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BOCA INVESTERINGS PARTNERSHIP v. U.S.
October 5, 2001
BOCA INVESTERINGS PARTNERSHIP, ET AL., PLAINTIFFS,
THE UNITED STATES OF AMERICA, DEFENDANT.
The opinion of the court was delivered by: Paul L. Friedman, District Judge.
OPINION, FINDINGS OF FACT AND CONCLUSIONS OF LAW
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
President, 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
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 Sumitomo 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; Macauley 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
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. Matthei'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.
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, 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, overthe-counter medicines, medical
instruments, foods, and household products.
During this time frame, AHP typically invested excess funds in
interest-bearing instruments. Stip. ¶ 7.*fn1
2. AHP is the tax matters partner of Boca under Section
6237(a)(7) of the Internal Revenue Code. Stip. ¶ 8.
3. 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)
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.
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; Considine 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.) 12:2113:12; 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.) 12:2114:4;
Kofol Tr. (6/21/00 a.m.) 26:19-28:5; Nee Tr. (6/20/00 a.m.)
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.
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.) 15:2216:8.
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 Puerto 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
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. Considine 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;
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
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. Considine 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.
Considine Tr. (9/12/00 a.m.) 14:5-17; Nee Tr. (6/20/00 a.m.)
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
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.
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, 21:2422:5; 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; Considine 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. Considine Dep. (4/12/99)
31:25-32:5; Nee Tr. (6/20/00 a.m.) 51:18-54:14; Nee Tr.
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
& 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) 22:1123:9; 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 1989
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.) 15:516:15, 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. Zakaria Dep. (5/8/98)
12:15-13:9, 25:7-26:3; Das Tr. (9/13/00 a.m.) 15:25-16:4;
Considine 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.
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.) 23:616 (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.
Matthei 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;
51. Soon thereafter, Messrs. Das, Zakaria 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; Considine Tr. (9/12/00
a.m.) 24:25-25:10, 27:2528:13; 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) 30:2031:6.
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
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.)
5:98:11, 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.)
16:1617:3, 18:4-21:25; Merrill Lynch 30(b)(6) Dep. (Das 3/10/98)
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.) 38:23-41:15; 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
(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
(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.
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.
58. After the initial meeting, Mr. Considine and Mr. Nee
decided they would continue to look at and further consider the
Merrill Lynch partnership proposal. Considine Dep. (3/13/98)
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.
Considine, 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.
Considine 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.) 16:2217:23; 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; Kofol Tr.
(6/21/00 a.m.) 31:6-32:3.
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,
53:1554:1; 58:1-5; Kofol Tr. (6/21/00 a.m.) 36:16-37:12; Nee Tr.
(6/20/00 p.m.) 29:1821, 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; Considine 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)
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.
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.)
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) 65:266:24; Considine Dep. (4/12/99)
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; Considine Tr. (9/12/00 a.m.) 61:19-62:13; Das Tr. (9/13/00
d. Risks Associated With and Timing and Review of Potential
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,
73. Defendant argues that an April 10, 1990 memorandum from
Mr. den Baas to G. Stroomer, see DEX 121A at Boca 437438, 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.C. 2000).*fn3 Since Exhibit 91
was excluded, testimony about
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, 60:416; Considine Dep. (4/12/99) 26:22-25,
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.*fn4
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.
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.) 27:1428:14, 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.) 36:1214; Kofol Tr. (6/21/00
a.m.) 37:20-38:2; Blount Dep. (4/28/00) 60:15-20.
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;
Considine 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
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;
Kofol Tr. (6/21/00 a.m.) 35:18-36:15; Nee Tr. (6/20/00 p.m.)
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.) 35:1836:11; 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.) 34:1625.
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; Considine Tr. (9/12/00
a.m.) 26:5-13, 37:22-38:6, 52:2-53:2; Considine Dep. (4/12/99)
26:2225, 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)
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,
74:2275:16; Nee Tr. (6/20/00 a.m.) 41:16-42:2; Nee Tr. (6/20/00
p.m.) 27:24-28:14, 34:2025; 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. ¶
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
management 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.
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 Addiscombe'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)
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)
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 Addiscombe. In this role, he and Robert
Verhoef 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 138139; 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.
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.)
43:2544:4; 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.
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 Matthei.*fn5 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; Considine 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, 166:16167:10,
169:15-20, 170:9-15, 170:21-171:7; Das Tr. (9/13/00 a.m.)
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. Matthei'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) 91:993:5 (Matthei admitting
that "I lied in a
sworn certification . . . which was filed 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.) 40:1641:25; 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.) 40:1641:25, 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; (iii) 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; Considine Tr. (9/12/00 a.m.)
45:12-46:8; Nee Tr. (6/20/00 p.m.) 44:10-24, 52:1-53:7, 53:1421;
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 Syringa 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, Toomey & 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) 9:1710:9; 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)
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) 77:2378:21, 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 Syringa. 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
for several reasons. See Trial Tr. (1/25/01) 81:11-17
(admitting memorandum primarily for background purposes); Order
of Jan. 30, 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.*fn6
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)
193:2-17; JEX 229, at ¶ 12.
114. There was no discussion or agreement among the AHP
partners, Addiscombe 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 Addiscombe 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
117. Boca was formed as a general partnership under New York
law, and each of its four named partners, including Addiscombe
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. (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)
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
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 P1 or higher and a Standard and Poor's rating of A-1,
U.S. Government backed obligations, U.S. Federal agency
securities, and municipal tax exempt notes. JEX 4, at Sch. A;
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 138139; 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,
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 unrecovered
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) 160:12161:11. 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.)
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.
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; FOF 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)
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 Addiscombe 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.)
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 Committee. 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
interests. Kofol Tr. (6/21/00 a.m.) 38:2239:6.
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 Cravath, 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.*fn7
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 one-time put after 13 months to 2 1/2 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; Considine Tr. (9/12/00
a.m.) 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 7993. 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.
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) 168:1316; den Baas Dep. (4/6/00)
150. AHP, AHP 10, Syringa and Addiscombe made the following
capital contributions in exchange for the following partnership
AHP 9% $135,000,000
AHP 10 1% 15,000,000
Syringa 83% 1,245,000,000
Addiscombe 7% 105,000,000
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 Addiscombe'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
Addiscombe 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. Addiscombe 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.
E. Boca's Investments and Transactions
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;
Kofol Tr. (6/21/00 a.m.) 47:3-48:15, 49:6-15; Merrill Lynch
30(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 Addiscombe's Partnership
Percentages were greater than 50 percent, the Partnership
Agreement provided that Syringa and Addiscombe 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)
157:19159:12; 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 Addiscombe 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. Considine 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
Norinchukin 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
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 561-563; 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
PepsiCo) 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.
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 Addiscombe 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)
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 Addiscombe that AHP would make up any loss to
Syringa and Addiscombe on the PPNs or on other investments.
Syringa and Addiscombe were liable for any default loss up to
$1.35 billion. Stip. ¶ 43; JEX 3, at § 4.40(d); Kofol ...