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The Morning Brief: Senate Finance Chair Picks Tax Fight With Funds

Senate Finance Committee Chairman Ron Wyden is calling for a crackdown on a tax-avoidance strategy used by hedge funds. In a letter fired off to the Obama administration, the Oregon Democrat questions the use of an insurance company in tax havens to reduce tax bills on some investment gains.

“The department and the IRS have been aware of this loophole for over a decade” and “appear to have made no progress in ending this kind of tax abuse,” Wyden said in a June 12 letter, according to a Bloomberg BusinessWeek report. Investors in hedge funds that trade frequently pay ordinary income tax rates, which top out at 39.6 percent, on their gains. However, Wyden points out that a number of managers have concocted a way of deferring the gains and paying the much lower long-term capital gains rate by investing in a fund indirectly through an insurance company domiciled in one of those tax haven countries, like Bermuda.

The report points out that in 2012, top executives at John Paulson’s Paulson & Co. put $450 million of their own money into Pacre Ltd., a newly-created Bermuda reinsurer with no employees and a low volume of reinsurance business. Virtually all its assets were invested in Paulson & Co.’s hedge funds. Other noted hedge fund managers who have created reinsurance businesses in recent years include Daniel Loeb’s Third Point and David Einhorn’s Greenlight Capital.

Shares of Micros Systems surged 15 percent on reports that Oracle Corp. may acquire the software maker for more than $5 billion. Micros is one among 14 holdings of Jeffrey Ubben’s ValueAct Capital, which in the first quarter slashed its position by two-thirds.

Daniel Och’s Och-Ziff Capital Management is one among roughly 18 investors in Citic Pacific, a Hong Kong conglomerate that recently bought $37 billion in Chinese mainland assets from Citic Group, the government-controlled company that owns 58 percent of Citic Pacific, according to the Financial Times. Other investors along with Och-Ziff include Bain Capital and Temasek, the Singapore government’s investment company. Citic Pacific’s so-called anchor shareholders do not have lock-ups. Och-Ziff is said to be investing $50 million.

Separately, Och Ziff’s OZ Management hedge fund established a new passive stake of more than 9 million shares, or 5.22 percent, of Cheetah Mobile, Inc., a security software maker. The New York–based hedge fund firm also said it raised its stake in Quinpario Acquisition Corporation by roughly one-third, to more than 1.27 million shares, or 5.17 percent of the blank check company that plans to invest in the specialty chemicals and performance materials sectors.

Citadel on Tuesday reported passive stakes exceeding 5 percent in two different companies. It now owns more than 3.4 million shares of Spansion Inc., or 5.7 percent of the maker of flash memory products. This is roughly triple Citadel’s stake at the end of the first quarter. Chicago-based Citadel also reported owning more than 7 million shares, or 5.5 percent, of Rice Energy, an oil and gas exploration and production company. At the end of the first quarter, it owned about 4.8 million shares and a small number of call and put options.

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