Preface: This article was written in collaboration with Gemini, originally written in English.

At the Special Productions, as an options trader, Epstein was able to use options for tax mitigation. In the 1970s, the U.S. tax code was far more rigid but also far more "porous" than it is today. The top marginal tax rate was a staggering 70%, creating a desperate demand among the wealthy for anyone who could lower that number. Jeffrey Epstein's "tax straddle" strategy was the financial equivalent of a magic trick: it allowed clients to keep their money while telling the IRS they had lost it. 

Imagine a client has a $1 million profit from a business deal in 1978. Without Epstein, they owe the IRS $700,000. To avoid this, Epstein would set up a "commodity straddle", as mentioned in the first paragraph, in a volatile market like silver or gold. He would simultaneously buy a contract betting silver goes up (Long) and a contract betting silver goes down (Short). No matter what happened to the price of silver, one side of the trade would lose $1 million while the other gained $1 million. The client’s actual net wealth hadn't changed at all.

This is where the tax avoidance happened. In late December, Epstein would close out (sell) only the losing side. The client now had a "realized loss" of $1 million to show the IRS. This loss wiped out their $1 million business profit, bringing their taxable income to $0. The winning side of the trade remained "open." Under the laws of the time, you didn't have to report profits until you actually sold the asset. So, the $1 million gain stayed off the books as "unrealized." 

On January 1st of the next year, the client still had that $1 million gain sitting in their account. To avoid paying taxes on it in the new year, Epstein would simply "roll" it into a new straddle and repeat the process the following December. By doing this every year, a client could theoretically defer taxes for decades. Often, Epstein would hold the winning side long enough to qualify it as a "long-term capital gain," which was taxed at a much lower rate (around 28%) than ordinary income (70%). He essentially "washed" high-tax income into low-tax income.

At the time, the IRS argued these trades had no "economic substance"—meaning they were done solely for tax reasons and shouldn't be allowed. However, Wall Street argued they were legitimate "hedging strategies" to protect against market risk. Because the laws weren't explicit, many wealthy individuals took the risk, and Epstein was the one bold enough to execute the math for them. 

For this specialty, Epstein’s “Special Products” were high-margin and highly attractive to the bank’s most important clients (the  “whales”). He wasn’t just a trader executing orders, he was a “rainmaker’. He brought in elite clients like the Bronfman family (Seagram) and provided them with these complex services that other departments couldn’t replicate. He successfully convinced the senior partners that he was a genius who could see patterns others couldn’t, which was more or less true, and even when he was caught lying on his resume (claiming he had degrees from NYU and Cooper Union), he turned lies into a strength. He reportedly told the partners he lied because he was so hungry for success and feared his humble background would hold him back. In the “cowboy culture” of Bear Stearns at the time, that kind of audacity was often rewarded rather than punished. 

In 1980, Epstein was named a limited partner at the age of 27. It’s worth-nothing that he wasn’t a general partner, but a limited partner, which meant that instead of running the firm and having unlimited liability, he was a high-ranking employee who was given a stake in the profits. For a 27-year-old in 1980, it was a massive achievement that put him in the top 1% of earners on Wall Street and gave him the “social capital” to start his own firm just a year later. 

Epstein’s  party at Bear Stearns ended with the Economic Recovery Tax Act of 1981 (ERTA). The government introduced the "Mark-to-Market" rule (Section 1256). The law now required traders to treat all open contracts as if they were sold on the last day of the year. You had to pay taxes on your "unrealized" gains immediately. This made Epstein's strategy obsolete. It’s no coincidence that Epstein’s career at Bear Stearns ended in 1981—the very year his primary "product" was made illegal. The same year, he left the firm following an internal investigation and a “Reg D violation”. 

Jeffrey Epstein’s departure from Bear Stearns in 1981 was the result of an internal investigation into several unethical and potentially illegal actions. While he later described his exit as being due to a "Reg D violation" (related to the private placement of securities), internal records and accounts from colleagues reveal a more complex set of reasons. The firm’s compliance department flagged Epstein for several specific activities that ultimately led to him being asked to leave. First, Epstein was found to have made personal loans to colleagues and others that were deemed inappropriate for a partner at the firm. 

The investigation found that Epstein had been issuing unsecured personal loans to various individuals, including his own colleagues and subordinates at Bear Stearns. In the highly regulated environment of a Wall Street partnership, a partner lending money to junior employees or colleagues can create an improper power dynamic. It can be seen as a way to "buy" loyalty, influence internal firm decisions, or bypass the firm's formal compensation and credit structures. He was already starting to create power dynamics and putting juniors in positions of risk so that they’d answer to him, instead of the firm. Many of these loans were made outside of the firm’s official channels, lacking the standard oversight, collateral, and reporting required for financial transactions involving a partner.

For a brokerage firm, maintaining a clear separation between a partner’s personal wealth and the firm's operations is vital. Using personal funds to create financial obligations among staff raised red flags about the transparency and integrity of Epstein’s business dealings. 

At the same time, he was investigated for allegedly providing a girlfriend with tips regarding upcoming stock IPOs, which raised serious regulatory red flags regarding insider trading. He was accused of providing confidential information about upcoming stock offerings to a girlfriend, which touched on potential insider trading concerns.  He was also questioned for charging personal luxury items to company accounts. Epstein himself later claimed his departure was due to a "Reg D violation." Regulation D governs how private companies can sell stock to investors without a full public registration, which was a total understatement of what actually went down at Bear Sterns’ firm. 

When confronted with these findings, Bear Stearns did not initially fire him but issued a suspension and a fine. However, the relationship was effectively broken. Epstein reportedly claimed he was "offended" by the scrutiny and chose to resign. This departure marked the end of his career as a "banker" and the beginning of his career as an independent "money manager." He immediately took the aggressive, high-risk strategies he learned at Bear Stearns and used them to start his own firm, Intercontinental Assets Group (IAG).

(will continue in the next post)