J. Walsh was Assistant Vice President, Taxes. Stip. ¶ 9; PEX 715; Kofol Tr. (6/21/00 a.m.) 10:2-8.
4. As Vice President and Treasurer of AHP, Mr. Considine was responsible for investing the Company’s funds and managing the cash flow from the Company’s business operations. With respect to Boca, Mr. Considine was appointed as AHP’s representative at the organizational meeting on April 19, 1990. During the relevant period, Mr. Considine was responsible for evaluating potential investments by both AHP and Boca to ascertain whether they would be sound investments, separate and apart from any potential tax benefits. JEX 5; Considine Tr. (9/12/00 a.m.) 7:22-8:25, 22:21-23:1, 60:4-16; Considine Dep. (4/12/99) 26:22-25, 78:25-79:10.
5. As Vice President, Taxes of AHP, Mr. Nee was responsible for the Company’s worldwide tax matters. This included providing tax counsel on all transactions the Company might enter into and having responsibility for filing all corporate tax returns. Mr. Nee’s responsibilities with respect to Boca included acting as a representative for AHP 10 at the organizational meeting and providing tax counsel to AHP and AHP 10 (the “AHP partners”) regarding transactions contemplated by the Partnership. Nee Tr. (6/20/00 a.m.) 15:8-20; Nee Tr. (6/20/00 p.m.) 38:2-13, 49:20-50:2; Nee Dep. (3/17/98) 10:19-11:17, 50:1-15.
6. Mr. Kofol, the Deputy Treasurer of AHP, was the most knowledgeable person within AHP on capital assets. As Deputy Treasurer, Mr. Kofol was responsible for the management of cash, debt and financial investments. This responsibility included monitoring exchange rates and interest rates. With respect to Boca, Mr. Kofol was appointed as alternative representative to represent both AHP and AHP 10 at Partnership Committee meetings. In addition, Mr. Kofol was responsible for reviewing proposed investments, for evaluating whether such investments were potentially in the economic interest of the AHP partners, and for monitoring the performance of Boca’s assets. Kofol Tr. (6/21/00 a.m.) 11:20-14:10, 38:18-25, 51:10-53:15; Kofol Tr. (6/21/00 p.m.) 46:13-19, 77:25-78:13, 96:9-14; Considine Tr. (9/12/00 a.m.) 54:22-55:2.
7. As Assistant Vice President, Taxes, Mr. Walsh assisted Mr. Nee in providing tax advice -to the Company. With respect to Boca, Mr. Walsh was responsible for advising Mr. Nee and preparing the Part
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nership’s tax returns. Walsh Tr. (9/11/00 a.m.) 22:16-24:2, 38:6-10.
8. AHP 10 was incorporated in Delaware on April 14, 1989. Its offices are located at 1100 North Market Street, Suite 780, Wilmington, DE 19801. AHP 10’s certificate of incorporation is Defendant’s Exhibit 327. Stip. ¶ 14; DEX 327.
9. During the period in issue, AHP 10 was a wholly owned subsidiary of AHP. The officers of AHP 10 were John R. Stafford, President; Thomas M. Nee, Vice President; Robert Blount, Vice President; John R. Considine, Treasurer; and Carol G. Emerling, Secretary. Stip. ¶ 15.
10. As noted, Mr. Nee represented AHP 10 at the organizational meeting of the Partnership on April 19, 1990. Thereafter, Mr. Kofol represented AHP 10 at the Partnership Committee meetings. FOF 5, 6; JEX 5, JEX 8, JEX 9, JEX 11, JEX 12, JEX 15, JEX 17.
2.
AHP General Business Goals
11. During the late 1980’s and early 1990’s, AHP was in the process of moving from a conglomerate of various businesses to becoming a health care company. Blount Dep. (4/28/98) 13:13-14:4; Consi-dine Tr. (9/12/00 a.m.) 12:21-13:12; Kofol Tr. (6/21/00 a.m.) 14:17-15:2.
12. AHP engaged in divestitures and acquisitions to facilitate this business plan. For example, in 1986, AHP sold Brach Candy. The Company also sold its foods and instruments divisions during this period. Considine Tr. (9/12/00 a.m.) 12:21-13:12; Kofol Tr. (6/21/00 a.m.) 14:17-15:12; Nee Tr. (6/20/00 a.m.) 12:4-21.
3.
AHP General Treasury Function
13. The primary function of AHP’s Treasury Department under the direction of Mr. Considine was to invest the company’s excess cash and to manage the cash flow from the Company’s business operations. Considine Tr. (9/12/00 a.m.) 12:21-14:4; Kofol Tr. (6/21/00 a.m.) 26:19-28:5; Nee Tr. (6/20/00 a.m.) 34:16-35:2.
14. The Treasury Department was responsible for ensuring that funds would be available to acquire a particular asset and for investing the proceeds from the sale of assets. Mr. Considine, as a senior officer of the Company and as head of the Treasury Department, was involved in strategic decision-making with regard to sales and acquisitions of assets. Considine Tr. (9/12/00 a.m.) 12:21-14:4; Kofol Tr. (6/21/00 a.m.) 26:19-28:5.
15. In investing the Company’s funds, the Treasury Department generally was concerned with: (i) preserving the Company’s capital, (ii) ensuring liquidity and ready access to funds, and (iii) receiving a return commensurate with the risk of the investment. Return of principal and liquidity generally were the most important of the three criteria. Considine Tr. (9/12/00 a.m.) 11:9-22; Kofol Tr. (6/21/00 a.m.) 12:21-14:5, 15:13-21, 16:9-19; Nee Tr. (6/20/00 a.m.) 34:16-35:2, 36:1-19.
16. When the Treasury Department considered a potential investment, it generally reviewed rates of return, risk profiles, and the credit quality of the potential investment. Considine Dep. (4/12/99) 18:3-12.
17. AHP generally did not have benchmarks for return on investments since its primary goals were preserving capital and maintaining liquidity. During the relevant period, AHP’s return on investments was commensurate with short-term, high quality investments. Considine Tr. (9/12/00 a.m.) 14:18-24; Kofol Tr. (6/21/00 a.m.) 15:13-21.
18. When reviewing potential investments, the Treasury Department would evaluate an investment on a pre-tax basis and consult with the Tax Department as to the tax consequences. AHP generally did
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not make investments that it expected would have negative pre-tax returns. Considine Tr. (9/12/00 a.m.) 14:5-17; Kofol Tr. (6/21/00 a.m.) 15:22-16:8.
19. Although the Tax Department advised the Treasury Department on the tax consequences of investments, it was the responsibility of the Treasury Department to satisfy itself regarding the quality of investments and to determine whether a particular investment made sense based on non-tax . considerations. Considine Tr. (9/12/00 p.m.) 30:14-31:2; Considine Dep. (4/12/99) 79:4-10; Nee Tr. (6/20/00 a.m.) 29:16-24; Kofol Tr. (6/21/00 a.m.) 15:22-16:8.
20. During the period in issue, the Treasury Department had a practice of maintaining a conservative posture by investing in high quality financial instruments that were primarily short term 30, 60 or 90-day interest bearing instruments. In addition to short-term paper, the Treasury Department also invested in certain tax advantaged investments, such as Puer-to Rico municipal securities (Puerto Rico 2-Js) and Voluntary Employee Benefit Association (“VEBA”) fund tax-free investments. Of AHP’s total investment portfolio of $1.64 billion in October 1991, $556.9 million was invested in Puerto Rico 2-Js, which had a rate of return of 6.79%; and $21.1 million was invested in VEBA fund investments, which had a rate of return of 8.71%. PEX 488; Nee Tr. (6/20/00 a.m.) 25:16-31:11; 36:1-19; Kofol Tr. (6/21/00 a.m.) 16:9-19.
21. The Tax Department advised the Treasury Department on the tax implications of tax advantaged investments, but it generally was left to the Treasury Department to decide whether to invest the Company’s funds in these investments. PEX 488; Nee Tr. (6/20/00 a.m.) 25:16-31:11.
22. The Treasury Department had certain guidelines for investing the Company’s funds. These guidelines listed permissible types of financial investments and the amount of money that could be invested at any one time. The guidelines ensured that risks were spread across the portfolio and that funds were liquid. Con-sidine Tr. (9/12/00 a.m.) 16:10-23; Kofol Tr. (6/21/00 a.m.) 21:10-22:16; Nee Tr. (6/20/00 a.m.) 36:1-19; Nee Tr. (6/20/00 p.m.) 28:1-3.
23. Periodically, however, AHP sought to invest outside of the Treasury guidelines. On each occasion, the Company would have to evaluate the proposed investment and determine whether the additional risks were warranted given the potential return on the investment. All proposed investments that were outside of the Treasury guidelines could only be pursued after going through such an evaluation and approval process — a process that was formalized at AHP through something called the “AHT process.” Considine Tr. (9/12/00 a.m.) 17:16-18:10; Kofol Tr. (6/21/00 a.m.) 22:2-23; Nee Tr. (6/20/00 a.m.) 36:20-37:12; 42:17-43:6.
24. The AHT process (“AHT” is short for American Home Treasury) was described by company witnesses as a strict management system that requires approval in advance at the highest levels of the company for all discretionary spending that is greater, than
de minimis
in amount, including investments and contractual relationships entered into by the Company. AHP’s Treasury Department was responsible for administering the AHT manual and circulating AHTs to AHP staff departments and to the chairman of the Company to allow for input, review and approval prior to any final decision to invest. Approval of an AHT was required prior to incurring any expense or making any capital outlay that did not fall within the Treasury guidelines. The testimony before the Court was that the AHT system generally
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was honored and respected by all who worked at AHP. Stip. ¶ 17; PEX 716; Stafford Dep. (5/11/98) 34:23-37:8; Blount Dep. (4/28/98) 40:15-41:20; Considine Tr. (9/12/00 a.m.) 18:11-19:1; Considine Dep. (3/13/98) 57:19-58:21; Kofol Tr. (6/21/00 a.m.) 22:17-23:8, 25:7-26:18; Nee Tr. (6/20/00 a.m.) 37:2-11, 40:25-41:15. AHP Vice President and Treasurer John Consi-dine described the AHT system as “critically important to American Home.... [I]t was almost the — quote, unquote — bible of American Home. It was the foundation for the control and information system that existed in the company.” Considine Tr. (9/12/00 a.m.) 18:13-18.
25.Neither AHP’s investment in Boca nor Boca’s investments outside of the investment guidelines could be undertaken without the review and control process required under the AHT system. Each transaction by Boca required its own, separate written AHT approval based on the circumstances at the time. Consequently, no transaction was to be or could be committed to in advance. Considine Tr. (9/12/00 a.m.) 58:22-59:6; Considine Tr. (9/12/00 p.m.) 13:5-6; Considine Dep. (3/13/98) 57:19-58:21, 72:15-73:4, 74:22-75:16; Nee Tr. (6/20/00 a.m.) 41:16-42:2; Nee Tr. (6/20/00 p.m.) 27:24-28:14, 34:20-25; Kofol Tr. (6/21/00 a.m.) 37:25-38:6. Under unusual circumstances when a situation required faster action than a written AHT would allow, a “verbal AHT” was permitted. The verbal AHT required the same approvals from the same departments and executives, but such approval would be granted orally, rather than with a signature on a written AHT. Considine Dep. (3/13/98) 57:19-58:21. In all circumstances, according to Mr. Nee, the “AHT system required that all investments that were outside the pre-approved guidelines that the treasury department followed had to be approved by an AHT,” whether written or verbal. Nee Tr. (6/20/00 p.m.) 28:1-4.
4.
AHP General Tax Function
26. AHP’s Tax Department is responsible for providing tax advice on all transactions that the Company might enter into and for assuring that all of the Company’s tax returns are filed in a timely and accurate manner. Nee Tr. (6/20/00 a.m.) 15:10-16.
27. While the Treasury Department is responsible for investing the Company’s funds, the Tax Department advises as to the tax consequences of those investments. Similarly, if a foreign operation were sold, the Treasury Department would consult with the Tax Department on how to bring the cash proceeds back to the United States in a tax efficient manner. Consi-dine Tr. (9/12/00 a.m.) 14:5-17; Considine Dep. (3/13/98) 20:13-21:8; Nee Tr. (6/20/00 a.m.) 17:20-18:13, 24:1-3, 29:15-16.
28. The Tax Department does not decide whether an acquisition or disposition would be made by AHP. Rather, it advises the Company on the tax consequences of proposed business decisions. Nee Tr. (6/20/00 a.m.) 22:25-23:7.
29. During the relevant period, the Tax Department and the Treasury Department worked very closely on a daily basis. Con-sidine Tr. (9/12/00 a.m.) 14:5-17; Nee Tr. (6/20/00 a.m.) 34:6-35:25.
30. AHP is a member of the Internal Revenue Service’s Large Case Audit Program. As a result, its tax returns are audited by the Service every year. The Tax Department ensures that the Company’s management understands that all transactions are going to be audited. The Tax Department is responsible for engaging in research in order to verify that the transactions are in accordance with the Internal Revenue Code and applicable
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Treasury Regulations. Nee Tr. (6/20/00 a.m.) 18:3-8, 21:1-7.
31. The Company paid $461 million in Federal income taxes for 1990. PEX 578; PEX 718; Nee Tr. (6/20/00 a.m.) 32:13-16.
B. American Home Products’ Sale of Boyle-Midway
32. During 1989 and 1990, AHP was negotiating the sale of a major non-pharmaceutical subsidiary, Boyle-Midway Household Products, Inc. (“Boyle-Midway”). Boyle-Midway was a wholly owned subsidiary of AHP that dealt in household products such as Easy Off and Wizard Air Freshener. Stip. ¶ 11; Considine Dep. (3/13/98) 12:13-17.
33. The sale of Boyle-Midway was part of AHP’s continuing effort to change the Company to principally a health care and prescription drug business and to move away from non-health care related enterprises. Blount Dep. (4/28/98) 13:13-14:4; Considine Tr. (9/12/00 a.m.) 19:3-17, 21:24-22:5; Considine Tr. (9/12/00 p.m.) 32:5-12; Considine Dep. (3/13/98) 14:12-15:10; Nee Tr. (6/20/00 a.m.) 45:23-46: 1; 46:17-21, 47:6-15, 49:19-50:5.
34. On March 9, 1990, AHP announced an agreement in principle to sell Boyle-Midway for $1.25 billion. At this time, AHP did not know precisely the amount of cash proceeds it would receive from the sale of Boyle-Midway or the amount of gain it would realize from that sale. Nonetheless, AHP anticipated receiving substantial cash proceeds and realizing a significant capital gain. Stip. ¶ 12; Consi-dine Tr. (9/12/00 a.m.) 20:25-21:23; Kofol Tr. (6/21/00 a.m.) 30:1-7; Nee Tr. (6/20/00 a'.m.) 51:7-17; Nee Dep. (3/17/98) 57:3-20.
35. The Boyle-Midway negotiations continued throughout the spring of 1990. Negotiations were complicated and lengthy. The allocation of the purchase price and the breakdown between capital assets and non-capital assets were subject to extensive negotiation. These issues were not finally resolved until shortly before the transaction closed in June of 1990. Nee Dep. (4/8/99) 66:16-67:22, 68:11-69:8.
36. Prior to the public announcement of the sale of Boyle-Midway, the potential sale was kept confidential. Nee Tr. (6/20/00 a.m.) 46:7-9; Das Tr. (9/13/00) 22:1-14.
37. Merrill Lynch was not involved in the sale of Boyle-Midway. Considine Tr. (9/12/00 a.m.) 25:20-26:4; Nee Dep. (3/17/98) 55:16-56:4; Das Tr. (9/13/00 a.m.) 22:1-14; Merrill Lynch 30(b)(6) (Das 3/10/98) 27:23-25.
38. The actual sale of Boyle-Midway took place on June 29, 1990, and resulted in a gain of approximately $1 billion; $605,104,183 of the gain was ultimately determined to be capital gain, and the remainder was ordinary income. The proceeds from the sale were later invested in Boca Investerings Partnership. Stip. ¶ 13; Nee Tr. (6/20/00 a.m.) 49:11-18; Considine Tr. (9/12/00 a.m.) 22:6-10.
39. The gain from the sale of Boyle-Midway was reported in the Company’s financial statements for 1990. The gain was fully tax affected, that is, AHP reported the gain as being fully taxable on the Company’s financial statements. Consi-dine Dep. (4/12/99) 31:25-32:5; Nee Tr. (6/20/00 a.m.) 51:18-54:14; Nee Tr. (4/12/01) 68:16-69:4.
C. Proposal of Boca Investerings Partnership
1.
Merrill Lynch Proposal
40. During the period in issue, Merrill Lynch was a holding company that, through its subsidiaries and affiliates, provided investment, financing, insurance, and related services. Merrill Lynch’s principal subsidiary, Merrill Lynch, Pierce, Fenner
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& Smith Inc., either directly or through its subsidiaries, was a broker in securities, options contracts, commodity and financial futures contracts, and selected insurance products; a dealer in options and in corporate and municipal securities; and an investment banking firm. Stip. ¶ 18.
41.During the period in issue, Merrill Lynch Capital Services, Inc. (“MLCS”) was a wholly owned Merrill Lynch subsidiary and a major derivatives dealer. Stip. ¶ 19.
42. During the period in issue, Merrill Lynch did not have an extensive relationship with AHP. Stafford Dep. (5/11/98) 24:21-25:25; Blount Dep. (4/28/98) 22:11-23:9; Considine Tr. (9/12/00 a.m.) 24:8-13.
43. During the period in issue, the following individuals held the following positions at Merrill Lynch:
E.S. Purander Das Managing Director o CO
Vice Chairman, Investment Banking 1990
Arshad Zakaria Associate Vice President 1989-1990
Managing Director 1991-1992
Richard Luciano Associate 1989-1990
Vice President 1991
Macauley Taylor Managing Director 1989-1991
Paul Pepe Associate Vice President, MLCS 1989-1990
Warren Matthei Relationship Manager 1989-1990
Stip. ¶ 20; Luciano Tr. (4/12/01) 5:8-11.
44. Mr. Das was a Managing Director in Merrill Lynch’s Investment Banking Group with regular relationship responsibility for AHP. Mr. Das’ role with respect to Boca was threefold: (i) he presented the investment partnership proposal to AHP and answered questions AHP had prior to the formation of the partnership; (ii) he negotiated the $7 million fee Merrill Lynch received from AHP; and (iii) he introduced AHP to its potential partners. After the formation of the Partnership, Mr. Das was no longer involved in the operation of Boca. Das Tr. (9/13/00 a.m.) 15:5-16:15, 23:25-24:4, 25:7-26:9.
45. Mr. Zakaria’s role with respect to Boca was to assist Mr. Das and to field questions from AHP regarding the proposal to form an investment partnership. Za-karia Dep. (5/8/98) 12:15-13:9, 25:7-26:3; Das Tr. (9/13/00 a.m.) 15:25-16:4; Consi-dine Tr. (9/12/00 a.m.) 24:25-25:6.
46. Mr. Luciano helped Mr. Das prepare presentations and perform analyses for client meetings. With respect to Boca, Mr. Luciano attended the organizational meeting in Bermuda on April 19,1990, and another partnership meeting with Milan Kofol in Bermuda. Luciano Tr. (4/12/01) 6:4-8; 40:12-19.
47. Mr. Taylor and Mr. Pepe were responsible for overseeing and implementing the Partnership’s acquisition of financial assets. Merrill Lynch 30(b)(6) Dep. (Taylor 3/10/98) 7:5-16, 9:17-24; Pepe Dep. (5/7/98) 29:5-15, 37:17-38:4.
48. Mr. Matthei was a relationship manager assigned to AHP. He was not substantively involved in presenting the investment partnership proposal to AHP, nor was he significantly involved in the
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organization of Boca or the conduct of its business operations. Stafford Dep. (5/11/98) 24:21-28:11; Considine Tr. (9/12/00 p.m.) 51:6-10; Considine Dep. (3/13/98) 40:23-41:5; Nee Tr. (6/20/00 p.m.) 3:16-5:6, 17:18-23; Das Tr. (9/13/00) 15:25-16:11; Matthei Tr. (11/28/00) 18:23-19:10, 66:9-20,112:24-114:1.
2
49. Defendant asserts that Mr. Matthei was the first individual to present AHP with the idea to create Boca. Defendant contends that Mr. Matthei first approached John Stafford and Robert Blount at a cocktail party in November 1989, where he explained the partnership concept and intimated that it could be used to shelter capital gains.
See
Matthei Tr. (11/28/00) 27:10-29:4. Defendant offers no testimony, however, to corroborate Mr. Matthei’s assertion that the discussion took place. Mr. Stafford testified that he never discussed the partnership concept with Mr. Matthei, let alone in November 1989. Stafford Dep. (5/11/98) 27:20-24;
see also
Considine Tr. (9/12/00 a.m.) 23:6-16 (indicating that Mr. Das was the first individual to propose the partnership concept to AHP in late 1989 or early 1990); Nee Tr. (6/20/00 p.m.) 3:1 — 4:7 (same); Das Tr. (9/13/00 a.m.) 10:1-17; 15:2-24 (same). Given Mr. Matthei’s general lack of credibility,
see
FOF 105, 105a, 105b, 105c, and the fact that all the other evidence relevant to this point contradicts Mr. Matthei’s testimony, the Court finds that Mr. Mat-thei did not present the idea for the Boca partnership to AHP in November 1989.
50. In late 1989 or early 1990, Mr. Das contacted Mr. Considine or Mr. Nee as part of Mr. Das’ routine effort to present AHP with potential investment opportunities. During that conversation, Mr. Das indicated that Merrill Lynch had developed a “potentially tax-advantaged investment” that might be of interest to AHP and that Merrill Lynch would like to meet to discuss the idea. Considine Tr. (9/12/00 a.m.) 23:6-16;
see
Nee Tr. (6/20/00 p.m.) 3:1 — 4:7; Das Tr. (9/13/00 a.m.) 10:1-17; 15:5-12.
51. Soon thereafter, Messrs. Das, Za-karia and Matthei (and perhaps others from Merrill Lynch) met with Messrs. Considine and Nee to present the concept of an investment partnership. The meeting took place at AHP and lasted about 90 minutes. It was general in nature and designed to introduce Merrill Lynch’s proposal to AHP. Mr. Das made a formal presentation of the concept using charts to illustrate potential transactions which could lead to a capital loss for AHP. Mr. Das indicated that the concept was being presented to a limited number of other corporations, but he did not reveal the names of those corporations or discuss the details of any proposed transactions that the other companies had entered or might enter. Mr. Zakaria assisted Mr. Das. Mr. Matthei did not have any significant participation in the meeting. Stip. ¶ 21; Con-sidine Tr. (9/12/00 a.m.) 24:25-25:10, 27:25-28:13; Nee Tr. (6/20/00 p.m.) 4:1-24; Das Tr. (9/13/00 a.m.) 16:16-17:3; Merrill Lynch 30(b)(6) Dep. (Das 3/10/98) 30:20-31:6.
52. Mr.. Considine attended the meeting at the request of Mr. Nee because any investment in a proposed partnership necessarily would entail the investment of AHP funds. Mr. Nee attended in order to gain an understanding of the tax consequences associated with the potential partnership so that he could do further research and counsel the Company regarding its tax implications. Considine
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Tr. (9/12/00 a.m.) 24:14-18; Nee Dep. (3/17/98) 68:20-69:15.
53. As described by Merrill Lynch at the initial meeting, using a flip chart presentation, the investment partnership would involve: (i) the formation of and investment in a partnership, (ii) the partnership’s investment in capital assets issued by creditworthy institutions that would likely generate a return satisfactory to AHP, and (iii) certain transactions which, if undertaken, would cause AHP to realize a capital loss for tax purposes pursuant to Section 453 of the Internal Revenue Code. If all of the transactions outlined in the flip chart were undertaken, the results under Section 453 would be an installment gain on the sale of the capital assets and the receipt of other assets in which the partnership would have a high basis in excess of value. If the high basis assets were distributed by the partnership to AHP, AHP’s tax basis in its partnership interest would be reduced to zero and AHP would have a tax loss if it subsequently sold the high basis assets. This loss would be counterbalanced by AHP’s share of the installment gain and an additional gain if AHP were to sell its interest in the partnership. Considine Tr. (9/12/00 a.m.) 24:25-27:24; Considine Dep. (3/13/98) 38:22-39:10; Nee Tr. (6/20/00 p.m.) 5:9-8:11, 9:23-10:2, 12:2-15:20, 18:17-20; Nee Dep. (3/17/98) 70:19-71:2, 74:18-75:16, 81:18-82:2; Das Tr. (9/13/00 a.m.) 16:16-17:3, 18:4-21:25; Merrill Lynch 30(b)(6) Dep. (Das 3/10/98) 30:20-31:6, 55:3-8.
54. The actual charts used by Merrill Lynch to outline the' steps that the partnership could take no longer exist and thus were not presented at trial. Das Tr. (9/13/00) 17:4-15. Those who were present at the meeting and who saw the charts, however, testified that the set of charts attached to a memorandum written by Mr. Nee summarizing the meeting and the proposed steps were very similar to the charts used by Merrill Lynch during the meeting. DEX 167B (Nee Memorandum outlining steps); DEX 1 (charts attached to Nee Memorandum outlining steps); Nee Tr. (6/22/00 p.m.) 90:4-7; Nee Tr. (6/23/00) 17:6-18:22; Considine Tr. (9/12/00 p.m.) 38:23^1:15; Das Tr. (9/13/00) 49:8-61:12;
see also
FOF 75, 76, 77. The potential steps were also summarized orally and in writing by Mr. Nee at trial. PEX 717A and 717B (charts created by Nee during testimony outlining steps); Nee Tr. (6/20/00 p.m.) 12:2-15:20.
54a. In each of these written iterations, the seven proposed steps are generally the same, and are summarized as follows:
(1) Partnership is formed among a United States company, a subsidiary of that United States company (which together would initially own 10% of the partnership) and a foreign financial institution (which would initially own 90% of the partnership);
(2) Partnership purchases corporate bonds/capital assets;
(3) Partnership sells corporate bonds/capital assets in exchange for cash and an installment note;
(4) United States companies increase their partnership interest by purchasing portion of foreign company’s interest;
(5) United States companies contribute additional assets to the partnership;
(6) Partners’ interests are partially redeemed by distributing installment note to United States companies and cash to foreign company; and
(7) United States companies sell installment note to a third party.
DEX 167B; DEX 1; PEX 717A and 717B.
55.There was no discussion at the initial meeting about: (i) who the potential partners would be or that the partnership would be foreign; (ii) the potential size of
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the partnership; (iii) a fee to Merrill Lynch; (iv) transaction costs; (v) timing of transactions; or (vi) any details of other partnerships that may have been created by other corporations to whom Merrill Lynch had made presentations. Considine Tr. (9/12/00 a.m.) 24:25-27:16, 28:16-13; Considine Dep. (3/13/98) 40:19-41:12; Nee Tr. (6/20/00 p.m.) 7:21-16:8; Nee Dep. (3/17/98) 74:6-17; Das Tr. (9/13/00 a.m.) 18:4-7, 18:13-15, 20:6-12, 21:13-25, 27:3-22. Mr. Das did, however, inform AHP that any potential partner would have to be tax neutral with respect to U.S. tax, Das. Tr. (9/13/00) 18:16-19:1, and that the capital assets purchased by the partnership likely would be private placement notes. Das Tr. (9/13/00) 55:7-56:6.
56. Merrill Lynch did not know about the Boyle-Midway transaction at the time of the initial meeting because it had not yet been announced to the public and was being kept confidential. Considine Tr. (9/12/00 a.m.) 25:20-26:4; Nee Tr. (6/20/00 p.m.) 8:18-9:2; Das Tr. (9/13/00 a.m.) 22:1-14; Merrill Lynch 30(b)(6) Dep. (Das 3/10/98) 27:2-25.
57. According to uncontested testimony at trial, the investment partnership proposal did not affect AHP’s decision to sell Boyle-Midway. That decision had been-made prior to Mr. Das’ presentation. Considine Tr. (9/12/00 a.m.) 19:3-22:5; Nee Dep. (4/8/99) 53:20-54:6.
58. After the initial meeting, Mr. Con-sidine and Mr. Nee decided they would continue to look at and further consider the Merrill Lynch partnership proposal. Considine Dep. (3/13/98) 41:13-42:20.
a.
Nature of Investments
59. After the initial meeting, executives of AHP had meetings and discussions during the winter of 1990 — primarily with Messrs. Das and Zakaria — in order to gain a better understanding of the proposal. According to Mr. Nee and Mr. Consi-dine, Mr. Matthei might have been part of the meetings and discussions, but was not substantively involved in the discussions. These discussions were intended to address AHP’s questions regarding the investment partnership proposal. Mr. Con-sidine was concerned with the quality of the investments, the terms of the instruments, and the safety of the Company’s funds being invested. Mr. Nee wanted a better understanding from Merrill Lynch regarding the proposal so that he, with assistance from Mr. Walsh, could research the various tax rules that applied to the partnership and the investments the partnership might make. Mr. Blount attended one meeting where the proposal was discussed so that he could understand generally the nature of the potential investments. He also attended a meeting where Merrill Lynch’s fee was discussed. He did not involve himself with the details of the proposal or the specifics of the investment, as Messrs. Nee and Considine were charged with gaining a complete understanding of the proposed investment partnership. Considine Tr. (9/12/00 a.m.) 28:17-23; Nee Tr. (6/20/00 p.m.) 16:22-17:23; Nee Dep. (3/17/98) 79:1-84:21; Merrill Lynch 30(b)(6) Dep. (Das 3/10/98) 53:19-54:9; Blount Dep. (4/28/98) 23:10-22, 30:25-32:15.
60.In evaluating the potential purchase of capital assets, Mr. Considine was concerned with credit quality, rates of return, and the risk profile. As a part of his evaluation of the financial aspects of the Merrill Lynch proposal, Mr. Considine asked Mr. Kofol about the yield on AHP’s investment portfolio. The purpose of this inquiry was to compare the potential return on the Merrill Lynch proposal with the return on AHP’s typical investments. Considine Dep. (4/12/99) 56:15-58:18; Ko-fol Tr. (6/21/00 a.m.) 31:6-32:3.
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61. During its investigation of the proposal, AHP learned that the investment would be in a partnership where the partners would share in the risks of the partnership investments and in the gains and losses of the partnership in accordance with their participation in the partnership. Considine Tr. (9/12/00 a.m.) 27:17-24; Nee Tr. (6/20/00 p.m.) 18:10-14; Merrill Lynch 30(b)(6) Dep. (Das 3/10/98) 55:3-8.
62. In evaluating Merrill Lynch’s proposal, AHP considered (i) that the investments would be in high-grade financial instruments with commensurate risk and return, (ii) that the initial investment would be in PPNs, (iii) that the PPNs would be liquid, and (iv) that the yield on the PPNs would be 12 to 24 basis points more than AHP’s non-tax-advantaged investments. JEX 2; Considine Tr. (9/12/00 a.m.) 26:5-27:2, 33:7-23, 35:14-17, 53:15-54:1; 58:1-5; Kofol Tr. (6/21/00 a.m.) 36:16-37:12; Nee Tr. (6/20/00 p.m.) 29:18-21, 32:5-33:7.
63. According to Company witnesses, AHP believed that it could make a profit from the partnership’s investment in financial instruments. This was an important consideration for AHP in determining whether it would invest in the partnership proposed by Merrill Lynch. There was no contrary testimony at trial. JEX 2; Con-sidine Dep. (4/12/99) 92:19-93:14; Blount Dep. (4/28/98) 130:22-131:9, 131:21-132:5; Considine Dep. (4/12/99) 92:14-93:14.
64. Mr. Considine testified that if the Treasury Department thought AHP would lose money on its investment in Boca, on a pre-tax basis, he would not have recommended the investment. Mr. Considine stated that from a financial earnings perspective, each transaction had to be profitable pre-tax. Considine Dep. (4/12/99) 92:14-93:14;
see
Kofol Tr. (6/21/00 a.m.) 16:5-8; Nee Dep. (4/8/99) 72:21-73:18, 88:11-90:9.
b.
Potential Partners
65. Prior to the formation of the Partnership, Mr. Considine and Mr. Nee questioned Merrill Lynch about AHP’s potential partners. AHP would only enter into a partnership with partners with whom it would be comfortable, who had expertise with respect to the financial instruments that would be involved, who were financially secure, and who were creditworthy. AHP received assurances from Merrill Lynch that any potential partner Merrill Lynch would present would meet those criteria. Considine Tr. (9/12/00 a.m.) 28:24-29:12, 43:18-24; Considine Dep. (4/12/99) 54:6-18; Nee Tr. (6/20/00 p.m.) 18:21-19:2; Merrill Lynch 30(b)(6) Dep. (Das 3/10/98) 56:2-57:14, 75:16-76:7.
66. It is unclear exactly when Merrill Lynch informed AHP that its partners would be foreign, but it is clear that AHP did learn that the partners would be foreign sometime prior to April 17,1990.
See
JEX 2; FOF 79, 80, 81. While Mr. Nee testified that AHP was not informed that its partners would be foreign until sometime after the initial meeting with Merrill Lynch, Nee Tr. (6/20/00 p.m.) 19:3-11, Mr. Considine said that AHP was so informed at the initial meeting. Considine Tr. (9/12/00 a.m.) 25:14-19.
67. AHP learned for the first time who its potential partners were on April 19, 1990, at a meeting in Bermuda to negotiate the Partnership Agreement and organize the Partnership. Prior to this meeting, AHP did not know who the foreign partners would be or that the foreign partners would be affiliated with ABN Bank. AHP had had no contact with its partners either directly or. indirectly through Merrill Lynch prior to April 19, 1990. JEX 229, at ¶ 14; Considine Tr. (9/12/00 a.m.) 28:24-29:5, 43:5-14; Considine Dep. (3/13/98) 84:22-85:2; Nee Tr. (6/20/00 p.m.) 30:16-
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31:8; Kofol Tr. (6/21/00 a.m.) 34:23-35:2; den Baas Dep. (3/11/98) 133:8-14; den Baas Dep. (4/6/00) 52:18-53:8, 166:16-167:10; Merrill Lynch 30(b)(6) Dep. (Das 3/10/98) 75:9-15.
c.
Merrill Lynch’s Fee
68. Sometime after the initial meeting with AHP and prior to the formation of the Partnership, Merrill Lynch explained to AHP that Merrill Lynch expected a fee for its services connected with the Partnership. Das Tr. (9/13/00 a.m.) 23:25-24:4.
69. Merrill Lynch’s fee was determined as a fraction of the private equity capital Merrill Lynch would raise from the foreign partners. Das Tr. (9/13/00) 69:8-19; Merrill Lynch 30(b)(6) Dep. (Das 3/10/98) 65:2-66:24; Considine Dep. (4/12/99) 37:13-22.
70. Mr. Considine, Mr. Blount and Mr. Das negotiated the fee arrangement. On May 29, 1990, Merrill Lynch and AHP executed an engagement letter wherein Merrill Lynch agreed to act as AHP’s financial adviser with respect to the Partnership. AHP understood that Merrill Lynch’s fee included its services in finding a foreign partner or partners, suggesting and bringing transactions to the Partnership, finding buyers and sellers for the Partnership’s investments, and providing financial advice to AHP with regard to partnership transactions and investments. For these services, AHP agreed to pay Merrill Lynch $7 million. JEX 21; Consi-dine Tr. (9/12/00 a.m.) 61:19-62:13; Das Tr. (9/13/00 a.m.) 23:25-24:22.
d.
Risks Associated With and Timing and Review of Potential Subsequent Transactions
71. It is likely, although not certain, that Merrill Lynch explained to AHP that there were interest rate and credit risks associated with the potential investments by the Partnership. Merrill Lynch 30(b)(6) Dep. (Das 3/10/98) 58:13-60:24.
72. AHP never discussed with Merrill Lynch the timing of any particular transactions. AHP never had and never relayed a schedule to Merrill Lynch for potential transactions, nor did Merrill Lynch suggest a timetable to AHP. Considine Tr. (9/12/00 a.m.) 29:15-18; 47:10-13; Nee Tr. (6/20/00 p.m.) 19:12-20; Nee Dep. (3/17/98) 134:11-136:13; Das Tr. (9/13/00 a.m.) 21:13-19, 26:20-27:2.
73. Defendant argues that an April 10, 1990 memorandum from Mr. den Baas to G. Stroomer,
see
DEX 121A at Boca 437-438, a mostly illegible document ostensibly authored by Mr. den Baas,
see
DEX 190, constitutes proof of ABN’s belief that its “investment” in the AHP transaction would be reduced to zero by September 1991, thus implying that a timetable did exist and presumably that that timetable was known to all partners, including AHP. At trial the Court questioned the relevance of Exhibits DEX 121A and DEX 190 but ultimately admitted both exhibits provisionally on the assumption that defendant would present testimony or at least additional documentary evidence that would put these exhibits in context and explain how they related to AHP or to Boca. Trial Tr. (1/25/01) 39:14-67:24; 79:22-23; 75:5-22. Defendant made no attempt to explain either exhibit through testimony at trial, however, and the only deposition testimony it offered in support of its argument— that of Mr. den Baas,
see
den Baas Dep. (3/11/98) 55:14-56:17 — was testimony relating specifically to an exhibit, defendant’s Exhibit 91, that was excluded by the Court in a written opinion during trial.
See Boca Investerings Partnership v. United States,
128 F.Supp.2d 16 (D.D.C.2000).
3
Since Exhibit 91 was excluded, testimony about
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the exhibit also is excluded and cannot be used to explain how Defendant’s Exhibits 121A and 190 relate to AHP or to Boca, and they, too, are excluded. For these reasons, the Court finds that there is no evidence that AHP ever discussed with Merrill Lynch the timing of any transactions, and no evidence that either AHP or Merrill Lynch ever relayed a schedule or timetable for potential transactions to the other.
74. It was understood within AHP that the Company might not engage in all of the transactions that Merrill Lynch had suggested. Consistent with the AHT system and sound financial management, the transactions that were outlined in the Merrill Lynch proposal would have to be reviewed individually as separate transactions at such time as they were proposed. The uncontested testimony at trial was that the decision to make a particular investment depended upon the Treasury Department’s subsequent evaluation at the time and would be evaluated independent of any potential tax benefit. It was understood within AHP that, even if it invested in the Partnership, it was not bound to undertake the rest of the proposed transactions. Nee Tr. (6/20/00 p.m.) 10:19-11:4; Considine Tr. (9/12/00 a.m.) 27:12-24, 60:4-16; Considine Dep. (4/12/99) 26:22-25, 78:25-79:10.
2.
AHP Internal Evaluation and Approval of Proposal
75. On April 4, 1990, Mr. Nee as tax counsel prepared a memorandum entitled “Tax Planning Re: Sale of Boyle-Midway to Reckertt & Colman” to inform and advise John Stafford and other executives at AHP of the tax consequences of the Merrill Lynch proposal should AHP decide to invest in the proposed partnership. The memorandum specifically noted that Merrill Lynch had advised that other companies were entering into similar transactions with Merrill Lynch and that any partnership in which AHP invested would be formed in a “favorable tax jurisdiction.” The Nee Memorandum was not a recommendation to invest in the partnership, nor did it seek authorization to invest. Stip. ¶ 22; DEX 167B; Nee Tr. (6/20/00 p.m.) 21:12-17; 22:15-23:17; Considine Dep. (4/12/99) 19:15-20:3.
4
76. The Nee Memorandum dealt with the tax considerations of the proposal and did not attempt to evaluate other considerations, such as major financial implications, that would bear on AHP’s decision whether to invest. Mr. Nee noted that the transaction was “technically sound” but was likely to be “vigorously attacked by the IRS.” DEX 167B. Mr. Nee testified that the financial -implications of the proposal were not the responsibility of the Vice President, Taxes, and Mr. Nee therefore thought it would have been inappropriate for him to advise on these considerations, and he testified that he did not. Nee Tr. (6/20/00 p.m.) 21:12-23:17.
77. Mr. Nee attached to his memorandum a series of charts, DEX 1, given to
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him by Merrill Lynch that he thought would be helpful to Mr. Stafford. The specific amounts used in the charts were not necessarily meant to apply to AHP or reflect any specific transactions the partnership might enter, and (he testified) the charts did not set forth a schedule or timetable for potential transactions. On cross-examination Mr. Nee discussed how each proposed step fisted in his memorandum was similar to or different from the steps fisted in the charts, and how similar (or not) each of those proposed actions were to the actions that AHP and Boca eventually took after the partnership was formed. Mr. Nee acknowledged the similarities between the memorandum, the charts and the transactions Boca ultimately entered, but insisted repeatedly that the Boca partnership and the transactions it entered did not mirror those set forth in the memorandum and charts.
See, e.g.,
Nee Tr. (6/23/00) 65:1-3 (“[W]e didn’t necessarily follow the transaction exactly the way it is laid out in these drawings.”).
77a. Mr. Nee testified at his deposition that AHP “felt that it was imperative that each and every investment that was made had to be made as if it stood on its own grounds, that [it] wasn’t conditioned upon the obtaining of a tax benefit, [and] that it was a sound financial investment .... ” Nee Dep. (4/8/99) 73:12-18;
see
Nee Dep. (4/8/99) 72:21-73:18; 88:11-90:9. Mr. Nee also clarified that the conclusions made in his memorandum (some of which are redacted as privileged,
see
DEX 167B) were his own. Nee Tr. (6/22/00 p.m.) 90:4-7; Nee Tr. (6/23/00) 17:6-18:22, 60:18-70:21; Nee Dep. (3/17/98) 90:9-18. There was no testimony at trial that contradicted Mr. Nee’s.
78.In April 1990, there was a meeting attended by Mr. Stafford, Mr. Blount, Mr. Considine, Mr. Nee, AHP Controller Ken Martin and AHP General Counsel Roger Kapp. The purpose of the meeting was to inform Mr. Stafford about the Merrill Lynch proposal to invest in a partnership and to answer any questions Mr. Stafford might have before AHP decided whether to invest. Mr. Considine was there to discuss the investment aspects of the proposal, and Mr. Nee was there to discuss the tax issues related to the proposal. Considine Tr. (9/12/00 a.m.) 30:4-24; Nee Tr. (6/20/00 p.m.) 20:4-21:4.
79. Shortly after the meeting with Mr. Stafford, Mr. Considine and Mr. Kofol drafted an AHT formally proposing that AHP enter the partnership. The AHT, submitted by Mr. Considine on April 17, 1990, sought authorization for an initial investment of $150 million to form a partnership with a highly-rated, foreign financial institution to invest in certain privately-placed floating rate notes rated A or better that the Treasury Department understood would yield between 12 and 24 basis points above AHP’s typical return. The AHT was required because the investment involved entering into a partnership and the capital assets to be purchased by the partnership were outside of AHP’s approved investment guidelines. JEX 2; Stip. ¶ 34; Considine Tr. (9/12/00 a.m.) 31:1-9: 31:23-32:18; Kofol Tr. (6/21/00 a.m.) 33:16-38:11; Nee Tr. (6/20/00 a.m.) 37:3-11; Nee Tr. (6/20/00 p.m.) 27:14-28:14, 30:4-10; FOF 21-25.
80. The April 17, 1990 AHT only sought approval to enter into a partnership and to invest in the privately placed notes. The AHT stated that the initial investment would be approximately $150 million. The AHT did not cover any other transaction. JEX 2; Considine Tr. (9/12/00 a.m.) 36:12-14; Kofol Tr. (6/21/00 a.m.) 37:20-38:2; Blount Dep. (4/28/00) 60:15-20.
81. The April 17, 1990, AHT was initiated by Mr. Considine of the Treasury Department because it involved the invest
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ment of Company funds and therefore was Treasury’s responsibility. Considine Tr. (9/12/00 a.m.) 38:2-6; Considine Dep. (3/13/98) 54:8-55:12; Nee Tr. (6/20/00 p.m.) 28:15-24.
82. The AHT contemplated that a partnership agreement would be executed. Because AHP had not yet received a proposed agreement, the AHT provided that the formation of the partnership was contingent on AHP’s Law Department approving the partnership agreement. If the partnership agreement were not acceptable to the Law Department, AHP would not have invested in Boca. JEX 2; Consi-dine Dep. (3/13/98) 68:7-69:6; Kofol Tr. (6/21/00 a.m.) 33:16-34:12; Nee Tr. (6/20/00 p.m.) 34:4-15.
83. At the time the AHT was drafted, AHP and AHP 10 had not met their potential foreign partner. Merrill Lynch had provided assurances that the partner would be an institution or institutions with which AHP would be comfortable. AHP’s approval of the investment in the partnership was contingent on AHP being satisfied with its potential partners. Had the partners not had sufficient financial resources and wherewithal, the AHP partners would not have entered into the partnership. Considine Tr. (9/12/00 a.m.) 28:24-29:12, 33:24-34:23, 43:18-24; Kofol Tr. (6/21/00 a.m.) 34:23-35:2.
84. AHP believed that the investment in PPNs would offer a return to the AHP partners of 12 to 24 basis points above AHP’s average return on its domestic portfolio. Because the PPNs were to be rated A or better, a lower rating than that of AHP’s domestic portfolio investments, AHP believed the return on the PPNs would be higher. JEX 2; Nee Tr. (6/20/00 p.m.) 32:19-33:7; Kofol Tr. (6/21/00 a.m.) 36:16-37:12; Considine Tr. (9/12/00 a.m.) 33:2-23.
85. The April 17, 1990, AHT indicated that the PPNs would contain a put option of 12, 18 or 24 months. The put option ensured liquidity. This was important to AHP because it ensured that AHP’s principal would be returned even if the issuer’s credit quality deteriorated during the time the partnership owned the notes. JEX 2; Considine Tr. (9/12/00 a.m.) 35:14-17; Ko-fol Tr. (6/21/00 a.m.) 35:18-36:15; Nee Tr. (6/20/00 p.m.) 32:10-17.
86. The AHT also indicated that the PPNs could be sold within one to two months in order to alert those within AHP who reviewed the AHT that the PPNs were liquid and could be sold prior to the date of any put option. The Treasury Department had to review the instruments, monitor their performance, and make recommendations when appropriate. JEX 2; Considine Tr. (9/12/00 a.m.) 35:18-36:11; Kofol Tr. (6/21/00 a.m.) 38:7-11; Nee Tr. (6/20/00 p.m.) 33:8-16; Nee Dep. (3/17/98) 154:8-22.
87. The AHT only authorized an initial investment of $150 million. At the time the AHT was drafted, AHP did not know what its total investment in the partnership might be. JEX 2; Considine Tr. (9/12/00 a.m.) 36:15-17; Considine Dep. (3/13/98) 72:15-73:4; Nee Tr. (6/20/00 p.m.) 34:16-25.
88. At the time the AHT was drafted, AHP did not have a potential timetable for any other potential investments in the partnership or by the partnership. AHP understood that the Company might enter into subsequent transactions, but because the Treasury Department would have to review and approve each proposed transaction on a pre-tax basis, based on financial considerations at the time a transaction was proposed, AHP did not know whether it would enter into any subsequent transactions. According to the uncontested testimony at trial, this is why AHP had to be
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comfortable with the credit quality of the issuers of the PPNs and why the put option was important to AHP. Considine Tr. (9/12/00 a.m.) 34:24-36:21, 37:9-14; Considine Dep. (3/13/98) 74:22-75:16; Con-sidine Dep. (4/12/99) 26:22-25; Kofol Tr. (6/21/00 a.m.) 35:18-36:15, 38:7-11.
89. The $150 million initial investment came from AHP’s general funds. None of the funds was borrowed. Considine Tr. (9/12/00 a.m.) 37:15-21; Kofol Tr. (6/21/00 a.m.) 50:5-12.
90. AHP ultimately approved entering the partnership and investing in PPNs because AHP believed the PPNs provided a reasonable return with appropriate risk and because if other transactions were consummated, there was a potential tax benefit. In approving the AHT, the executives at AHP had the following understandings: (i) the investment would be in the form of a partnership; (ii) the original investment by the partnership would be in certain privately-placed, floating rate notes that would offer a higher return to AHP than it was experiencing on other investments in its current portfolio and would be satisfactory to AHP if held until the put date; and (iii) if other transactions were subsequently approved, there was a potential for AHP to experience a capital loss and tax benefit. There was no testimony at trial to the contrary. Blount Dep. (4/28/98) 57:7-58:9; Considine Tr. (9/12/00 a.m.) 37:22-38:6; Considine Dep. (3/13/98) 74:5-21; Nee Tr. (6/20/00 p.m.) 5:9-8:11, 27:14-34:25.
91. The testimony at trial makes clear that while tax consequences clearly were a consideration in AHP’s evaluation of the investment partnership proposal, the Treasury Department evaluated the proposal as an investment from a Treasury perspective. The Treasury Department understood that these investments would yield a satisfactory return, separate and apart from any tax consequences. JEX 2; Con-sidine Tr.(9/12/00 a.m.) 26:5-13, 37:22-38:6, 52:2-53:2; Considine Dep. (4/12/99) 26:22-25, 74:22-75:16, 78:9-23, 92:2-23; Nee Tr. (6/20/00 p.m.) 28:19-24; Nee Tr. (6/22/00 p.m.) 74:8-15; Nee Dep. (4/8/99) 72:21-73:18; 88:11-90:9.
92. AHP’s approval of the initial AHT and the initial investment in the partnership did not obligate the AHP partners to engage in any other transactions, and neither AHP nor the Partnership could have entered into any subsequent transactions without AHT approval. Considine Tr. (9/12/00 a.m.) 27:12-16; Considine Tr. (9/12/00 a.m.) 58:22-59:6; Considine Tr. (9/12/00 p.m.) 13:5-6; Considine Dep. (3/13/98) 57:19-58: 21, 72:15-73:4, 74:22-75:16; Nee Tr. (6/20/00 a.m.) 41:16-42:2; Nee Tr. (6/20/00 p.m.) 27:24-28:14, 34:20-25; Kofol Tr. (6/21/00 a.m.) 37:25-38:6.
93. Each transaction needed to be evaluated on a stand alone basis to be sure it made economic sense. Each subsequent transaction by AHP was to be authorized pursuant to a separate AHT based on the same considerations. Considine Tr. (9/12/00 a.m.) 60:4-16; Considine Dep. (4/12/99) 78:20-79:10.
3.
Foreign Partners’ Decision to Invest in Partnership
94. During 1989, ABN Bank was the largest bank in the Netherlands and one of its largest financial institutions, with more than $85 billion in assets, approximately 950 offices in 43 countries worldwide, and approximately 29,000 employees. Stip. ¶ 23.
95. During the period in issue, ABN Bank offered comprehensive corporate, institutional and individual financial services, including domestic and international lending, trade finance and international payments, international corporate finance and advisory services, global investment man
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agement and advisory services, foreign exchange, treasury and risk management services, and trust services. In 1991, ABN Bank merged with Amsterdam Rotterdam Bank (“Amro Bank”). Stip. ¶ 24.
96. Syringa and Addiscombe, originally named Melisande Corporation N.V. and Pelleas Corporation N.V., respectively, were two companies that eventually partnered with AHP. Syringa and Addiscombe were registered as limited liability companies in Curacao, Netherlands Antilles and were owned by private foundations. They were formed by ABN Trust, and ABN Trust served as the managing director of Addiscombe and Syringa and maintained their books and records and the books and records of the Partnership. Stip. ¶¶ 26, 27, 30. According to uncontested testimony, they were not a part of ABN Bank, den Baas Dep. (4/6/00) 22:22-23:6.
97. Hans den Baas was a Vice President at ABN Bank. With respect to Boca, Mr. den Baas acted as a consultant to ABN Trust in managing Syringa’s and Ad-discombe’s risks concerning their investments in the partnership, including interest rate and credit risks. Stip. ¶ 25; JEX 229, at ¶¶ 1-2; den Baas Dep. (3/11/98) 15:13-16:7, 71:17-73:19; den Baas Dep. (4/6/00) 30:6-32:8, 33:15-34:8.
98. ABN Bank’s role in Boca was primarily twofold: (1) ABN Bank loaned funds to Syringa and Addiscombe to invest in Boca; and (2) ABN Bank provided advice to ABN Trust in managing Syringa’s and Addiscombe’s risks with respect to their investment in Boca, den Baas Dep. (3/11/98) 83:17-84:3; den Baas Dep. (4/6/00) 23:25-24:7; 31:5-34:8.
99. ABN Trust was a wholly-owned subsidiary of ABN Bank. With respect to Boca, ABN Trust acted as the representative of Addiscombe and Syringa at Partnership Committee meetings. Stip. ¶ 28; den Baas Dep. (3/11/98) 35:10-13; den Baas Dep. (4/6/00) 168:21-25.
100. Peter de Beer was head of the Legal Department at ABN Trust. During 1990, Mr. de Beer was the person in charge of managing Syringa and Addis-combe. In this role, he and Robert Ver-hoef represented Syringa and Addiscombe at Partnership Committee meetings. Stip. ¶¶ 28, 31.
101. ABN Bank and ABN Trust Company were not partners in Boca. The partners were Addiscombe and Syringa. JEX 3; JEX 128-132; JEX 134-135; JEX 138-139; JEX 141-142; JEX 146-148; JEX 150-158; JEX 161-164. Nee Tr. (6/20/00 p.m.) 40:18-41:2, 42:17-43:1.
D. Organization of Boca
1.
Formation of the Partnership in Bermuda
102. On April 19, 1990, two meetings were held at the Elbow Beach Hotel in Bermuda regarding the formation of Boca. The first was a meeting to introduce the partners, form Boca, and execute a partnership agreement. The Partnership Agreement is Joint Exhibit 3. JEX 3. Following the execution of the Partnership Agreement, the partners held the first meeting of the Partnership Committee. This meeting is referred to as the organizational meeting. The minutes of that meeting are Joint Exhibit 5. Stip. ¶37; JEX 5; Considine Tr. (9/12/00 a.m.) 43:25-44:4; Nee Tr. (6/20/00 p.m.) 39:3-41:2; Nee Tr. (4/12/01) 92:7-19; Nee Dep. (3/17/98) 171:16-172:11.
103. The meetings on April 19, 1990, were held in Bermuda at the request of the foreign partners; their stated reason was their concerns regarding U.S. tax liability. Considine Tr. (9/12/00 a.m.) 40:4r-10; Considine Dep. (3/13/98) 82:8-14; Nee Dep. (3/17/98) 170:4-22; Das Tr. (9/13/00
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a.m.) 18:16-19:6, 25:7-13; Merrill Lynch 30(b)(6) Dep. (Das 3/10/98) 75:9-15.
104. Defendant asserts that a meeting was held at the Castle Harbor Hotel in Bermuda prior to April 19, 1990, at which Mr. den Baas and Mr. Considine orally agreed to a “take-down schedule” — essentially a predetermined schedule setting dates for the foreign partners’ withdrawal from Boca. Defendant further asserts that the agreement was not reduced to writing for concern that doing so would destroy any business purpose for the partnership. It is on this basis, among others, that defendant argues that the partnership agreement, and hence the partnership, is a sham.
105. The only evidence defendant offers in support of this “Castle Harbor meeting” theory and the oral “Castle Harbor agreement” is the testimony of Merrill Lynch relationship manager Warren Mat-thei.
5
Mr. Matthei’s testimony, however, cannot support a finding that the Castle Harbor meeting ever occurred or that there ever was an oral Castle Harbor agreement. First, Mr. Matthei contends that the Castle Harbor meeting took place four or five weeks before the April 19, 1990 organizational meeting, but there is no documentary or testimonial evidence (other than his own) that anyone involved in the partnership was in Bermuda at the time. Indeed, all the evidence and all the testimony on this issue are to the contrary. JEX 26; JEX 27; JEX 229, at ¶¶ 14-15; Considine Tr. (9/12/00 a.m.) 40:16^41:25, 43:5-14, 46:9-15, 47:6-9, 50:22-51:3; Consi-dine Dep. (3/13/98) 84:22-85:2; Nee Tr. (6/20/00 p.m.) 30:25-31:5, 31:19-32:4, 44:25-45:7, 46:23-47:5, 56:1-8; Nee Tr. (4/12/01) 92:7-19; Nee Dep. (3/17/98) 166:3-8; Kofol Tr. (6/21/00 a.m.) 40:17-23; den Baas Dep. (3/11/98) 133:8-14; den Baas Dep. (4/6/00) 157:15-18, 166:16-167:10, 169:15-20, 170:9-15, 170:21-171:7; Das Tr. (9/13/00 a.m.) 26:20-27:2.
105a. Second, much of Mr. Matthei’s testimony regarding the Castle Harbor meeting and agreement — and in particular his testimony that the alleged agreement was not reduced to writing for concern that doing so would destroy any business purpose — lacked a proper foundation. Mr. Matthei rarely clarified how he knew what the partners thought or what they were allegedly agreeing to and only occasionally attributed repeated statements to any one individual. A large portion of Mr. Mat-thei’s testimony was hearsay and unreliable.
105b. Finally, the Court generally finds it difficult to place much stock in the testimony of Mr. Matthei since he admitted that he was not knowledgeable about the specifics of the Boca partnership, Matthei Tr. (11/28/00) 104:17-106:7; since he is biased against his former employer, Merrill Lynch, Matthei Tr. (11/28/00) 69:11-70:15; 87:7-91:8 (recounting Merrill Lynch’s firing of Mr. Matthei, Mr. Matthei’s threat to sue Merrill Lynch and Mr. Das, and his feelings about his treatment by Merrill Lynch and Mr. Das); and since, as an admitted liar in other court proceedings, he is generally untrustworthy and lacking in credibility. Matthei Tr. (11/28/00) 91:9-93:5 (Matthei admitting that “I lied in a
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sworn certification ... which was füed with the court” in connection with his alleged avoidance of child support, for which he currently is incarcerated).
105c. Based on the credible testimony before it, and discounting the testimony of Mr. Matthei, the Court therefore finds that the Castle Harbor meeting never took place, that the alleged Castle Harbor agreement was never reached, and that prior to April 19, 1990, no one from AHP or AHP 10 had been to Bermuda or any other offshore location in connection with the Merrill Lynch proposal to form an investment partnership. JEX 26; JEX 27; Considine Tr. (9/12/00 a.m.) 40:16-41:25; Nee Tr. (6/20/00 p.m.) 31:19-32:4; Kofol Tr. (6/21/00 a.m.) 40:17-23.
106. The AHP partners had not met or had any contact, directly or indirectly, with representatives of Addiscombe, Syringa, ABN Bank, or ABN Trust regarding an investment partnership prior to going to Bermuda on April 19, 1990. Nor, prior to April 19, 1990, did the AHP partners know the identity of the partners that Merrill Lynch would propose or their relationship with ABN Bank or ABN Trust. JEX 229, at ¶ 14; Considine Tr. (9/12/00 a.m.) 40:16-41:25, 43:5-14; Considine Dep. (3/13/98) 84:22-85:2; Nee Tr. (6/20/00 p.m.) 30:25-31:5, 31:19-32:4; Kofol Tr. (6/21/00 a.m.) 40:17-23; den Baas Dep. (3/11/98) 133:8-14; den Baas Dep. (4/6/00) 166:16-167:10.
107. The first meeting on April 19, 1990, was principally for the AHP partners to meet the potential partners, determine whether those partners were acceptable to AHP, and to negotiate a partnership agreement. Nee Tr. (6/20/00 p.m.) 38:6-9; Considine Tr. (9/12/00 a.m.) 43:15-44:17.
108. According to AHP officials, the topics of negotiation included: (i) sharing of profits and losses resulting from Boca transactions; (ii) sharing of expenses; (in) sharing of risks among the partners; (iv) adoption of investment guidelines; and (v) partner participation in decision making. All negotiations regarding the formation and operation of Boca took place at this meeting on April 19, 1990. JEX 3; Consi-dine Tr. (9/12/00 a.m.) 45:12-46:8; Nee Tr. (6/20/00 p.m.) 44:10-24, 52:1-53:7, 53:14-21; Nee Tr. (4/12/01) 61:21-62:23.
109. Mr. Considine, Mr. Nee, and Geraldine Moss, in-house legal counsel at AHP, negotiated the Partnership Agreement on behalf of the AHP partners. Mr. de Beer represented Addiscombe and Sy-ringa in the negotiations and was assisted by Mr. den Baas. Martin Tallin of the law firm of Cravath, Swaine & Moore attended on behalf of the Partnership. Robert Feldgarden of the law firm of Lee, Too-mey & Kent attended to assist the AHP partners if any tax issues arose. Representatives from Merrill Lynch (Mr. Das, Mr. Zakaria, Mr. Taylor, and Mr. Matthei) also were in Bermuda at this time to assist the partners, but they were not involved in the negotiation of the Partnership Agreement. Mr. Das was there to introduce the partners, Mr. Taylor was there to discuss potential investments, and Mr. Zakaria attended to provide general assistance to the Merrill Lynch team. Mr. Matthei came to Bermuda, but was absent from much of the meeting and was uninvolved with the formation of Boca while there. Considine Tr. (9/12/00 a.m.) 40:11-15; 42:2 — 43:3; Nee Tr. (6/20/00 p.m.) 39:3-41:2, 43:13-16; Das Tr. (9/13/00 a.m.) 25:7-26:6; Merrill Lynch 30(b)(6) Dep. (Taylor 3/10/98) 9:17-10:9; Merrill Lynch 30(b)(6) Dep. (Das 3/10/98) 80:20-81:14; den Baas Dep. (4/6/00) 167:11-20, 168:21-169:5; Zakaria Dep. (5/8/98) 25:7-26:3; Matthei (11/28/00) 104:17-105:9.
110. When negotiating the Partnership Agreement, AHP, AHP 10, Addiscombe, and Syringa understood that the relationship among them was going to be that of
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partners and that the partners were going to share in the risks and rewards of the Partnership in accordance with the Partnership Agreement. JEX 229, at ¶¶ 4, 10; Considine Tr. (9/12/00 a.m.) 45:12-46:8; Nee Tr. (6/20/00 p.m.) 43:19-22; den Baas Dep. (4/6/00) 18:24-19:21, 20:19-21:18, 156:19-158:16,169:6-14.
111. Defendant argues that the negotiations in Bermuda regarding the partnership consisted of little more than minor handwritten additions to a nearly complete pre-prepared partnership agreement provided by Cravath, Swaine & Moore, that perhaps was actually an agreement that was used in a previous partnership. The only proof offered by defendant in support of this argument is a faxed copy of a draft of the Partnership Agreement, DEX 370, and the testimony of Mr. Nee explaining the draft. Nee Tr. (4/12/01) 76:13-91:23. Mr. Nee testified, however, that he had no idea where the draft written partnership agreement originated — other than the fact that it was drafted by Mr. Tallin from Cravath, Swaine & Moore — or how many other drafts may have preceded or followed the draft; he testified that he did not believe that the draft was from another partnership. Nee Tr. (4/12/01) 77:23-78:21, 85:20-86:1. The Court finds that there is no evidence that the negotiations consisted merely of “minor handwritten additions.” What is clear is that Joint Exhibit 3 is the final version of the Partnership Agreement agreed upon by the parties at the April 19 meeting. JEX 3; FOF 116-139.
112. The written Partnership Agreement was the only agreement between the AHP partners and Addiscombe and Syrin-ga. There were no unwritten agreements or commitments between the partners, nor were there any side agreements between the AHP partners and ABN Bank or ABN Trust. JEX 3; Considine Tr. (9/12/00 a.m.) 50:22 — 51:3; Nee Tr. (6/20/00 p.m.) 56:1-8; den Baas Dep. (4/6/00) 157:15-18, 169:15-20. When specifically questioned about any side agreements or understandings, Mr. Nee testified that there was no agreed upon schedule whereby certain transactions would take place at certain times, there was no schedule by which the foreign partners would decrease their interest in or withdraw from the partnership, there was no commitment to the foreign partners that certain investments or transactions would occur at certain times, there was no agreement that the foreign partners would receive a specified return from their investment in the partnership, and there was no agreement or commitment to compensate the foreign partners for losses that the they might experience as a result of the partnership. Nee Tr. (4/12/01) 63:4-67:11;
see
Considine Tr. (9/12/00 a.m.) 46:9-15 (confirming absence of agreement that AHP partners would purchase additional interests in the partnership or that AHP partners would buy out Addiscombe and Syringa); Nee Tr. (6/20/00 p.m.) 44:25-45:7; Nee Dep. (3/17/98) 166:3-8; den Baas Dep. (4/6/00) 170:9-15. Mr. Kofol, who later monitored AHP’s involvement in Boca and evaluated individual transactions, confirmed that no such schedules or agreements existed. Kofol Tr. (4/12/01) 43:20-44:13.
113.Defendant contends that while in Bermuda AHP promised ABN specific remuneration in the form of premiums for ABN’s role in the partnership. Defendant relies upon certain deposition testimony of Hans den Baas,
see
den Baas Dep. (4/6/00) 41:21-45:25, 122:15-124:3, and on an August 7, 1989 memorandum from Mr. den Baas to Arthur Arnold that allegedly outlines ABN’s anticipated remuneration.
See
DEX 202. The den Baas memorandum, which was only provisionally admitted by the Court during trial, cannot support defendant’s assertion
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for several reasons.
See
Trial Tr. (1/25/01) 81:11-17 (admitting memorandum primarily for background purposes); Order of Jan. 80, 2001 (same). First, defendant offered no testimony at trial or through depositions to explain the memorandum or place it in any context. Second, it seems highly unlikely that the memorandum is at all related to AHP or Boca because it predates the formation of Boca by eight months. Third, the memorandum was produced in a separate lawsuit involving ABN that did not involve either AHP or Boca. And fourth, the text of the memorandum gives no indication that it has any relation to AHP or Boca; indeed, it discusses a transaction subject to the Alternative Minimum Tax, a tax to which AHP has never been subject. The deposition testimony of Mr. den Baas is similarly unhelpful since, as plaintiffs pointed out when they objected to this deposition testimony, it discusses several partnerships with which ABN did business — none of them being AHP or Boca. It therefore is irrelevant.
6
113a. The Court finds that there was no discussion or agreement between the AHP partners and Addiscombe, Syringa, ABN Bank, or ABN Trust for the payment of any premiums to Addiscombe, Syringa, ABN Bank, or ABN Trust if the AHP partners wanted to purchase an additional interest in the Partnership. Considine Tr. (9/12/00 a.m.) 46:16-19, 47:14-17; Kofol Tr. (6/21/00 p.m.) 21:19-22:2, 24:1-14; den Baas Dep. (4/6/00) 198:2-17; JEX 229, at ¶ 12.
114.There was no discussion or agreement among the AHP partners, Addis-combe and Syringa, or ABN Bank regarding a return the foreign partners hoped to achieve or that ABN Bank expected to receive on the funds it loaned to Addis-combe and Syringa. Neither the foreign partners nor ABN Bank ever relayed to the AHP partners a target return they expected to achieve from the partnership. Considine Tr. (9/12/00 a.m.) 46:20 — 47:5; Nee Tr. (6/20/00 p.m.) 46:15-22; den Baas Dep. (4/6/00) 192:19-25.
115. There were no discussions between the AHP partners and ABN Bank or the foreign partners concerning any party’s agreement to certain transactions that Boca might propose in the future. Likewise, there was no discussion or agreement setting forth a schedule for entering into any such transactions. JEX 229, at ¶ 15; Considine Tr. (9/12/00 a.m.) 47:6-9; Nee Tr. (6/20/00 p.m.) 46:23-47:5; Das Tr. (9/13/00 a.m.) 26:20-27:2; den Baas Dep. (4/6/00) 170:21-171:7.
2.
The Partnership Agreement
116. On April 19, 1990, the four partners entered into the formal Partnership Agreement. DEX 3. The agreement was signed by Mr. Considine on behalf of both AHP and AHP 10, and by Mr. de Beer on behalf of each of the foreign partners. DEX 3, at GOV 026193.
117. Boca was formed as a general partnership under New York law, and each of its four named partners, including Ad-discombe and Syringa, was bound by such law. The Partnership Agreement conformed with the partners’ intent to create a “general partnership pursuant to the provisions of the partnership laws of the State of New York,” and the Partnership Agreement was to be “construed in accordance with the laws of the State of New York.” Stip. ¶ 41; JEX 2; JEX 3, at §§ 2.01, 11.11; JEX 229, at ¶ 4; Considine Tr. (9/12/00 a.m.) 27:17-24; Nee Tr.
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(6/20/00 p.m.) 7:11-18, 11:5-12, 17:24-18:3, 43:17-44:2; den Baas Dep. (4/6/00) 18:24-19:21, 20:19-21:18,156:9-157:18.
118. Under the Partnership Agreement and New York Partnership Law: (i) the Boca partners were jointly and severally liable for Boca’s obligations; (ii) each partner had the ability to bind Boca and the other partners; and (iii) each partner had the ability to dissolve or terminate Boca (although it could be in breach of its obligations to the other partners). JEX 3, at §§ 8.01,10.01,10.02,11.01.
119. The partners agreed that Curacao would be the Partnership’s principal place of business. JEX 3, at § 2.03.
120. The fiscal year of the Partnership for book and tax purposes was to end each year on May 31 because the majority partner’s (Syringa’s) fiscal year ended on May 31. JEX 3, at § 6.02; Nee Tr. (6/20/00 p.m.) 53:23-55:3. AHP did not request that May 31 be the partnership’s fiscal year end. Prior to April 19, 1990, AHP did not know when the fiscal year end would be. Considine Tr. (9/12/00 a.m.) 50:4-8; Nee Dep. (3/17/98) 140:22-141:18.
121. Under the Partnership Agreement, except as otherwise expressly provided, Boca was to be governed by a Partnership Committee composed of a representative and alternate representative of each partner. Action by the Partnership Committee required the assent of partners “whose Partnership Percentages aggregate not less than 95%.” In effect, the affirmative agreement of both the AHP partners and the foreign partners was required for actions taken by the Partnership Committee. JEX 3, at §§ 5.01-5.03.
122. Because most significant decisions required a 95% vote, neither the AHP partners nor the foreign partners, acting alone, could control the partnership. Under Boca’s governance provisions, both the AHP partners and the foreign partners effectively had veto power over each other group’s decisions with respect to actions to be taken by Boca, including any proposed sale or distribution of any assets by Boca. JEX 3, at §§ 5.01-5.03.
123. Boca adopted investment guidelines for the Partnership’s investments. Stip. ¶ 36; JEX 4, at Sch. A. Schedule A investments included short-term bank certificates of deposit, bank holding company commercial paper, domestic bank Eurodollar CDs, commercial paper of industrial companies that had a Moody’s rating of P-1 or higher and a Standard and Poor’s rating of A-l, U.S. Government backed obligations, U.S. Federal agency securities, and municipal tax exempt notes. JEX 4, at Sch. A; JEX 5.
124. Under the Partnership Agreement, an investment in an instrument of the type identified on Schedule A to the Partnership Agreement could be made without the consent of representatives of the partners. Other investments could be made, but were subject to the 95% approval requirement. JEX 3, at §§ 5.01-5.03, 6.01.
125. The Partnership was formed for the “purpose of making investments in notes, bonds, debentures, and other interest bearing instruments ... [and] sharing the profits and losses therefrom.” JEX 3, at § 2.04.
126. It was the intent of the partners that the income, expenses, gains, and losses of the Partnership be shared in accordance with the Partnership Agreement. JEX 128-132; JEX 134-135; JEX 138-139; JEX 141-142; JEX 146-148; JEX 150-158; JEX 161-164; Nee Tr. (6/20/00 p.m.) 52:1-53:7; Considine Tr. (9/12/00 a.m.) 45:15-46:8; den Baas Dep. (4/6/00) 158:17-159:12, 159:22-161:15, 170:21-173:5.
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127. The Partnership Agreement provided that as a general rule Boca’s income, expenses, gains, and losses for each fiscal period (or fiscal quarter) would be apportioned among the partners in proportion to their respective Partnership Percentages on the first day of the fiscal period. At the outset, therefore, the partners shared in the results of the Partnership’s operations in proportion to their initial capital contributions. Thereafter, the partners’ Partnership Percentages were adjusted by amendments to the Partnership Agreement to reflect the initial capital contributions adjusted by distributions, purchases of partnership interests, and prior allocations of income, expenses, gains, and losses. JEX 3, at §§ 2.04, 4.04; JEX 133; JEX 136: JEX 140: JEX 143: JEX 149; JEX 159; PEX 720 (direct testimony of Elizabeth Case) at 8-9; den Baas Dep. (4/6/00) 158:17-159:12,159:22-161:15.
128. During any fiscal period in which the unrecovered capital of Addiscombe and Syringa exceeded 50 percent of the percentage of the Partnership’s unrecovered capital (a “Qualified Fiscal Period”), the Partnership Agreement provided that the Partnership’s operating income (excluding gains on sales of assets and default loss) was to be allocated as follows: (1) first, to AHP and AHP 10 in an amount up to their únrecovered capital multiplied by the 90-day Treasury Bill rate plus 10 basis points; (2) second, to Addiscombe and Syringa in an amount up to their unrecovered capital multiplied by LIBOR plus 10 basis points; and (3) third, the balance to the partners in proportion to their Partnership Percentages, as defined in the Partnership Agreement. JEX 3, at §§ I (Definitions), 4.04; den Baas Dep. (4/6/00) 158:17-159:12, 159:22-161:15. This provision is referred to as the “preferred return provision.”
129. The Partnership Agreement further provided that, during a Qualified Fiscal Period, any loss to Boca attributable to the bankruptcy of an issuer of a debt instrument held by Boca (“default loss”) was to be allocated as follows: (1) first, to Addiscombe and Syringa up to the amount of the positive balances of their capital accounts; (2) second, the AHP partners up to the amount of the positive balances of their capital accounts; and (3) third, the balance to the partners in proportion to their Partnership Percentages. JEX 3, at § 4.04(d); den Baas Dep. (4/6/00) 160:12-161:11. This provision is referred to as the “default loss provision.”
130. While the combination of the preferred return provision and the default loss provision effectively assured AHP of achieving a rate of return higher than Treasury Bill rates with virtually no risk as long as the foreign partners held a majority interest in the Partnership, the main importance of the provision to AHP was that it decreased AHP’s credit risk with respect to Boca’s investments by effectively shifting that risk to Addiscombe and Syringa. Considine Tr. (9/21/00 a.m.) 48:11-50:3.
131. The Partnership Agreement provided that capital accounts be established for each partner and be maintained in accordance with the terms of the Partnership Agreement and in the same manner as required for federal income tax purposes (the “Partnership Capital Accounts”). As Boca received income or gains or incurred expenses or losses, and these amounts were shared by the four partners, corresponding adjustments were made to the Partnership Capital Accounts. JEX 3, at §§ 4.03, 8.02; PEX 720 (direct testimony of Elizabeth Case) at Appendix A.
132. The partners’ interests in Boca’s assets were distributable upon their withdrawal from Boca or upon its liquidation. JEX 3, at §§ 4.06, 8.02.
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133. The Partnership Percentages, as adjusted from time to time by amendments to the Partnership Agreement reflected the relative Partnership Capital Accounts of the partners. JEX 133; JEX 136; JEX 140; JEX 143; JEX 149; JEX 159; PEX 720 (direct testimony of Elizabeth Case) at Appendix A.
134. Under the Partnership Agreement, the Partnership Capital Accounts also governed the amounts to be distributed to each partner upon withdrawal from or dissolution of the Partnership. JEX 3, at §§ 4.03, 4.06, 8.02.
135. Addiscombe and Syringa had no creditor’s rights or remedies against Boca, its assets, or against AHP or AHP 10. JEX 3; Considine Tr. (9/12/00 a.m.) 50:19-21; POF 110,112,114.
136. ABN Bank did not receive fees from participation in the purchase and sale of securities relating to Boca, except for very small amounts relating to securities clearances. JEX 229, at ¶ 16; den Baas Dep. (4/6/00) 65:11-22.
137. Pursuant to the terms of the Partnership Agreement, each partner was exposed to its pro rata share of the interest rate risks and credit risks associated with the Partnership’s assets. Addiscombe and Syringa were aware that they were exposed to those partnership risks. JEX 3, at §§ 4.02-4.04; den Baas Dep. (4/6/00) 31:7-32:24, 163:10-164:7, 170:21-173:5, 175:22-176:5.
138. Boca consistently held itself out as a partnership to third parties, including issuers and purchasers of investment instruments, auditors, law firms, investment advisers, and the United States government.
See, e.g.,
JEX 114; JEX 129; PEX 502A; PEX 503-505; PEX 561-573.
139. After meeting the partners and negotiating the Partnership Agreement, the AHP partners and Addiscombe and Syringa believed that Boca was a partnership and that Addiscombe and Syringa were partners. Considine Tr. (9/12/00 a.m.) 50:9-21; Nee Tr. (6/20/00 p.m.) 55:10-25; den Baas Dep. (4/6/00) 18:24-19:21, 20:19-21:15.
3.
The Organizational Meeting in Bermuda
140. After the Partnership Agreement was signed, a second meeting was held in Bermuda on April 19, 1990, to organize the Partnership and to determine how it would operate on a day-to-day basis. This was the first meeting of the Partnership Committee and is referred to as the “organizational meeting.” Mr. Considine and Mr. Nee represented AHP and AHP 10, respectively. Mr. de Beer represented Ad-discombe and Syringa. Representatives from Merrill Lynch and Cravath, Swaine & Moore also attended. Minutes memorializing this meeting are Joint Exhibit 5. JEX 5; Considine Tr. (9/12/00 a.m.) 51:24-52:6; Considine Dep. (3/13/98) 93:12-94:12; Nee Tr. (6/20/00 p.m.) 56:20-58:14.
141. AHP appointed John R. Considine as its Representative. AHP 10 appointed Thomas M. Nee as its Representative. AHP and AHP 10 appointed Milan Kofol, Angel Seda-Coma, Geraldine Moss, and Eileen Lach as Alternate Representatives to the Boca Investerings Partnership Com>-mittee. Stip. ¶¶ 10,16; JEX 5.
142. Mr. Considine was appointed AHP’s Representative because significant amounts of AHP’s funds were invested and Mr. Considine had responsibility for safeguarding AHP’s investment. Considine Tr. (9/12/00 a.m.) 52:2-6.
143. As an Alternate Representative to the Partnership, Mr. Kofol understood that his responsibilities were to ensure that the Partnership was managed in accordance with the Partnership Agreement and to protect the AHP partners’ financial
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interests. Kofol Tr. (6/21/00 a.m.) 38:22-39:6.
144. Addiscombe and Syringa appointed Mr. de Beer as their Representative and Mr. Robert G.M. Verhoef as First Alternate Representative and Geraldine X.C. Martines as a Second Alternate Representative to the Partnership Committee. JEX 5; Stip. ¶ 31.
145. At the organizational meeting on April 19, 1990, certain aspects of Boca’s operations were delegated by the Partnership Committee to outside advisers. JEX 5. Boca engaged N.V. Fides, an affiliate of ABN Trust, to perform certain administrative and investment management services on behalf of Boca. JEX 5; Nee Tr. (6/20/00 p.m.) 58:15-23; Kofol Tr. (6/21/00 a.m.) 43:23-44:23. It engaged Merrill Lynch Capital Services as its financial advisor to provide advice to Boca on investment strategies, acquisition and disposition of assets, and general financial matters. Stip. ¶ 40; JEX 102; Das Tr. (9/13/00 a.m.) 26:11-19. It decided that audited financial statements, which were to be prepared in accordance with generally accepted accounting principles, would be prepared by Arthur Andersen, Willemstad, Curacao, and that unaudited financial statements would be prepared by N.V. Fides. Stip. ¶ 39; JEX 5; JEX 129; Kofol Tr. (6/21/00 a.m.) 45:10-46:8. And it hired Cravath, Swaine & Moore as its legal counsel. Nee Tr. (6/20/00 p.m.) 48:16-17; Nee Tr. (6/22/00 p.m.) 76:23-24. The fees charged by N.V. Fides, Arthur Andersen and Cra-vath, Swaine
&
Moore were taken into account in determining the Partnership’s operating income and allocated among the four partners in accordance with the Partnership Agreement. Stip. ¶ 38; JEX 3, at Article I, §§ 4.04 and 4.05; JEX 5; JEX 128-132; JEX 134-135; JEX 138-139; JEX 141-142; JEX 146-148; JEX 150-158; JEX 161-164; Nee Tr. (6/20/00 p.m.) 58:15-23; Kofol Tr. (6/21/00 a.m.) 43:23-45:9, 46:4-8.
7
146. In addition to discussing the Partnership’s daily operations, those in attendance at the organizational meeting also discussed a proposal by Merrill Lynch for Boca to invest in private placement notes (“PPNs”). During the meeting, Merrill Lynch assured the partners that the PPNs would be issued by “investment grade issuers.” JEX 5. Merrill Lynch also explained that the PPNs would be “floating rate with a five-year maturity and a onetime put after 13 months to 2]é years.” JEX 5. After discussing the proposal at the organizational meeting, the partners decided to make such an investment and instructed Merrill Lynch to locate potential issuers in accordance with the criteria discussed at the meeting. JEX 5; Consi-dine Tr. (9/12/00 sun.) 52:11-13, 53:3-6; Nee Tr. (6/20/00 p.m.) 59:18-60:14; den Baas Dep. (4/6/00) 167:21-168:12.
147. The AHP partners were authorized to agree to the purchase of the PPNs based on the April 17, 1990 AHT approved by AHP management. JEX 2; FOF 79-93. The AHP partners wanted to invest in PPNs because they understood that the notes were of high quality, were liquid, and would yield a satisfactory return, and that if other transactions were subsequently completed, the AHP partners would receive a tax benefit. JEX 2; Considine Tr. (9/12/00 a.m.) 52:14-21; Nee Tr. (6/20/00 p.m.) 60:15-23.
148. When Boca decided to purchase the PPNs, there was no understanding or
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agreement as to how long the Partnership would hold the PPNs. The AHP representatives understood that the PPNs did not have to be sold by a certain date in order for AHP to receive a tax benefit from investing in the Partnership. Considine Tr. (9/12/00 a.m.) 27:8-11, 54:10-21, 57:23-25; Kofol Tr. (6/21/00 a.m.) 38:7-11; Kofol Tr. (4/12/01) 43:20-44:13; Nee Tr. (6/20/00 p.m.) 61:25-62:16; Nee Tr. (4/12/01) 63:4-8; Nee Dep. (3/17/98) 163:12-17.
149.There was no discussion of the purchase of LIBOR Notes at the organizational meeting. Considine Dep. (3/13/98) 94:13-16; den Baas Dep. (4/6/00) 168:13-16; den Baas Dep. (4/6/00) 168:13-16.
150.AHP, AHP 10, Syringa and Addis-combe made the following capital contributions in exchange for the following partnership interests:
Percent Amount
AHP 9% $ 135,000,000
AHP 10 1% 15,000,000
Syringa 83% 1,245,000,000
Addiscombe 7% 105,000,000
100% $1,500,000,000
Stip. ¶43.
151. The $1.5 billion contributed by the partners was used to purchase Boca’s investments. JEX 128-129; JEX 114; JEX 561-563.
152. There was no assurance or guarantee from AHP that Syringa’s and Addis-combe’s capital contributions would be returned, that they would possess a priority claim on the Partnership’s assets, that they would have creditor’s rights, that they would be protected from risk of loss if credit risks materialized for the Partnership, that they would receive a particular rate of return on their capital contributions, or that they would be reimbursed for losses incurred as a result of their capital contributions to Boca. FOF 354-359.
153.On April 30, 1990, a meeting was held in Bermuda to change the names of the foreign partners to Syringa and Addis-combe and to increase their capital contributions and their proportionate interests in the partnership. Other minor changes also were made to the Partnership Agreement. Mr. Nee and Mr. Considine attended on behalf of the AHP partners. Addis-combe and Syringa attended via telephone. An amended and restated Partnership Agreement was executed on May 3, 1990. JEX 4; Nee Dep. (3/17/98) 182:19-183:19, 232:12-233:11; Considine Dep. (3/13/98) 95:5-96:3.
E. Boca’s Investments and Transactions
1.
Purchases of PPNs
154. After receiving instructions from the Boca partners, Merrill Lynch contacted potential PPN issuers and relayed to them certain criteria that Boca required for the PPNs. Merrill Lynch 30(b)(6) Dep. (Taylor 3/10/98) 54:9-16, 55:21-56:19; Pepe Dep. (5/7/98) 38:20-39:13.
155. After Merrill Lynch located potential issuers, the AHP Treasury Department conducted due diligence on the PPNs proposed by Merrill Lynch. Mr. Kofol reviewed the particular issues to ensure that the PPNs complied with the April 17, 1990 AHT authorizing the investment. Specifically, Mr. Kofol made sure that the PPNs were issued by institutions with A ratings or better, that the PPNs contained a put option, that the PPNs were floating rate, and that the PPNs would likely pay a rate of interest between 12 and 24 basis points above AHP’s average yield. Prior to approving the PPNs, Mr. Kofol satisfied himself that the Partnership was paying a fair price for the PPNs given the yield, risk, put option, and maturity. Although Mr. Considine delegated this responsibility to Mr. Kofol, Mr. Considine also satisfied himself with respect to the PPNs’ creditworthiness, liquidity, yield, and price. Considine Tr. (9/12/00 a.m.) 53:9-54:9; Ko-
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fol Tr. (6/21/00 a.m.) 47:3^18:15, 49:6-15; Merrill Lynch 80(b)(6) Dep. (Taylor 3/10/98) 73:23-74:15.
156. The put provisions contained in the PPNs assured AHP that the PPNs could be sold (or put) back to the issuers at par after a certain interval. If the Partnership held the PPNs until the put date, AHP knew that it would receive the promised rate of return for the period the PPNs were held. Mr. Kofol testified that the put options were important to all the partners. If the credit of a PPN issuer deteriorated during the period between the put date and the option date, the PPN could be put back to the issuer at the put date. Kofol Tr. (6/21/00 a.m.) 35:18-36:15, 38:7-11; Considine Tr. (9/12/00 a.m.) 35:16-17.
157. So long as Syringa’s and Addis-combe’s Partnership Percentages were greater than 50 percent, the Partnership Agreement provided that Syringa and Ad-discombe would be responsible for any default losses caused by bankruptcy up to the amount of their capital contributions. JEX 3, at § 4.04(d); Nee Tr. (6/20/00 a.m.) 52:20-53:7; den Baas Dep. (4/6/00) 157:19-159:12; 160:19-161:11. Default losses would have to exceed $1.35 billion (out of $1.5 billion invested) before the AHP partners would bear any portion of the losses. Stip. ¶43; JEX 3, at § 4.04(d).
158. The uncontradicted testimony at trial was that the AHP partners agreed to the purchase of the PPNs by the Partnership because: (1) AHP believed that the PPNs were creditworthy (rated A or better) and offered a reasonable rate of return; and (2) the PPNs qualified for installment sale treatment under Section 453 of the Internal Revenue Code. Considine Tr. (9/12/00 a.m.) 37:24-38:6, 52:14-53:1; Nee Tr. (6/20/00 p.m.) 60:15-23; FOF 90.
159. ABN Trust, on behalf of Addis-combe and Syringa, also reviewed the PPNs to assure itself of the creditworthiness of the issuers because Addiscombe and Syringa were exposed to the first loss position should the issuers’ credit deteriorate. den Baas Dep. (4/6/00) 161:18-162:21;
see also
JEX 3, at § 4.04.
160. The AHP partners and the foreign partners understood that the credit risk associated with the A rating of the PPN issuers would be borne by the Partnership and shared by the partners in accordance with the Partnership Agreement. Consi-dine Tr. (9/12/00 a.m.) 54:2-5; Kofol Tr. (6/21/00 a.m.) 48:11-50:4; den Baas Dep. (4/6/00) 175:22-176:18,176:20-177:2.
161. On May 1, 1990, Boca purchased private placement, floating-rate certificates of deposit from Norinchukin having a face value of $300 million and similar instruments from Sanwa having a face value of $300 million. Tranche A of the Norinchu-kin PPNs ($200 million issue) had a five-year term and paid a rate of interest of 8.2875% for the first period and LIBOR minus 15 basis points for the period commencing on the third Wednesday in May 1990 through the third Wednesday in November 1991. Thereafter the PPNs paid LIBOR minus 25 basis points. Tranche B of the Norinchukin PPNs ($100 million) had a five-year term and paid a rate of interest of 8.50% for the first period and LIBOR minus 10 basis points for the period commencing on the third Wednesday in May 1990 through the third Wednesday in April 1992. Thereafter, the PPNs paid LIBOR minus 25 basis points. Interest was reset monthly. The payment of interest was to occur on the third Wednesday of every month commencing on the third Wednesday of May 1990. The Sanwa PPNs had a five-year term and paid 8.4625% for the initial period and, thereafter, LIBOR minus 10 basis points. Interest was reset monthly. The payment of interest was to occur on the first day of
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each month commencing on June 1990. At the time of the purchase, the credit ratings of Norinchukin and Sanwa were AA. Stip. ¶ 44; PEX 561; PEX 562; PEX 563.
162. On May 2, 1990, Boca purchased private placement floating rate certificates of deposit from PepsiCo with a face value of $500 million. The PepsiCo PPNs had a five-year term and paid a rate of interest of commercial paper minus 12.5 basis points. Interest was reset monthly. The payment of interest was to occur on the third Wednesday of each month commencing on the third Wednesday in May 1990. At the time of the purchase, the credit rating of PepsiCo was A. The Norinchukin, Sanwa, and PepsiCo PPNs are collectively referred to as “the PPNs.” The interest rates on all the PPNs were consistent with market rates. Stip. ¶ 45; JEX 114; PEX 561-568; Pepe Dep. (5/7/98) 82:16-83:5.
163. Under the terms of the PPNs, Boca had the option of putting the notes to the issuers (Norinchukin, Sanwa and Pep-siCo) at par plus accrued interest in between twelve, eighteen or twenty-four months. The put option had considerable value to Boca. The put option was important because there was a real possibility of (1) the credit deteriorating, and (2) holding the PPNs until maturity. If the credit of the issuer deteriorated during the period between the issue date of the PPNs and the date of the option, the notes could be put back to the issuer at the put date. PEX 561; PEX 562; PEX 563; JEX 114; Kofol Tr. (6/21/00 a.m.) 35:18-36:15.
164. The terms of the purchases of the PPNs were negotiated between the issuers and Merrill Lynch. Merrill Lynch was only authorized to negotiate on the Partnership’s behalf after it had received authorization to do so from the partners at the April 19, 1990, organizational meeting. Merrill Lynch 30(b)(6) Dep. (Taylor 3/10/98) 53:22-54:16.
165. The PPNs were not registered under the Securities Act of 1933, nor were they traded on an established securities market. Stip. ¶ 46.
166. Of the $1.1 billion used by Boca to acquire the PPNs, 10% was provided by AHP and AHP 10, and 90% was provided by Addiscombe and Syringa — consistent with their partnership interests at the time. Stip. ¶ 43; JEX 128-129.
167. At the time the Partnership purchased the PPNs, there had been no determination to sell the PPNs at any particular time. This is one reason the put options were important. Considine Tr. (9/12/00 a.m.) 54:10-21, 56:11-13; Considine Tr. (9/12/00 p.m.) 39:10-16; Kofol Tr. (6/21/00 a.m.) 38:7-11; Kofol Tr. (4/12/01) 43:20-44:13; Nee Tr. (6/20/00 p.m.) 61:16-62:16; Nee Tr. (4/12/01) 63:4-8.
168. As of May 2, 1990, Boca had invested a total of $1.1 billion in PPNs. The remaining $400 million was invested in certain other short-term obligations that were within the Partnership’s investment guidelines. N.V. Fides was responsible for managing these investments. Mr. Kofol monitored the investments on behalf of the AHP partners to make sure they were within the Partnership’s investment guidelines and to check the creditworthiness of the issuers. Stip. ¶ 47; PEX 407; PEX 408; Kofol Tr. (6/21/00 a.m.) 50:24-54:17.
169. Boca possessed all the benefits and burdens of ownership with respect to the PPNs as well as the short-term obligations, including the receipt of market-rate interest and all risk of loss. JEX 114; PEX 561-563.
170. AHP, AHP 10, Syringa, and Ad-discombe shared the interest rate risk, credit risk, default risk, and credit spread risk with respect to the PPNs and other investments in accordance with the Partnership Agreement, den Baas Dep. (4/6/00)
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30:6-21, 162:15-22; 175:22-176:5, 195:16-196:23.
171. Boca purchased and held title to the PPNs and other investments in its own name. JEX 114; PEX 561; PEX 562; PEX 563.
172. There was no agreement between the AHP partners and Syringa and Addis-combe that AHP would make up any loss to Syringa and Addiscombe on the PPNs or on other investments. Syringa and Ad-discombe were liable for any default loss up to $1.35 billion. Stip. ¶ 43; JEX 3, at § 4.40(d); Kofol Tr. (4/12/01) 46:24-47:5; Nee Tr. (4/12/01) 167:1-11; den Baas Dep. (4/6/00) 169:21-170:8.
2.
Sale of the PPNs for Cash and LIBOR Notes
a.
May 18, 1990 Partnership Meeting
173. A Partnership Committee meeting was held on May 18, 1990, in Bermuda. Mr. Kofol attended on behalf of AHP and AHP 10. Mr. Verhoef represented Addiscombe and Syringa via telephone conference from Curacao. A Merrill Lynch representative and a Cravath, Swaine & Moore representative also were in attendance. The Merrill Lynch representative proposed selling the PPNs for $880 million in cash and contingent installment payment agreements (“LIBOR Notes”). The $880 million was to be reinvested in commercial paper. LIBOR is the London Interbank Offering Rate. The aggregate notional principal amounts of all of the LIBOR Notes was $578,689,000. These amounts were “notional” in the sense that, unlike typical debt securities, the LIBOR Notes required no principal payment at maturity. The only payments were the 20 quarterly payments. Because the quarterly payments depended on three-month LIBOR, as determined in the future, the total contract price could not be readily ascertained. The three-month LIBOR for the first quarterly payment did not become fixed until June 1, 1990. Stip. ¶ 49; JEX 8; Kofol Tr. (6/21/00 a.m.) 58:5-61:1. FOF 190-192, 320.
174. During the May 18 meeting, Merrill Lynch illustrated the mechanics of the proposed sale and explained certain characteristics of the LIBOR Notes. Specifically, Merrill Lynch explained that (i) the value of the LIBOR Notes would fluctuate significantly with changes in interest rates and were extremely volatile instruments; (ii) the sale of the PPNs and purchase of the LIBOR Notes may effectively reduce Boca’s credit risk because (a) the $1.1 billion investment in PPNs would be spread over the LIBOR Note and the $880 million of commercial paper, and (b) Merrill Lynch would look for LIBOR Note issuers with a credit rating higher than that of the PPN issuers; and, (iii) the cash received on the sale could be invested in commercial paper thereby reducing the maturities of Boca’s investments and improving the liquidity of the Partnership’s portfolio. Stip. ¶ 49; JEX 8; Kofol Tr. (6/21/00 a.m.) 58:5-61:1.
175. Mr. Kofol approved the sale of the PPNs on behalf of the AHP partners. Prior to approving- the sale, Mr. Kofol called Mr. Considine from the May 18 meeting to inform him of Merrill Lynch’s proposal to sell the PPNs for cash and LIBOR Notes. After discussing the proposal with Mr. Kofol, Mr. Considine gave oral authorization approving the transaction. Considine Tr. (9/12/00 a.m.) 59:14-60:3; Considine Dep. (3/13/98) 105:7-25; Kofol Tr. (6/21/00 a.m.) 61:2-10.
176. At the meeting, the partners agreed to sell the PPNs for 80% cash and LIBOR Notes for the remaining 20%. The partners authorized Merrill Lynch to locate purchasers of the PPNs who would issue LIBOR Notes consistent with the criteria and list of issuers discussed at the
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meeting. Stip. ¶ 49; JEX 8; Kofol Tr. (6/21/00 a.m.) 61:2-10.
177. At the time of the meeting, Mr. Considine and Mr. Kofol were aware of the then current interest rate environment and interest rate trends predicted in the market. Considine Tr. (9/12/00 a.m.) 60:17-22; Considine Dep. (3/13/98) 109:9-18; Kofol Tr. (6/21/00 p.m.) 3:1-9.
178. AHP and AHP 10 had not discussed or reached any agreement with Ad-discombe or Syringa to sell the PPNs prior to the May 18, 1990 meeting. Considine Tr. (9/12/00 a.m.) 54:10-21, 56:11-13; Nee Tr. (6/20/00 p.m.) 61:7-62:16.
179. At the conclusion of the May 18, 1990 meeting, there was no understanding or agreement as to when the next partnership meeting would be held. Kofol Tr. (6/21/00 p.m.) 16:9-21.
b.
AHP Approval
180. On May 24, 1990, the AHP Treasury Department initiated an AHT to request authorization for Boca to sell the PPNs for cash and LIBOR Notes. An AHT was required because the proposed investment in LIBOR Notes was outside of AHP’s investment guidelines and because the Partnership was selling an asset that AHP previously had authorized it to buy. JEX 25; Considine Tr. (9/12/00 a.m.) 58:13-59:6.
181. The AHT was requested after Mr. Considine had given oral approval of the sale by telephone to Mr. Kofol during the May 18, 1990 Partnership Committee meeting. An AHT had not been written prior to the meeting because AHP was unaware that the sale was to be the subject of the meeting. This practice was unusual but in conformance with the AHT system, which required flexibility. Consi-dine Tr. (9/12/00 a.m.) 59:14 — 60:3; Consi-dine Dep. (3/13/98) 105:7-25, 111:22-113:5; Kofol Tr. (6/21/00 a.m.) 61:2-10; Nee Dep. (3/17/98) 199:7-16; FOF 25.
182. The AHP partners agreed to the sale of the PPNs for cash and LIBOR Notes because (i) the LIBOR Notes had potential to generate a significant return because of their sensitivity to interest rates; (ii) the sale would reduce credit risk and maturities; and (iii) the sale of the PPNs for cash and LIBOR Notes qualified for contingent payment installment treatment under Section 453 of the Internal Revenue Code so that, if certain transactions were subsequently approved, AHP could receive a tax benefit. JEX 25; Con-sidine Tr. (9/12/00 a.m.) 56:14 — 57:15; Ko-fol Tr. (6/21/00 p.m.) 3:15-4:17, 6:12-7:17.
183. The potential financial benefits of the transaction, as understood by the AHP partners at that time, were the following: (i) because of their interest-rate sensitivity the LIBOR Notes had the potential to generate a significant return; (ii) the reinvestment of the cash proceeds in commercial paper would provide a return commensurate with the risk associated with those investments; (iii) diversification would reduce credit risk on the partnership portfolio; and (iv) diversification would reduce maturities and, thus, improve the portfolio’s liquidity. JEX 8; JEX 25; Considine Tr. (9/12/00 a.m.) 56:15-22; Kofol Tr. (6/21/00 p.m.) 3:1-4:17, 6:12-7:17.
184. Although Mr. Considine was aware of a potential tax benefit if certain other transactions took place, he recommended and sought authorization for the sale of the PPNs and purchase of the LIBOR Notes based on the potential financial benefits of the transaction; there was no guarantee or obligation that any subsequent transactions would occur. Consequently, the sale of the PPNs for cash and LIBOR Notes had to stand on its own financial viability irrespective of any potential tax consequences. Considine Tr.
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(9/12/00 a.m.) 60:4-16; Considine Dep. (4/12/99) 78:20-79:10; Nee Dep. (4/8/99) 88:17-90:9.
185. At the time AHP approved the sale of the PPNs for cash and LIBOR Notes, AHP had an understanding of the interest rate environment. Considine Tr. (9/12/00 a.m.) 60:17-22;
see
FOF 177.
186. At the time of the purchase of the LIBOR Notes, there was no understanding or expectation by the Partnership or AHP as to how long the LIBOR Notes would be held by the Partnership. Consi-dine Tr. (9/12/00 p.m.) 9:15-20; Kofol Tr. 44:23-46:2.
187. There was no agreement between the AHP partners and Syringa and Addis-combe that the AHP partners would make up any loss Syringa and Addiscombe might experience on the LIBOR Notes, den Baas Dep. (4/6/00) 169:21-170:8.
c.
Sale of PPNs for Cash and LIBOR Notes
188. At the request of Boca and in accordance with instructions received from Boca, Merrill Lynch identified BFCE, Sumitomo, BETA, and Mitsubishi as potential purchasers of the PPNs. Merrill Lynch negotiated the sales on behalf of Boca, after it had received instructions from the Partnership to do so. Merrill Lynch 30(b)(6) Dep. (Taylor 3/10/98) 55:21-56:19.
189. After Merrill Lynch located potential LIBOR Note issuers, Mr. Kofol reviewed the LIBOR Notes to ensure that they were consistent with what was decided at the May 18, 1990 Partnership Committee meeting and that they complied with the May 24, 1990 AHT. Among other things, Mr. Kofol made sure that the credit quality of the LIBOR Notes was higher than that of the PPNs because credit risk was a concern of AHP’s. Kofol Tr. (6/21/00 p.m.) 7:18-9:3.
190. On May 24, 1990, the Partnership sold $200 million in principal amount of the Norinchukin, Sanwa, and PepsiCo PPNs to BFCE and Sumitomo. The aggregate consideration received by the partnership from the sales consisted of $160 million in cash and certain Installment Purchase Agreements providing for contingent payments (the “BFCE LIBOR Notes” and “Sumitomo LIBOR Notes”). The BFCE and Sumitomo LIBOR Notes required BFCE and Sumitomo to make 20 quarterly payments, starting on September 1, 1990, equal to three-month LIBOR multiplied by stated notional amounts times the number of days from the last payment divided by 360. The first quarterly payments under the BFCE and Sumitomo LIBOR Notes were based on three-month LIBOR on June 1, 1990, and did not become fixed until June 1, 1990. Stip. ¶ 50; PEX564; PEX565; PEX566.
191. On May 29, 1990, the Partnership sold $400 million principal amount of the Norinchukin, Sanwa, and PepsiCo PPNs to BETA. The aggregate consideration received by the partnership from the sales consisted of $320 million in cash and certain Installment Purchase Agreements providing for contingent payments (the “BETA LIBOR Notes”). The BETA LI-BOR Notes required BETA to make 20 quarterly payments, starting on September 1, 1990, equal to three-month LIBOR multiplied by stated notional amounts times the number of days from the last payment divided by 360. The amounts of the first quarterly payments under the BETA LIBOR Notes were based on three-month LIBOR on June 1, 1990, and did not become fixed until June 1, 1990. Stip. IT 51; PEX567; PEX568; PEX569.
192. On May 30, 1990, the Partnership sold $500 million principal amount of the Norinchukin, Sanwa, and PepsiCo PPNs to Mitsubishi. The aggregate consideration
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received by the partnership in the sale consisted of $400 million in cash and certain Installment Purchase Agreements providing for contingent payments (the “Mitsubishi LIBOR Notes”). The Mitsubishi LIBOR Notes required Mitsubishi to make 20 quarterly payments, starting on September 1, 1990, equal to three-month LIBOR multiplied by stated notional amounts times the number of days from the last payment divided by 360. The amounts of the first quarterly payments under the Mitsubishi LIBOR Notes were based on three-month LIBOR on June 1, 1990, and did not become fixed until June 1, 1990.
8
Stip. ¶ 52; PEX 570; PEX
571;
PEX 572; PEX 573.
193. Thus, all together, the PPNs were sold for $880 million in cash plus LIBOR Notes. The cash was received in Boca’s taxable year ended May 31, 1990. The 20 quarterly payments were to be received over the next six taxable years, starting on September 1, 1990, and ending on June 1, 1995. Thus, all together, the payments were to be received over seven taxable years. Stip. ¶¶ 50-52; PEX 564-573.
194. The LIBOR Notes provided that the issuers would make 20 quarterly payments based upon the three-month LIBOR interest rate and a notional amount. The LIBOR Notes did not provide for payment of any stated principal, and the amount of each of the periodic payments varied depending upon the three-month LIBOR interest rates on the specified dates. The future interest rates on those dates were not known as of May 31, 1990. Therefore, although the term and notional amounts of the LIBOR Notes were fixed, because of the variable and unknown future three-month LIBOR rate, the total contract price for the PPNs could not be readily ascertained as of the end of the tax period in which the sale occurred (May 31, 1990). PEX 564-573; Walsh Tr. (9/11/00 a.m.) 28:2-29:5; AHP 30(b)(6) Dep. (Walsh 3/3/98) 28:1-22; Nee Tr. (6/20/00 p.m.) 12:2-13:18.
195. The sales of the PPNs were treated as contingent payment installment sales because (i) the payments to be received stretched over seven taxable years, and because (ii) the amount of each quarterly payment under the LIBOR Notes depended on future interest rates and, therefore, could not be ascertained. PEX 564-573.
196. After Boca sold the PPNs, it retained no incidents of ownership of the PPNs, either directly or indirectly. JEX 114; PEX 561-563.
197. When Merrill Lynch negotiated the sale of the PPNs for cash and LIBOR Notes, Merrill Lynch made no assurances to the LIBOR Note issuers that the PPNs would be bought back or that the LIBOR Notes would be sold prior to their maturity. Taylor Dep. (3/10/98) 57:21-58:5; den Baas Dep. (4/6/00) 186:9-187:11.
198. At the time of the issuance of the LIBOR Notes, AHP was aware that the LIBOR Notes were very volatile. This is one of the reasons AHP believed the LI-BOR Notes could be profitable. AHP knew that the LIBOR Notes could go up significantly in value if interest rates went up. AHP also knew that the LIBOR Notes could go down significantly in value if interest rates fell. The AHP partners did not hedge their 10% interest in the LIBOR Notes because they believed that hedging would eliminate the potential benefit of owning the Notes. Considine Tr. (9/12/00 a.m.) 60:23 — 61:14; Kofol Tr. (6/21/00 p.m.) 9:4-10:1.
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199. Boca invested the $880 million in cash received on its sale of the PPNs in commercial paper and time deposits consistent with Boca’s investment guidelines. JEX 128-129.
200. The return on this investment of $880 million plus the original $400 million plus the LIBOR Notes was shared pro rata by the partners as were all risks such as credit risk, default risk, interest rate risk, and liquidity risk. JEX 128-129.
d.
Negotiability of LIBOR Notes
201. The “LIBOR Notes [were] very illiquid and privately negotiated instruments.” Fong Tr. (9/21/00 p.m.) 12:3-4.
9
They were not registered under the Securities Act of 1933, they were not payable on demand, and they did not have interest coupons attached. Stip. ¶ 54; PEX 564-573; Fong Tr. (9/21/00 a.m.) 32:14-34:13; Fong Tr. (9/21/00 p.m.) 11:23-12:9. Merrill Lynch never provided any guarantees that it would be able to sell the LIBOR Notes. Pepe Dep. (5/7/98) 74:13-18.
202. The LIBOR Notes themselves expressly precluded the creation of a market for the LIBOR Notes. Paragraph 5.9 of the LIBOR Notes provided:
No Secondary Markets.
Purchaser and Seller each agree (i) not to engage any broker or dealer to make a market in this Agreement (or any direct or indirect interest therein), and (ii) not to offer or list this Agreement (or any direct or indirect interest herein) in an established securities market. An established securities market is (a) a national securities exchange which is registered under Section 6 of the Securities Exchange Act of 1934 (the “Exchange Act”), (b) an exchange which is exempted from registration under Section 5 of the Exchange Act because of its limited volume of transactions or (c) any over-the-counter market. An over-the-counter market includes any system of general circulation to brokers and dealers which regularly disseminates quotations of obligations by identified brokers or dealers, other than a quotation sheet prepared and distributed by a broker or dealer in the regular course of business and containing only quotations of such broker or dealer.
PEX 564-573. In compliance with these limitations, Merrill Lynch refrained from taking any steps that would have been necessary to create a market for the LI-BOR Notes at the time they were issued. PEX 564-573; Merrill Lynch 30(b)(6) Dep. (Taylor 3/10/98) 63:17-64:3.
e.
Results as of May SI, 1990
203. On May 31, 1990, the end of Boca’s first taxable year, Boca owned all of the LIBOR Notes and all other assets shown on the financial statements. Stip. ¶ 57.
204. During the period April 19, 1990 to May 31, 1990, Boca’s net operating income, as reflected in its financial statements, was $10,055,226, as follows:
Interest on securities $ 2,884,639
Interest on PPNs 6,883,106
Interest on time deposits 288,035
$10,055,780
Less: General expenses 554
$10,055,226
This is reflected in the Partnership balance sheet as of May 31, 1990, which is Joint Exhibit 128. Stip. ¶ 58; JEX 128.
205. Pursuant to Section 4.04(c) of the Partnership Agreement, this operating income, including expenses, was allocated first to AHP and AHP 10 up to the amounts of their preferred returns and the
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balance to Syringa and Addiscombe, as follows:
AHP $ 887,130
AHP 10 98,570
Syringa 8,364,119
Addiscombe 705,407
$10,055,226
Stip. ¶ 59; JEX 128; Kofol Tr. (6/21/00 p.m.) 13:4-13.
206.A partner’s allocation of the interest income from Boca’s investments, including the PPNs for Boca’s tax year ended May 31, 1990, was credited to that partner’s respective capital account pursuant to Section 4.03(a) of the Partnership Agreement. Stip. ¶ 60.
207.Boca’s partners shared the income from the PPNs. Syringa and Addiscombe were allocated approximately 90% of the interest income received on the PPNs. Stip. ¶ 60; JEX 128-129.
208.The installment gain was allocated in accordance with the Partnership Agreement as follows:
AHP 9% $ 64,968,646
AHP 10 1% 7,218,738
Syringa 83% 599,155,290
Addiscombe 7% 50,531,169
100% $ 721,873,843
These amounts were credited to each partner’s capital account maintained under the Partnership Agreement. Stip. ¶ 61; JEX 128-129.
209.Boca’s reported tax basis in the PPNs was $1,106,883,099, which included the $1.1 billion cost of the PPNs plus accrued interest. PEX 502A.
f.
Merrill Lynch Valuations and the Loss on the LIBOR Notes
210.Merrill Lynch periodically provided Boca with what was stated to be the market value of the LIBOR Notes. For purposes of these valuations, the transaction costs — specifically the cost of the transaction in which Boca sold the PPNs for cash and LIBOR Notes — was embedded (or included) in the value of the LI-BOR Notes. Subsequent valuations were then adjusted to reflect changes in the value of the LIBOR Notes. Merrill Lynch’s valuation letters are Joint Exhibits 31A through 31D. Stip. ¶ 55; JEX 31A-JEX 31D; Pepe Dep. (5/7/98) 86:3-89:15.
211.Merrill Lynch’s valuation of the LIBOR Notes was based on the value a purchaser would have to pay to acquire the Notes, rather than on the value a seller could obtain by selling the Notes. AHP did not know how Merrill Lynch valued the Notes and in fact understood the valuation to represent the amount for which the Notes could be sold. Kofol Tr. (6/21/00 p.m.) 15:6-16:8; Merrill Lynch 30(b)(6) Dep. (Taylor 3/10/98) 47:10-48:3, 52:3-5, 76:8-24; Pepe Dep. (5/7/98) 86:8-88:6; den Baas Dep. (4/6/00) 52:3-17.
212.On June 4, 1990, Merrill Lynch sent a letter to Boca, stating that the market value of the LIBOR Notes on May 31, 1990, was $223,880,000. Stip. ¶ 62; JEX 31A.
213.The partnership’s LIBOR Notes decreased in value during the period ended May 31, 1990, by $705,928.94. Pursuant to the Partnership Agreement, this amount was allocated among the four partners as follows:
AHP 9% $ 63,534
AHP 10 1% 7,059
Syringa 83% 585,921
Addiscombe 7% 49,415
100% $ 705,929
Stip. ¶ 63; JEX 128; Kofol Tr. (6/21/00 p.m.) 12:1-13:3.
214.There is a letter from Merrill Lynch to Boca, dated “As of July 20, 1990,” stating that the market value of the LIBOR Notes on July 20, 1990, was $220,770,000. This amount reflected a decrease in value of $3,110,000 during the period from June 1, 1990 through July 20, 1990. Stip. ¶ 69, 70; JEX 31C, 131.
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215.Pursuant to the Partnership Agreement, the additional loss of $8,110,000 was allocated among the partners as follows:
AHP 9% $ 279,900
AHP 10 1% 31,100
Syringa 83% 2,581,300
Addiseombe 7% 217,700
100% $ 3,110,000
Stip. ¶ 70; JEX 131.
g.
Transaction Costs
216. When AHP agreed to the sale of the PPNs for cash and LIBOR Notes, it expected that there would be normal transaction costs. Considine Tr. (9/12/00 a.m.) 58:1-5.
217. The transaction costs involved in the sale of the PPNs for cash and LIBOR Notes were approximately $13 million. These costs were embedded in Merrill Lynch’s valuation of the LIBOR Notes.
See
FOF 210. As a consequence of Merrill Lynch’s valuations, the transaction costs would be borne by the party that owned the LIBOR Notes when they were sold or matured. The costs therefore would be shared pro rata among the partners if the Partnership sold the LIBOR Notes or held the LIBOR Notes until they matured. Alternatively, if the LIBOR Notes were distributed, the costs would be borne by the partners who received the LIBOR Notes in the distribution. Stip. ¶ 56; JEX 229, at ¶ 11; Pepe Dep. (5/7/98) 84:11-89:15; den Baas Dep. (4/6/00) 49:7-50:9; Tucker Tr. (9/20/00 p.m.) 2:9-21.
218. Because the costs of the PPN/LI-BOR Notes transaction was reflected in the carrying value of the LIBOR Notes, the .costs were not deducted by the partnership for accounting and financial reporting purposes at the time of the sale of the PPNs. JEX 128, JEX 129, JEX 131, JEX 132, JEX 134, JEX 135; den Baas Dep. (4/6/00) 49:7-51:14, 198:9-199:3; Pepe Dep. (5/7/98) 88:11-89:15.
219. When the LIBOR Notes were distributed by Boca to AHP and AHP 10 on August 3, 1990,
see
FOF 237-254, the cost of acquiring the LIBOR Notes was effectively passed on to the AHP partners. If the Notes had been retained by Boca, all of the partners would have shared the cost proportionately. There was no pre-exist-ing agreement that the AHP partners would bear the cost. JEX 229, at ¶ 11; Considine Tr. (9/12/00 p.m.) 16:5-20; den Baas Dep. (4/6/00) 52:3-16.
220. Since the AHP partners received the LIBOR Notes and the potential benefits of such ownership, it accepted those costs. If the partnership had retained ownership of the LIBOR Notes and the potential benefits, it would have borne the cost. Kofol Tr. (6/21/00 p.m.) 37:24-40: 20; den Baas Dep. (4/6/00) 49:7-51:14, 198:9-199:3.
221. All of Boca’s other costs were shared proportionately by the four partners pursuant to the Partnership Agreement. JEX 128-132; JEX 134-135; JEX 138-139; JEX 141-142; JEX 146-148; JEX 151-158; JEX 160-163.
3.
Purchase of Portion of Syringa’s Partnership Interest in Boca
a.
Syringa’s Request and Partnership Meeting
222. On July 6, 1990, Syringa sent a letter to AHP requesting that the partners meet to discuss a reduction in Syringa’s interest in the Partnership. Stip. ¶ 64; JEX 89. Before it received this letter, there was no expectation on AHP’s part as to when the foreign partners might want to reduce their investment in the Partnership. Considine Tr. (9/12/00 a.m.) 62:17-63:4; Considine Dep. (3/13/98) 116:12— 118:6.
223. In response to the July 6 letter and because this expenditure was not con
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templated in the April 17, 1990 AHT, on July 10, 1990, the AHP Treasury Department initiated an AHT seeking authorization to increase the AHP partners’ interests in Boca from 10% to 55%. Although the purchase price of the additional 45% was estimated at $680 million, the exact purchase price was to be determined on the day of the purchase because the value of Boca’s assets varied every day. The AHT authorized using the proceeds from the sale of Boyle-Midway, which had occurred on June 29, 1990, for the purchase. Stip. ¶ 65; JEX 19; JEX 111;7 Kofol Tr. (6/21/00 p.m.) 17:3-19:20;
see also
JEX 2; JEX 25.
224. Mr. Considine recommended purchasing the additional interest in the Partnership because AHP would have an increased interest in a generally very safe, attractive portfolio and it would have a 45% greater interest in the LIBOR Notes, which had a potential for significant gains given their interest rate sensitivity. In addition, if additional transactions were approved, AHP had the potential for a tax benefit. Considine Tr. (9/12/00 a.m.) 4:4-12, 6:10-19.
225. On July 20, 1990, the Partnership Committee -held a meeting in Curacao. Mr. Kofol represented the AHP partners. Mr. de Beer represented Addiscombe and Syringa. A representative from Merrill Lynch and Mr. den Baas also were in attendance. They discussed, the AHP partners’ purchase of an increased interest in the Partnership. Stip. ¶ 66; JEX 19; Kofol Tr. (6/21/00 p.m.) 19:21-20:25.
226. At the July 20, 1990 partnership meeting, the partners agreed that AHP and AHP 10 would purchase approximately 45% of Boca from Syringa for $684,292,462. This price reflected (1) Sy-ringa’s share of Boca’s operating income and expenses up to that time, including the interest from the PPNs, (2) Syringa’s share of the decrease in the value of the LIBOR Notes as a consequence of a decrease in interest rates, and (3) a premium of $2.5 million above book value. Book value was $681,792,462. Stip. ¶ 66; JEX 229, at ¶ 12; JEX 134-135.
227. The $2.5 million premium was negotiated at arms-length at the July 20 meeting by Mr. Kofol, Mr. de Beer, and Mr. den Baas. The premium had not been discussed among any representatives of AHP, AHP 10, Addiscombe, Syringa, and ABN Bank prior to July 20, 1990, and was not based on a prior agreement or formula. Because the July 10, 1990, AHT did not provide for the payment of a premium, Mr. Kofol called Mr. Considine to discuss the proposal and to seek authorization to pay the premium. Mr. Considine approved payment of the premium. Neither the value of Boca’s assets nor the premium payments were agreed to prior to July 20, 1990. JEX 19; JEX 229, at ¶ 12; den Baas Dep. (4/6/00) 193:2-17; Kofol Tr. (6/21/00 p.m.) 21:19-24:4; Considine Tr. (9/12/00 a.m.) 46:16-19; Considine Tr. (9/12/00 p.m.) 5:22-7:20; Considine Dep. (3/13/98) 131:9-24.
228. A new AHT, in addition to the July 10 AHT authorizing the purchase of Syringa’s interest, was not necessary because the AHT system allows for some flexibility. The July 10th AHT had approved a $680 million investment. An additional $2.5 million premium, only one-third of one percent of the purchase price, was allowed without having to obtain subsequent approval. Considine Tr. (9/12/00 p.m.) 6:23 — 7:12; Considine Dep. (3/13/98) 130:12-25; Kofol Tr. (6/21/00 p.m.) 22:11-23; Nee Dep. (3/17/98) 206:22-207:11; FOF 25.
229. The AHP partners agreed to pay the $2.5 million premium over the value of Syringa’s partnership interest because (1) it was necessary to purchase an additional 45% interest in the Partnership which pur
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chase furthered the goals of investing the proceeds from Boyle-Midway in a relatively conservative portfolio with the additional upside and risk of the investment in volatile LIBOR Notes, and (2) because if certain transactions occurred, AHP had the potential for a tax benefit. AHP representatives testified that these goals were consistent with the AHP partners’ objectives for investing in Boca in the first place. Considine Tr. (9/12/00 p.m.) 6:7-19; Considine Dep. (3/13/98) 126:4-8; Kofol Tr. (6/21/00 p.m.) 24:17-23.
230.AHP was not obligated to purchase a portion of Syringa’s interest in Boca. There was no commitment of any kind except as provided in the Partnership Agreement, which provides that a partner may request redemption under certain circumstances. JEX 3, at Article VII; Con-sidine Tr. (9/12/00 a.m.) 50:22-51:3; Nee Tr. (6/20/00 p.m.) 56:1-8; den Baas Dep. (4/6/00) 157:15-18,169:15-20.
b.
Effect of Purchase
231.The partners’ capital accounts and Partnership Percentages on July 20, 1990, following the purchase, were as follows:
Capital Account Partnership Percentage
AHP $ 750,456,154 49.3495467
AHP 10 83,384,017 5.4832830
Syringa Addiscombe 580,404,604 106.450.355 38.1670588 7.0001115
$1,520,695,129 100.0000000
Stip. ¶ 71.
232. These capital accounts reflected the partners’ prior sharing of both operating income and the decrease in value of the LIBOR Notes in accordance with the Partnership Agreement. This is reflected in the partnership balance sheet as per July 20, 1990, before and after the change in partnership interest, which are Joint Exhibits 131 and 132. Stip. ¶ 71; JEX 131, 132.
233. After their purchase of Syringa’s interest, the AHP partners had approximately $834 million invested in Boca of which approximately $720 million was in conservative high grade securities and $115 million was in the more risky, volatile LIBOR Notes. JEX 134-135; JEX 138-139; JEX 141-142; JEX 146-148; JEX 150-150; JEX 160-165.
234.The purchase of Syringa’s interest resulted in the AHP partners having approximately a 55% interest in the partnership and, thus, a 55% interest in the LI-BOR Notes. Consequently, insofar as the LIBOR Notes rose or fell in value, 55% of such future gain or loss would be allocated to AHP and AHP 10. The AHP partners did not hedge their risk in owning the LIBOR Notes because that would have eliminated the possibility to profit from the LIBOR Notes. Considine Tr. (9/12/00 p.m.) 7:21-8:11; Kofol Tr. (6/21/00 p.m.) 24:24-25:23.
235.During the period from June 1, 1990 through July 20, 1990, Boca’s net operating income, as reflected in its financial statements, was $14,455,832, as follows:
Interest on securities $14,462,735
Interest on time deposits 69.743
$14,532,478
Less: General expenses 76.646
$14,455,832
Stip. ¶ 67; JEX 131.
236.Pursuant to Section 4.04(c) of the Partnership Agreement, the operating income was allocated first to AHP and AHP 10 up to the amounts of their preferred returns and the balance to Syringa and Addiscombe, as follows:
AHP $ 1,299,241
AHP 10 144,360
Syringa 12,000,169
Addiscombe 1.012,062
$14,455,832
Stip. ¶ 68; JEX 131.
4.
Distribution of LIBOR Notes to AHP and AHP 10 and Cash to Addiscombe and Syringa
237.At a meeting of the Partnership Committee on August 3,1990, the partners
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decided to distribute the LIBOR Notes to AHP and AHP 10 and cash to Addiscombe and Syringa. Mr. Kofol attended the partnership meeting on behalf of AHP and AHP 10. Mr. de Beer represented Addis-combe and Syringa. JEX 11.
238. Mr. Kofol, in consultation with Mr. Considine, authorized the distribution of the LIBOR Notes to the AHP partners based on their belief that the Notes still provided an upside opportunity. Kofol Tr. (6/21/00 p.m.) 34:6-35:8; Considine Dep. (3/13/98) 133:10-134:16; 137:3-13.
239. During the period from July 20, 1990 to August 3, 1990, Boca’s net operating income was $4,003,611 ($3,856,376 in interest on securities, plus $147,235 in interest on time deposits). This is reflected in the partnership balance sheet as per August 3, 1990, before distribution, which is Joint Exhibit 134. Stip. ¶ 73; JEX 134.
240. Pursuant to Section 4.04(a) of the Partnership Agreement, the net operating income was allocated by the partners based on their partnership percentages established on July 20,1990, as follows:
Partnership Percentages Amount
AHP 49.3495467 $ 1,975,764
AHP 10 5.4832830 219,529
Syringa 38.1670588 1,528,060
Addiscombe 7.0001115 280,258
100.0000000 $ 4,003,611
This is also reflected in the partnership balance sheet as per August 3, 1990, before distribution, which is Joint Exhibit 134. Stip. ¶ 74; JEX 134.
241. There are two sets of signed meeting minutes in existence which purport to be the minutes of the August 3, 1990 Boca partnership meeting. Both are signed by Peter de Beer who appears as the elected secretary of the meeting. DEX 10; JEX 11. The minutes are nearly identical in format and content except that one set, JEX 11, values the installment notes at a higher value — a value that includes transaction costs — while the other set, DEX 10, does not. At trial, Mr. Kofol stated that he had seen both sets of minutes in August 1990, but could not explain why two sets of minutes existed. Mr. Kofol was aware that the LIBOR Notes had recently decreased in value and that insofar as the AHP partners accepted the Notes, they would accept the associated costs of acquiring the Notes. Kofol Tr. (6/21/00 p.m.) 37:24-46:24; Kofol Tr. (6/22/00 a.m.) 13:11-18:2; FOF 217, 219, 220, 242.
242. There was a letter from MLCS to Boca, dated “As of August 3,1990,” stating that the market value of the LIBOR Notes on August 3, 1990, was $217,082,000, a value that includes transaction costs. The valuation letter is Joint Exhibit 31D. JEX 31D. It is this value that is stated on what therefore must be the correct minutes of the August 3, 1990 meeting — Joint Exhibit 11. JEX 11. The second set of minutes sets forth a lesser value, DEX 10, but that value apparently does not include the embedded transaction costs of the LIBOR Notes that AHP agreed to accept upon distribution. Stip. ¶ 75. See Kofol Tr. (6/21/00 p.m.) 37-44;
see
Merrill Lynch 30(b)(6) Dep. (Taylor 3/10/98) 10:22-11:25; FOF 241.
243. The Partnership’s LIBOR Notes decreased in value during the period ended August 3, 1990, by $3,688,000. This amount was allocated among the partners based on their partnership percentages established on July 20,1990, as follows:
Partnership Percentages Amount
49.3495467 $ 1,820,012 AHP
5.4832830 202,223 38.1670588 1,407,600 AHP 10 Syringa
7.0001115 258,165 Addiscombe
100.0000000 $ 3,688,000
This is reflected in the partnership balance sheet as per August 3, 1990, before distri-
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button, which is Joint Exhibit 134. Stip. ¶ 76; JEX 134. .
244.During the period the LIBOR Notes were owned by Boca, the LIBOR Notes decreased in value by $7,503,929 as a consequence of a decrease in interest rates. This decrease in value was shared by the partners as follows:
Acquisition Date Through May 31 June 1 Through July 20 July 21 Through August 3 Total
AHP $ 63,534 $ 279,900 $1,820,012 2,163,446
AHP 10 7,059 31,100 202,223 240,382
Syringa 585,921 2,581,300 1,407,600 4,574,821
Addiscombe 49,415 217,700 258,165 525,280
705,929 $3,110,000 $3,688,000 $7,503,929
Under the Partnership Agreement, Syrin-ga’s and Addiscombe’s shares of the decrease in value of the LIBOR Notes were fully borne by them. AHP’s and AHP 10’s share of the decrease in value was $2,303,822 out of $7,503,929. Addiscombe and Syringa bore the remainder, and no portion was shifted to the AHP partners. JEX 128; JEX 131; JEX 132; JEX 134; Kofol Tr. (6/21/00 p.m.) 10:16-13:13, 27:19-28:18, 35:22-36:6.
245.When Boca assigned its rights and interests arising from the LIBOR Notes to AHP and AHP 10 on August 3, 1990, it distributed the LIBOR Notes and cash as follows:
LIBOR Notes Cash Total
AHP $197,485,353 $ 0 $197,485,353
AHP 10 19,596,647 2,264,432 21,861,079
Syringa 0 147,282,023 147,282,023
Addiscombe _0 27,596,125 27,596,125
$217,082,000 $177,142,580 $394,224,580
Stip. ¶ 72; JEX 11.
246. AHP had monitored the performance of the LIBOR Notes while they were in the Partnership. AHP was aware that the LIBOR Notes had decreased in value because of a decline in interest rates. Although interest rates had declined, the AHP partners wanted the LIBOR Notes because (1) the AHP partners believed there was at least an equal chance that interest rates would rise and there was a commensurate potential for profit, and (2) there was a potential tax benefit should the AHP partners sell or hold LIBOR Notes to maturity. JEX 11; Considine Tr. (9/12/00 p.m.) 10:9-24; Kofol Tr. (6/21/00 p.m.) 34:6-22.
247. When the AHP partners accepted the LIBOR Notes, they accepted the costs associated with acquiring the LIBOR Notes. Because the AHP partners were taking the five year Notes with each of its 20 quarterly payments inuring to their benefit, they determined it was fair to accept the costs to the Partnership of acquiring such Notes. If the Notes had stayed in the Partnership, Boca would have borne these costs. JEX 229, at ¶ 11; Considine Tr. (9/12/00 p.m.) 16:10-20; Ko-fol Tr. (6/21/00 p.m.) 37:24^11:6, 44:1-5; den Baas Dep. (4/6/00) 49:7-50:9; FOF 216-221.
248.When the AHP partners accepted the LIBOR Notes, Mr. Considine and Mr. Kofol were aware of the interest rate environment. Considine Dep. (3/13/98) 138:16— 23; Considine Tr. (9/12/00 p.m.) 10:9-24; Kofol Tr. (6/21/00 p.m.) 36:7-37:8.
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249. When the LIBOR Notes were purchased in May 1990, the AHP partners did not know that they would be distributed to them in August 1990. Considine Tr. (9/12/00 p.m.) 9:10-20; Kofol Tr. (6/21/00 p.m.) 44:23-46:1.
250. When the AHP partners accepted the LIBOR Notes in distribution in August, 1990, they had no plan to sell them. AHP’s Treasury Department continued to monitor the performance of the LIBOR Notes to determine whether they should be sold or held until maturity. Considine Tr. (9/12/00 p.m.) 10:25-11:11, 18:4-13; FOF 148.
251. On September 1, 1990, AHP and AHP 10 received the first quarterly payment under the LIBOR Notes of approximately $12 million. PEX 731; Nee Tr. (4/12/01) 71:8-72:25; 93:20-94:7; Ross Tr. (9/18/00 p.m.) 93:2-20.
252. The distribution of the LIBOR Notes to the AHP partners resulted in the AHP partners having a 100% interest in the LIBOR Notes. The AHP partners did not enter into any interest rate swaps or other hedging activity to reflect their increased exposure to interest rate sensitivity following the August 3, 1990 distribution. AHP’s Treasury Department made the decision for economic reasons, believing that there was a prospect of profit on the LIBOR Notes due to the Notes’ interest rate sensitivity. Considine Tr. (9/12/00 p.m.) 9:21-10:24; Kofol Tr. (6/21/00 p.m.) 34:20-35:8; 46:4-12.
253.As a result of the distribution of the LIBOR Notes to AHP and AHP 10, the capital accounts of AHP and AHP 10 were reduced by the reported value of the LIBOR Notes. The capital accounts of Syringa and Addiscombe were reduced by the amounts of the cash distributed. The partners’ reported capital accounts and Partnership Percentages on August 3, 1990, following the distributions, were as follows:
Capital Account Partnership Percentage
AHP $ 553,126,553 49.0888664
AHP 10 „ 61,540,244 5.4615726
Syringa 433,242,041 38.4494463
Addiscombe 78,876,323 7.0001147
$1,126,786,161 100.0000000
This is reflected in the Partnership balance sheet as per August 3, 1990, after distribution, which is Joint Exhibit 135, and the amendment to the Partnership Agreement, dated August 3, 1990, which is Joint Exhibit 136. Stip. ¶77; JEX 135, JEX 136.
254.AHP and AHP 10 reported a basis in the LIBOR Notes equal to their reported tax basis in their partnership interests computed as follows:
AHP AHP 10 Consolidated
Initial Contribution $135,000,000 $ 15,000,000 $150,000,000
Portfolio Interest Income 905,020 100,558 1,005,578
Net Short Term Capital Gain 64,968,646 7,218,738 72,187,384
Purchase of Syringa’s Partnership Interest 615,863,216 68,429,246 684,292,462
Total Tax Basis as of 7/20/90, 8/3/90 $816,736,882 $ 90,748,542 $907,485,424
As a consequence, the reported tax bases in their partnership interests were reduced to zero. Stip. ¶ 78;
see
FOF 391, 392.
5.
Further Reductions In Syringa’s Interest
255.On August 29, 1990, Syringa sent a letter to AHP requesting a further reduction in its interest in Boca. JEX 13; Stip. ¶ 79.
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256.An AHT was not required to authorize Syringa’s request for a reduction because the AHP partners continued to own the same amount of assets and the same type of assets. As Mr. Considine testified, AHP “continued to own the same dollar amount of assets as it had the second before Syringa withdrew. [AHP] ended up owning a larger percentage of a smaller partnership. But in terms of dollars, we owned the same amount, so it had no impact on [AHP] .... ” Because Syrin-ga’s reduction in interest would have no financial impact on AHP, the AHT system did not require an AHT in that instance. Considine Tr. (9/12/00 p.m.) 11:12-12:1.
257. On September 12, 1990, the Partnership Committee held a meeting during which the Partnership redeemed a portion of Syringa’s interest at book value by distributing to it $245,038,806 in cash and $54,961,194 in marketable securities. Stip. ¶ 80; JEX 12.
258. During the period August 3, 1990 to September 12, 1990, Boca’s net operating income was $9,787,042. This is reflected in the partnership balance sheets as per August 31, 1990, and as per September 12, 1990, before distribution, which are Joint Exhibits 135 and 138, respectively. Stip. ¶ 81; JEX 135, JEX 138.
259. Pursuant to Section 4.04(a) of the Partnership Agreement, the net operating income was allocated among the partners based on their Partnership Percentages established on August 3, 1990, as follows:
Partnership Percentages Amount
AHP 49.0888664 $4,804,348
AHP 10 5.4615726 534,527
Syringa 38.4494463 3,763,063
Addiscombe 7.0001147 685,104
100.0000000 $9,787,042
This is reflected in the partnership balance sheet as per August 31, 1990, and September 12, 1990, which are Joint Exhibits 135 and 139, respectively. Stip. ¶ 82; JEX 135, JEX 139.
260.The partners’ reported capital accounts and Partnership Percentages on September 12, 1990, following the distribution, were as follows:
Capital Account Partnership Percentage
AHP $ 557,930,901 66.6924184
AHP 10 62,074,771 7.4201242
Syringa 137,006,104 16.3770611
Addiscombe 79,561,427 9.5103963
$ 836,573,203 100.0000000
This is reflected in the partnership balance sheet as per September 12, 1990, after distribution, which is Joint Exhibit 139 and the amendment to the Partnership Agreement, dated September 12, 1990, which is Joint Exhibit 140. Stip. ¶ 83; JEX 139, JEX 140.
261.On October 17, 1990, Syringa sent a letter to AHP requesting a further reduction in its interest in Boca due to continuing financial needs. Syringa’s letter is Joint Exhibit 16. Stip. ¶ 84; JEX 16.
262.On October 31, 1990, the Partnership Committee held a meeting during which the Partnership redeemed a portion of Syringa’s interest at book value by distributing to it $95,363,916 in cash and $9,968,811 in marketable securities. Minutes of the meeting are Joint Exhibit 15. Stip. ¶ 85; JEX 15.
263. During the period September 12, 1990 to October 31, 1990, Boca’s net operating income was $9,191,132. This is reflected in the partnership balance sheet as per October 31,1990, which is Joint Exhibit 141. Stip. ¶ 86; JEX 141.
264. Pursuant to Section 4.04(a) of the Partnership Agreement, the net operating income was allocated by the partners based on their Partnership Percentages established on September 12, 1990, as follows:
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Partnership Percentages Amount
AHP 66.6924184 $6,129,789
AHP 10 7.4201242 681,993
Syringa 16.3770611 1,505,237
Addiseombe 9.5103963 874,113
100.0000000 $9,191,132
This is reflected in the partnership balance sheet as per September 12, 1990, after distribution, which is Joint Exhibit 139. Stip. ¶ 87; JEX 139.
265.The partners’ capital accounts and Partnership Percentages on October 31, 1990, following the distribution, were as follows:
Capital Account Partnership Percentage
AHP $564,060,690 76.1799852
AHP 10 62,756,764 8.4757003
Syringa 33,178,614 4.4809830
Addiseombe 80,435,540 10.8633315
$740,431,608 100.0000000
These capital accounts reflected the partners’ prior sharing of both operating income and the decrease in value of the LIBOR Notes in accordance with the Partnership Agreement, which is reflected in the partnership balance sheet as per October 31, 1990, after distribution, which is Joint Exhibit 142, and the amendment to the Partnership Agreement, dated October 31, 1990, which is Joint Exhibit 143. Stip. ¶ 88; JEX 142, JEX 143.
6.
Sale of LIBOR Notes
266. The Treasury Department monitored the performance of the LIBOR Notes when they were owned by Boca and after they were distributed on August 3, 1990. Considine Tr. (9/12/00 p.m.) 10:9— 11:1; Kofol Tr. (6/21/00 p.m.) 46:16-19.
267. The LIBOR Notes increased in value by $10,951,000 or approximately 5% from August 3, 1990, the date of distribution, to September 25, 1990. After that, the Notes fluctuated in value and then began a general downward trend that lasted approximately three years. PEX 721 (direct written testimony of Rahl) at 45-47; Kofol Tr. (6/21/00 p.m.) 54:24-55:21.
10
268. AHP and AHP 10 had no expectation regarding when they might dispose of the LIBOR Notes. Considine Tr. (9/12/00 p.m.) 9:21-11:1, 16:21-18:13; Merrill Lynch 30(b)(6) Dep. (Taylor 3/10/98) 62:23-63:9.
269. Concerned about an increasingly unstable credit market' and unstable interest rates and the volatility of the LIBOR Notes, AHP decided to sell the LIBOR Notes in late 1990. Mr. Kofol, Mr. Consi-dine and possibly Mr. Blount were principally involved in the decision to sell the LIBOR Notes. AHP gave instructions to Merrill Lynch to find buyers for the LI-BOR Notes for an appropriate price. Ko-fol Tr. (6/21/00 p.m.) 54:24-56:4; Considine Tr. (9/12/00 p.m.) 10:9-11:2, 16:12-17:13; AHP 30(b)(6) Dep. (Walsh 3/3/98) 223:16-224:8. Merrill Lynch 30(b)(6) Dep. (Taylor 3/10/98) 62:23-63:9.
270. On November 6, 1990, AHP 10 sold its LIBOR Note with a total reported basis of $90,748,542 for $17,703,145, reporting a short-term capital loss of $73,045,397. Stip. ¶ 89.
271. Also on November 6, 1990, AHP sold four LIBOR Notes with a total reported basis of $329,531,346 for $71,981,040, reporting a short-term capital loss of $257,550,306. Stip. ¶ 90.
272. On November 7, 1990, AHP sold an additional three LIBOR notes with a total reported basis of $325,064,843 for $71,782,478, reporting a short-term capital loss of $253,282,365. Stip. ¶ 91.
273. On November 8, 1990, AHP sold the final two LIBOR notes with a total
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reported basis of $162,140,692 for $85,349,624, reporting a short-term capital loss of $126,791,068. Stip. ¶ 92.
274.The sales of the LIBOR Notes were the result of arms-length negotiations with the buyers, and there was no market to set the price. Merrill Lynch 30(b)(6) Dep. (Taylor 3/10/98) 63:22-64:24. The price for the LIBOR Notes was determined by reference to market conditions on the date of the sale transaction and was computed in accordance with standard market practices. Merrill Lynch 30(b)(6) Dep. (Taylor 3/10/98) 73:23-74:15.
275. If AHP had held the Notes, they would have lost as much as $70 million because of severely declining interest rates. PEX 721 (direct written testimony of Rahl) at 39-40; Rahl Tr. (9/15/00 a.m.) 37:22-38:7; Ross Tr. (9/18/00 p.m.) 95:6-8.
276. On its consolidated 1990 consolidated Federal income tax return, Form 1120, AHP reported the following on its Schedule D:
AHP AHP 10 Other Companies Total
Short term cap gain from Form 1065 $ 64,968,646 $ 7,218,738 $ 72,187,382
Other short-term capital gain 5,149,664 0 5,149,664
Long-term cap. gain ffeale of Boyle-Midway 99,807,436 0 505,297,147 605,104,583
Other long-term capital gains 9,058,240 0 996,102 10,054,342
Other gains from Form 4797 0 0 1,098,828 1,098,828
TOTAL CAPITAL GAINS $178,983,986 $ 7,218,738 $507,392,077 $693,594,801
Short-term cap. loss frsale of LIBOR Notes (637,623,739) (73,045,397) (710,669,136)
NET CAPITAL LOSS ( 17,074,335)
Stip. ¶ 93.
277. The short-term capital losses generated from the sale of the LIBOR Notes offset AHP’s long-term capital gain of $605,104,183 from the sale of Boyle-Midway (as well as other smaller gains). Stip. ¶ 94.
7.
Withdrawal Of Syringa from Boca
278. On December 3, 1990, Syringa wrote to AHP requesting to withdraw from Boca because of its financial needs. Syringa’s letter is Joint Exhibit 18. Stip. ¶ 95; JEX 18.
279. On December 17, 1990, a Partnership Committee meeting was held during which the Partnership redeemed the remainder of Syringa’s interest in the partnership by distributing to it $33,524,207 in cash. Minutes of the meeting are Joint Exhibit 17. Stip. ¶ 96; JEX 17, JEX 150.
280. During the period October 31, 1990 to December 17, 1990, Boca’s net operating income as reflected in its financial statement was $7,712,433. This is reflected in the partnership balance sheet as per December 17, 1990, after the change in partnership interest, which is Joint Exhibit 146. Stip. ¶ 97; JEX 146.
281.Pursuant to Section 4.04(a) of the Partnership Agreement, the net operating income was allocated by the partners based on their Partnership Percentages established on October 31, 1990. as follows:
Partnership Percentages Amount
AHP 76.1799852 $5,875,330
AHP 10 8.4757003 653,583
Syringa 4.4809830 345,593
Addiscombe 10.8633315 837,827
100.0000000 $7,712,433
This is reflected in the partnership balance sheet as per December 17, 1990, after distribution, which is Joint Exhibit 142. Stip. ¶ 98; JEX 142.
282.The partners’ reported capital accounts and Partnership Percentages on December 17, 1990, following the distribution, were as follows:
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Capital Account Partnership Percentage
AHP $569,936,020 79.7537365
AHP 10 63,410,447 8.8733119
Addiscombe 81,273,368 11.3729516
$714,619,834 100.0000000
These capital accounts reflected the partners’ prior sharing of both operating income and the decrease in value of the LIBOR Notes in accordance with the Partnership Agreement. This is reflected in the amendment to the Partnership Agreement, dated December 17, 1990, which is Joint Exhibit 149. Stip. ¶ 99; JEX 149.
8.
Purchase of Addiscombe’s Partnership Interest
a.
AHP’s Request
283. In the summer of 1991, AHP was in the process of reviewing a potential acquisition, Genetics Institute, and AHP wanted to use the funds in Boca to make the acquisition. There were sufficient funds in the Partnership for the acquisition, and AHP would not have to borrow for the acquisition if it could use these funds. Using the funds in Boca also made sense from a tax perspective, because AHP would not have to take funds out of tax-advantaged investments in Puerto Rico in order to acquire Genetics Institute. If AHP had taken the funds out of the Puer-to Rican investments it would have had to pay a surtax to repatriate such funds. JEX 20; Considine Tr. (9/12/00 p.m.) 13:19-25; Kofol Tr. (6/21/00 p.m.) 51:22-52:10; Walsh Tr. (9/11/00 a.m.) 33:6-36:5.
284. The acquisition of Genetics Institute was not within the stated kind of investments allowed by the Partnership Agreement. Any decision of the partnership to invest had to be agreed to by 95% of the partnership. Accordingly, AHP needed consent from Addiscombe in order to use the Partnership’s funds to acquire Genetics Institute. JEX 3, at 5.01-5.03, JEX 20; Walsh Tr. (9/11/00 a.m.) 36:14-37:1; FOF 283.
285. On July 25, 1991, AHP requested that the partners meet to discuss “a significant equity investment in which it anticipated using Boca’s funds.” Mr. den Baas, as consultant to Addiscombe, informed AHP that Addiscombe was reluctant to agree to the request. AHP’s request is Plaintiffs’ Exhibit 416. Stip. ¶ 103; PEX 416; Walsh Tr. (9/11/200 a.m.) 37:10-15.
286. Because of Addiscombe’s reluctance to consent to the desired use of funds, AHP’s Treasury Department sought and received authorization to purchase Ad-discombe’s interest in Boca on August 30, 1991. The AHT authorizing the buy-out approved up to a $3 million premium to be paid to Addiscombe for its investment in Boca. The AHT is Joint Exhibit 20. Stip. ¶ 104; JEX 20; Walsh Tr. (9/11/00 a.m.) 37:5-38:2.
287. The AHP partners were willing to pay a premium of up to $3 million for Addiscombe’s interest in Boca because AHP wanted to use the funds in Boca to purchase Genetics Institute; AHP believed Addiscombe would not consent; and even if Addiscombe would agree to AHP’s request, AHP did not want another partner having an interest in Genetics Institute. Considine Tr. (9/12/00 p.m.) 14:1-17; Con-sidine Dep. (3/13/98) 158:16-159: 14; Blount Dep. (4/28/98) 122:10-123:3, 126:7-16; Walsh Tr. (9/11/00 a.m.) 37:16-38:2; 46:2-10.
b.
Effect of Buy-Out
288. At a Partnership Committee meeting on September 13,1991 in Toronto, Canada, the partners agreed that on September 17, 1991, AHP and AHP 10 would purchase Addiscombe’s interest in Boca. Mr. Kofol and Mr. Walsh attended on behalf of the AHP partners. Mr. Verhoef represented Addiscombe via telephone conference. Mr. den Baas attended the
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meeting in person to assist Mr. Verhoef in negotiating the price of the buy-out. During the meeting, the AHP partners agreed to purchase Addiscombe’s interest for $87,496,250. This price reflected: (1) Boca’s undistributed operating income; (2) Addiscombe’s share of the decrease in value of the LIBOR Notes; and (3) a negotiated premium of $2.2 million above book value. The book value of Addiscombe’s partnership interest was $85,296,250. Stip. ¶ 105; JEX 162; JEX 166; Walsh Tr. (9/11/00 a.m.) 38:11-46:1; Walsh Tr. (9/11/00 p.m.) 19:6-24:3; Considine Tr. (9/12/00 p.m.) 14:18-21.
289.There are two sets of minutes for the September 13 partnership meeting in Toronto. One set, DEX 331, was signed and apparently drafted by Mr. Walsh, while the other set, JEX 166, was signed and drafted by Mr. Verhoef. The existence of two sets of minutes appears to arise from confusion over who was the secretary of the meeting, Mr. Walsh or Mr. Verhoef. The sets of minutes are different in only minor respects that have nothing to do with the business that took place at the meeting. The only relatively substantive difference is the fact that Mr. Walsh’s set, DEX 331, do not indicate the amount of the premium paid to Addis-combe. Since there is no dispute that a premium was paid and no evidence that AHP was trying to hide that fact — indeed, the September 3 AHT authorized a premium and the premium was eventually recorded in the books and records of AHP— Mr. Walsh’s mistake or oversight is insignificant. Because Mr. Verhoefs minutes are more complete, the Court finds that his minutes, JEX 166, were the correct minutes for the September 13 partnership meeting in Toronto. Stip. ¶ 105; JEX 166; DEX 331; Walsh Tr. (9/11/00 a.m.) 38:11-43:19; Walsh Tr. (9/11/00 p.m.) 19:6-24:3; Considine Tr. (9/12/00 p.m.) 14:18-21.
290.The premium paid to Addiscombe was negotiated at arms-length at the time of payment between the representative of AHP and AHP 10 and the representative of Addiscombe. Neither the value of Boca’s assets nor the premium payments were agreed to prior to the September 13, 1991 partnership meeting. AHP paid the premium because there were sufficient funds in the partnership to make the acquisition of Genetics Institute and because it would not have to borrow money or take funds out of Puerto Rican tax advantaged investments if it could use Boca assets for the Genetics Institute acquisition. At the time of the buyout, there was no tax benefit involved in AHP’s purchase of Addis-eombe’s interest. JEX 229, at ¶ 13; Con-sidine Tr. (9/12/00 p.m.) 14:18-21; Walsh Tr. (9/11/00 p.m.) 22:9-23:24; Nee Dep. (3/17/98) 226:10-227:2.
291. During the period December 17, 1990 to May 31, 1991, Boca’s net operating income as reflected in its financial statements was $22,344,037. This is reflected in the partnership financial statements for the periods December 17, 1990-December 31, 1990, December 31, 1990-January 31, 1991, January 31, 1991-February 28, 1991, February 28, 1991-March 31, 1991, March 31, 1991-April 30, 1991, and April 30, 1991-May 31, 1991, which are Joint Exhibits 150 through 155. Stip. ¶ 100; JEX 150, JEX 151, JEX 152, JEX 153, JEX 154, JEX 155.
292. Pursuant to Section 4.04(a) of the Partnership Agreement, the operating income was allocated by the partners based on their Partnership Percentages established on December 17, 1990, as follows:
Partnership Percentages Amount
AHP 79.7537365 $17,820,204
AHP 10 8.8733119 1,982,656
Addiscombe 11.3729516 2,541,177
100.0000000 $22,344,037
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This is reflected in the partnership balance sheet as per December 17, 1990, after change in the partnership interest, which is Joint Exhibit 147. Stip. ¶ 101; JEX 147.
293.The partners’ reported capital accounts and Partnership Percentages on May 31,1991, were as follows:
Capital Account Partnership Percentage
AHP $587,756,224 79.7537365
AHP 10 65,393,103 8.8733119
Addiscombe 83,814,544 11.3729516
$736,963,871 100.0000000
These capital accounts reflected the partners’ prior sharing of both operating income and the decrease in value of the LIBOR Notes in accordance with the Partnership Agreement. This is reflected in the financial statements as of May 31, 1991, which is Joint Exhibit 155. Stip. ¶ 102; JEX 155.
294. During the period May 31, 1991 to September 17, 1991, Boca’s net operating income was $13,028,332. This is reflected in the partnership balance sheet as per September 17, 1991, which is Joint Exhibit 161. Stip. ¶ 106; JEX 161.
295. Pursuant to Section 4.04(a) of the Partnership Agreement, the net operating income was allocated among the partners based on their Partnership Percentages established on May 31, 1991, as follows:
Partnership Percentages Amount
AHP 79.7537365 $10,390,581
AHP 10 8.8733119 1,156,045
Addiscombe 11.3729516 1,481,706
100.0000000 $13,028,332
This is reflected in the partnership balance sheet as of September 17, 1991 which is Joint Exhibit 155. Stip. ¶ 107; JEX 155.
296.The reported capital accounts and Partnership Percentages on September 17, 1991, following the distribution, were as follows:
Capital Account Partnership Percentage
AHP $674,903,222 .899880318
AHP 10 75,088,981 .100119682
$749,992,203 100.000000000
This is reflected in the partnership balance sheet as per September 17, 1991, which is Joint Exhibit 161. Stip. ¶ 108; JEX 161. These capital accounts reflected the partners’ prior sharing of both operating income and the decrease in value of the LIBOR Notes in accordance with the Partnership Agreement. Stip. ¶ 109.
297. After buying out Addiscombe, AHP used the funds in the Partnership to purchase a majority interest in Genetics Institute. The purchase price for Boca’s interest in Genetics Institute was $666 million. Since then, the Partnership has acquired 100% of Genetics Institute. Con-sidine Tr. (9/12/00 p.m.) 12:5-13:1; Consi-dine Dep. (3/13/98) 157:21-158:4.
298. Since the buyout of Addiscombe, Boca has continued operating as a partnership with a principal place of business in Curacao. The partners, AHP and AHP 10, share the operating income of the Partnership pursuant to Section 4.04(a) of the Partnership Agreement. The partners’ capital accounts reflect the partners’ sharing of operating income. Boca is still administered by N.V. Fides, which is paid $10,000 a year. The partnership books and records are still audited by Arthur Andersen, Curacao. Each year, the Partnership files a partnership Federal income tax return with the IRS in Philadelphia, Pennsylvania. The Partnership has filed U.S. Federal and state income tax returns as a partnership for each year of its existence. Stip. ¶ 3; PEX 502A; PEX 503-505; Considine Dep. (3/13/98) 11:22-12:8; Nee Tr. (4/12/01) 97:16-98:4.
F. Economic Relationship Among the Partners
299. Based on the preceding findings of fact, the Court finds that: (1) AHP, AHP
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10, Addiscombe, and Syringa all intended to, and did, organize Boca as a partnership to share the income, expenses, gains, and losses from Boca’s investments; (2) Boca was properly formed as a general partnership under New York law, and each of its named partners, including Addiscombe and Syringa, was bound by such law; (3) the written Partnership Agreement was the only agreement between the AHP partners and Addiscombe and Syringa and there were no unwritten agreements, side agreements or commitments between the AHP partners and Addiscombe, Syringa, ABN Bank or ABN Trust; (4) there was no discussion or agreement between the AHP partners or their representatives and Addiscombe, Syringa, ABN Bank, ABN Trust, or their representatives concerning a specified return to Addiscombe or Syrin-ga on their contributions to the Partnership; (5) the Partnership was formed for the purpose of making investments in notes, bonds, debentures, and other interest bearing instruments and sharing the profits and losses therefrom; and (6) all four partners shared the income, expenses, gains, and losses from the Partnership’s assets in accordance with the Partnership Agreement.
See
FOF 61, 62, 79, 112, 117, 118, 207, 213, 215, 221, 243, 244, 259, 354-358.
G. Economic Substance of Plaintiffs’ Transactions
1.
The Expert Witnesses
300. Elizabeth A. Case, an expert witness called by plaintiffs, heads the National Partnership Tax Services Group of PricewaterhouseCoopers LLP, an international accounting firm that provides auditing, tax accounting, and consulting services to a variety of companies. Ms. Case has experience consulting with partnerships on tax accounting rules and maintenance of partnership capital accounts under Section 704(b) of the Internal Revenue Code. Ms. Case is an expert in tax accounting with an emphasis on partnership tax accounting. PEX 720 (direct testimony of Elizabeth Case) at 1-3; Case Tr. (9/14/00 a.m.) 11:13-16.
301. Leslie Rahl, an expert witness called by plaintiffs, is the President of Capital Markets Risk Advisors (“CMRA”), a consulting firm that specializes in risk management and complex capital market transactions. Ms. Rahl has been in the financial services industry for almost 30 years and is recognized
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