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Under the one-sided swaps, ABN received from Merrill Capital and
Kannex received from ABN a return on this .4402742 percentage
point discrepancy in the capital accounts. When the transaction
cost was subsequently recognized in part and charged to
Southampton's capital account upon the distribution of the BFCE
Notes, the understatement of Kannex's capital account was partly
corrected and the notional principal amount on which the
one-sided swap payment obligations were based was accordingly
reduced. This compensatory arrangement appears to be critical to
an understanding of why ABN agreed to an accounting policy that
caused the partners' capital accounts to misrepresent the agreed
allocation of costs to Kannex's detriment.
An unexecuted version of the one-sided swap between Merrill
and ABN ran for a 5-year period coterminous with the hedge swap.
In the executed agreements, the termination date was December 1,
1990. At the expiration of this term, the one-sided swap between
ABN and Kannex was extended for a second year. There is no
record of any similar extension of the corresponding one-sided
swap between ABN and Merrill.
Through another series of swaps arranged by ABN New York,
Kannex effectively eliminated its risk of loss and opportunity to
gain from allocations of the Yield Component of the Colgate debt.
The counterparty in these swaps was ABN Cayman Islands, but it
was den Baas and others at ABN New York who executed the
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