Case Highlight
STARS Transaction

The United States Court of Federal Claims and the United States Tax Court recently ruled that transactions entered into by BB&T Corporation and Bank of New York (BNY) lacked economic substance, and denied the banks their multi-billion dollar claims. The transactions, called a Structured Trust Advantage Repackaged Securities (STARS), involved a purportedly below market financing from Barclays to BB&T and BNY. The complex structured finance deal required that BB&T and BNY place $6 billion worth of assets into a U.K. trust. BB&T and BNY claimed they owed U.K. and not U.S. taxes and that they were entitled to a foreign tax credit for the associated tax payments.

Brattle’s Role
On behalf of the United States government, Brattle principal Michael Cragg testified over the course of two days on the financial impacts of the transaction, and analyzed the pricing and economics of the loan component of the transaction. Judge Wheeler said that “While all of the experts were helpful to the Court in varying degrees, Dr. Cragg for the Government was the single most helpful expert in providing a comprehensive analysis of the STARS transaction.” Dr. Cragg opined that BNY and BB&T had not paid taxes on the income from the trust assets, and that the transactions lacked economic substance because they did not create an incremental opportunity for economic profits other than the creation of tax benefits.

The Brattle team included principals Michael Cragg, Darrell Chodorow, Evan Cohen, and Mark Sarro; associate Christine Polek; and research analysts David Hutchings and Minal Shankar. The entire team worked closely with the government in all phases of case and trial preparation, including the month long trials in October of 2012 and February of 2013, by developing expert testimony and providing consulting support.

The economic analysis provided by the Brattle economists proved pivotal in the favorable verdicts for the United States government. In the BNY case, Judge Kroupa agreed with Dr. Cragg’s testimony, saying that STARS was “an elaborate series of pre-arranged steps designed as a subterfuge for generating, monetizing and transferring the value of foreign tax credits among the STARS participants.” The Courts further agreed with Dr. Cragg in finding that: the underlying cash flows were circular and had no non-tax economic effect; the income from the $6 billion in assets did not generate incremental benefits in the STARS transaction; the financing was not low cost; and the critical cash flow in STARS, the return of a portion of the tax benefits paid through Barclays to BNY, was an after-tax cash flow and should not be included as part of the pre-tax economics of the transaction to BNY. The court said that “Mr. Cragg concluded more generally that it would have been economically irrational for BNY to enter into [STARS] without the foreign tax credits BNY derived from it. Accordingly, we find that [STARS] lacks economic substance.” In his Order, Judge Wheeler said that “After wading through the intricacies of the STARS transaction, the Court shares Dr. Cragg’s view that “[t]he human effort, the amount of creativity and overall effort that was put into this transaction . . . is a waste of human potential.”

Additional Information
The opinions in these two matters are available below:

Salem Financial, Inc. v. United States

Bank of New York Mellon Corporation, As Successor in Interest to the Bank of New York Company, Inc. v. Commissioner of Internal Revenue

Experts Involved
Chodorow 075
Darrell Chodorow has more than 15 years of consulting experience in commercial damages, valuation, and tax matters. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Cohen photo search
Mr. Cohen specializes in financial modeling and valuation, with a focus on complex business litigation. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Principal & Chairman
(Boston) +1.617.234.5721
(Toronto) +1.416.360.4849
Dr. Cragg has extensive consulting, research, and expert witness experience in corporate finance, financial services, and valuation. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Sarro 061
Dr. Sarro is principal and director of The Brattle Group, and a leader of its practice in cases involving “big data” and document analytics. He is a financial and empirical economist who is the lead consulting expert to investigative and trial teams in complex investigations and high-stakes litigation. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Polek 083
Senior Associate
Dr. Christine Polek has over ten years of professional experience in the expert witness consulting industry. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4