WASHINGTON (MarketWatch) — Hedge fund Renaissance Technologies used structured financial products purchased from Barclays and Deutsche Bank to avoid more than $6 billion in taxes, a pair of senators said Monday.

Sens. Carl Levin and John McCain, respectively the chairman and ranking Republican of the Senate Permanent Subcommittee on Investigations, released a 93-page report detailing the sale and use of so-called basket options ahead of a hearing with company executives on Tuesday.

The report covers sales of options to more than a dozen hedge funds but focuses on what it calls two of the largest users of the product, Renaissance and George Weiss Associates. The banks and hedge funds also evaded federal leverage limits through the transactions, the report said.

Briefing reporters on Monday, Levin said the subcommittee is not alleging illegal behavior by the banks or hedge funds. “We never reach those kind of judgments,” he said. Levin said the subcommittee presents facts and leaves it up to regulators and prosecutors to determine if any laws have been broken.

But Levin and McCain both said the use of so-called basket options deprived the Treasury and was unfair to U.S. taxpayers.

“These banks and hedge funds used dubious structured financial products in a giant game of ‘let’s pretend,’ costing the Treasury billions and bypassing safeguards that protect the economy from excessive bank lending for stock speculation,” Levin said.

McCain said hedge funds “cannot be allowed to have an unfair tax advantage over ordinary citizens.”

The report said the banks and hedge funds used the basket option structure to open trading accounts in the banks’ names, creating the “fiction” that banks owned the account assets. But in fact the hedge funds exercised total control over the assets and executed all the trades. The funds often exercised the options shortly after the one-year mark and claimed profits were eligible for the lower income tax rate.

In Renaissance Technologies’ case, the subcommittee said using basket options to treat short-term gains as long-term gains allowed the hedge fund to avoid more than $6 billion in taxes between 2000 and 2013. The subcommittee did not give an estimate for George Weiss Associates.

Jonathan Gasthalter, a spokesman for Renaissance Technologies, said in an emailed statement that the fund believes it followed tax laws.

“We believe that the tax treatment for the option transactions being reviewing by the [subcommittee] is appropriate under current law,” he said. “These options provide Renaissance with substantial business benefits regardless of their duration.” Renaissance has cooperated fully with an Internal Revenue Service review of the transactions, he added.

Deutsche Bank DB, -1.62% spokeswoman Renee Calabro said the options offered by the bank “were at all times fully compliant with applicable laws, regulations and guidance.”

Deutsche Bank stopped offering basket options in 2010. Barclays stopped offering them in 2013.

Barclays BCS, -3.27% didn’t immediately return a request for comment. Stephen Labaton, a spokesman for George Weiss Associates, said the company acquired basket options years ago and terminated them by May 2010 “because of increasing market volatility, lessening the need for greater leverage.” He said basket options are “lawful financial instruments” that are often used to obtain leverage and added the company wasn’t asked to testify.

The subcommittee’s report makes a number of recommendations, including Internal Revenue Service audits and collection of related unpaid taxes from hedge funds that used Deutsche Bank or Barclays basket options. Regulators should also intensify scrutiny and take legal action against banks involved with abusive tax structures, the report said.

Peter Brown, co-CEO of Renaissance Technologies, will testify at Tuesday’s hearing, as will Gerard LaRocca, chief administrative officer for the Americas at Barclays. Barry Bausano, president of Deutsche Bank Securities Inc., will also testify.

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