- 11 -
option or any other closing transactions with respect
thereto, should be treated for tax purposes as ordinary
gain or loss.
In practice, Merit's trades were placed by "investment
advisers", a few individuals who traded for their own accounts or
as advisers for certain of their customers. These included, inter
alia, Dr. Richartz, Chris Carabini (for Monex Corp.; see supra
note 1), Edward Seykota, Donald Haberlein, and Albert Alessandra.
In 1979, Merit's personnel designed a computer system with
connections to the trading advisers' offices. Merit developed and
made available to its customers or their advisers computer programs
to assist them in analyzing possible positions. Merit's computer
system enabled it to keep accurate track of the daily trades and
margin requirements, as well as a record of its customers' realized
and unrealized gains and losses. The computer system enabled
advisers and customers to analyze their trading positions and to
show the income tax consequences of the possible trading positions.
Merit's computers could also be used to develop new programs.
Merit required an initial margin deposit of $25,000 upon
opening an account. It also required customers to deposit
sufficient funds as a "maintenance margin".
(4) Actual Initiation of Trades
(a) T-bill Transactions
A trade on the Merit markets began when an investment advisor
would contact Merit employees to seek a certain trading position
for himself or his customers. The parties would discuss the
interest rate to be used in pricing their options and, if before 11
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