ABUSE OF STRUCTURED FINANCIAL PRODUCTS- Misusing Basket Options to Avoid Taxes and Leverage Limits MAJORITY AND MINORITY STAFF REPORT

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26 III. BASKET OPTION CASE STUDIES The financial institutions that most extensively promoted and used the basket option structure from 1998 to 2013, were Deutsche Bank, Barclays, and hedge funds RenTec and George Weiss. The Subcommittee’s case studies involving their actions illustrate how basket options have been used to circumvent taxes and federal leverage limits. A. Basket Option Participants (1) Deutsche Bank Deutsche Bank AG (“Deutsche Bank”) was founded in 1870 and is headquartered in Frankfurt, Germany. 98 Deutsche Bank is the largest bank in Germany and one of the largest financial institutions in the world. 99 It had total assets of over $2.2 trillion as of December 31, 2013. 100 As of December 31, 2012, Deutsche Bank employed about 100,000 people on a fulltime basis and operated over 3,000 branches worldwide in 72 countries, with nearly 50% of its employees located in Germany. 101 Deutsche Bank is a global investment bank and offers a wide variety of investment, financial, and related products and services to private individuals, corporate entities, and institutional clients around the world. Deutsche Bank has offices in major centers including London and New York City. 102 It has eight major entities in the United States. 103 Deutsche Bank AG New York Branch deals with derivatives trading and standard deposit and currency transactions; the New York Branch, along with almost all other U.S. entities, is Deutsche Bank AG’s subsidiary. 104 Other subsidiaries include Deutsche Bank Securities Inc., a SEC-registered broker dealer and investment advisor, and Deutsche Bank Trust Corporation, a bank holding company. 105 Deutsche Bank offers financial products and services for corporate and institutional clients along with business and high net worth clients. 106 Services include global banking; corporate finance; sales, trading and structuring of financial products; mergers and acquisitions; and investment and wealth management. 107 98 “Chronicle –from 1870 until today,” prepared by Deutsche Bank, at 2, 8, https://www.db.com/en/media/Deutsche- Bank-History--Chronicle-from-1870-until-today.pdf. See also “Addresses,” prepared by Deutsche Bank, https://www.db.com/en/content/Addresses.htm. 99 “Annual Financial Statements and Management Report of Deutsche Bank AG 2012,” prepared by Deutsche Bank, at 2, https://agm.db.com/en/docs/Annual_Financial_Statements_and_Management_Report_Deutsche_Bank_ AG_2012.pdf. 100 “Deutsche Bank AG (DB) Balance Sheet,” Yahoo Finance, http://finance.yahoo.com/q/bs?s=DB&annual. 101 5/2013 “Deutsche Bank at a Glance,” prepared by Deutsche Bank, at 9, 12, https://www.db.com/medien/en/downloads/Deutsche_Bank_at_a_glance.pdf. 102 10/31/2013 “Deutsche Bank Resolution Plan,” prepared by Deutsche Bank, at 20, http://www.fdic.gov/regulations/reform/resplans/plans/deutschebank-165-1310.pdf. 103 Id. at 5-9. 104 Id. 105 Id. at 5-6. 106 5/2013 “Deutsche Bank at a Glance,” prepared by Deutsche Bank, at 4, 8, https://www.db.com/medien/en/downloads/Deutsche_Bank_at_a_glance.pdf. 107 Id.
27 Jürgen Fitschen and Anshu Jain are the current co-Chief Executive Officers of Deutsche Bank and were appointed to those positions in 2011. 108 Mr. Jain was previously head of Deutsche Bank’s investment banking group. 109 In the United States, Jacques Brand has been the Chief Executive Officer of Deutsche Bank in North America since 2012. 110 He was previously the Global Head of Investment Banking Coverage & Advisory in Deutsche Bank’s Corporate Banking & Securities division. 111 Deutsche Bank Non-Prosecution Agreement. About ten years ago, Deutsche Bank became the subject of a series of investigations focused on its participation in abusive tax shelters from 1996 through 2002, which aided and abetted evasion of an estimated $5.9 billion in U.S. income taxes. 112 On December 21, 2010, Deutsche Bank and the U.S. Attorney for the Southern District of New York executed a non-prosecution agreement (NPA) related to the bank’s involvement with the abusive tax shelters. 113 Under the agreement, the bank paid more than $550 million to the United States, 114 and the U.S. Attorney and the U.S. Department of Justice (DOJ) agreed not to prosecute Deutsche Bank criminally for participating in abusive tax shelters benefiting its clients from 1997 to 2005, provided the bank meet certain requirements. 115 Those requirements included Deutsche Bank’s continued cooperation with the DOJ in its tax shelter prosecutions, and appointment of an independent expert to oversee bank reforms to ensure the bank stopped participating in transactions used to defraud the IRS. 116 The NPA also banned Deutsche Bank's involvement with any pre-packaged tax products, which were the type of tax shelters that led to the criminal proceedings. 117 Bart Schwartz was selected to serve as the independent expert to monitor Deutsche Bank’s actions. 118 In that position, Mr. Schwartz was responsible for evaluating the implementation and effectiveness of the bank’s compliance 108 “Deutsche Bank Names Co-C.E.O.’s to Succeed Ackermann,” The New York Times, Jack Ewing (7/25/2011), http://dealbook.nytimes.com/2011/07/25/deutsche-bank-taps-co-ceos-to-replace-ackermann/. 109 Id. 110 11/1/2012 “Deutsche Bank appoints Jacques Brand and Bill Woodley as CEO and Deputy CEO of North America,” prepared by Deutsche Bank, https://www.db.com/medien/en/content/3862_4221.htm. 111 Id. 112 12/21/2010 letter from Preet Bharara, United States Attorney, to Deutsche Bank’s outside counsel, “Deutsche Bank AG – Non-Prosecution Agreement,” at 1, http://www.gibsondunn.com/publications/Documents/DeutscheNPA.pdf. See also “U.S Tax Shelter Industry: The Role of Accountants, Lawyers, and Financial Professionals,” U.S. Senate Permanent Subcommittee on Investigations, S. Hrg. 108-473 (Nov. 18 and 20, 2003). 113 12/21/2010 letter from Preet Bharara, United States Attorney, to Deutsche Bank’s outside counsel, “Deutsche Bank AG – Non-Prosecution Agreement,” at 1, http://www.gibsondunn.com/publications/Documents/DeutscheNPA.pdf. 114 The $553,633,153 payment represented the fees Deutsche Bank earned from its participation in the tax shelter activity, the amount of taxes and interest the IRS was unable to collect from the taxpayers because of Deutsche Bank’s activity, and a civil penalty of more than $149 million. 12/21/2010 “Deutsche Bank to Pay More Than $550 Million to Resolve Federal Tax Shelter Fraud Investigation,” U.S. Attorney for the Southern District of New York Press Release, at 1, http://www.justice.gov/tax/usaopress/2010/deutschebankpr.pdf. 115 12/21/2010 letter from Preet Bharara, United States Attorney, to Deutsche Bank’s outside counsel, “Deutsche Bank AG – Non-Prosecution Agreement,” at 1-6, http://www.gibsondunn.com/publications/Documents/DeutscheNPA.pdf. 116 12/21/2010 “Deutsche Bank to Pay More Than $550 Million to Resolve Federal Tax Shelter Fraud Investigation,” U.S. Attorney for the Southern District of New York Press Release, at 1, http://www.justice.gov/tax/usaopress/2010/deutschebankpr.pdf. 117 Id. 118 Id. at 2.
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Page 13 and 14: 9 II. BACKGROUND This chapter provi
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Page 19 and 20: 15 Since the hedge fund’s gain or
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Page 25 and 26: 21 The abusive derivatives used pri
Page 27 and 28: 23 over form doctrine is that the t
Page 29: 25 securities in the basket. 95 It
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Page 35 and 36: 31 Financial Officer, Chief Complia
Page 37 and 38: 33 as U.S. persons, among other typ
Page 39 and 40: 35 which was initially designed by
Page 41 and 42: 37 Barclays COLT Options. In 2002,
Page 43 and 44: 39 C. Development of MAPS and COLT
Page 45 and 46: 41 the trades were placed and execu
Page 47 and 48: 43 option accounts. 254 In other wo
Page 49 and 50: 45 Because the investment advisor,
Page 51 and 52: 47 changed the formula used to calc
Page 53 and 54: 49 D. Analysis of Basket Option Cas
Page 55 and 56: 51 of its investment portfolio betw
Page 57 and 58: 53 The financing charges and transa
Page 59 and 60: 55 Removing Palomino, a shell corpo
Page 61 and 62: 57 • RenTec is effectively entitl
Page 63 and 64: 59 Barclays’ SEC filing also incl
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Page 67 and 68: 63 (ii) Constantly Changing Asset M
Page 69 and 70: 65 selection was at the discretion
Page 71 and 72: 67 Percentage Allocations. Because
Page 73 and 74: 69 protection. 357 He explained tha
Page 75 and 76: 71 The technique that RenTec used w
Page 77 and 78: 73 In addition to moving assets fro
Page 79 and 80: 75 (a) Facilitating Tax Avoidance B
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77 Mr. Haas’ description of the 2
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79 legal opinion from outside couns
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81 available to Renaissance pursuan
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83 as their hedge fund clients - th
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85 continuing with the Option Trans
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87 Within the bank, some executives
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89 Attempts to Develop New Structur
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91 IV. SYSTEMIC CONCERNS In its Gen
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93 as publicly traded partnerships,
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ABUSE OF STRUCTURED FINANCIAL PRODUCTS- Misusing Basket Options to Avoid Taxes and Leverage Limits MAJORITY AND MINORITY STAFF REPORT

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