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

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The financing charges and transaction fees ultimately reduced the cash-settled payout to
RenTec when it exercised the option on that account to withdraw its profits. Paying those daily
trading and financing costs offer further evidence that the accounts did not operate as the banks’
accounts to hedge the options, but as prime brokerage accounts for RenTec.
Disguising Control. At Deutsche Bank, a representation made by the option holder in
some option confirmations appears to disguise RenTec’s control over the option account.
When RenTec purchased an option, it did not hold the option in its own name, using
instead one of its related entities. For the Deutsche Bank basket options, RenTec used a
Bermuda corporation, named Franconia Equities Ltd., as the official option holder until 2007,
when it replaced the company with a Delaware partnership named Mosel Equities LP. 293
RenTec served as the general partner of the Mosel partnership, and RenTec officials
signed legal documents on behalf of Mosel. According to a recent ruling of the First Circuit
Court of Appeals, under Delaware partnership law, “a partner ‘is an agent of the partnership for
the purpose of its business, purposes or activities,’ and an act of a partner ‘… binds the
partnership.’” 294 Under that ruling and Delaware law, since RenTec was the general partner of
Mosel, it necessarily acted as an agent of Mosel.
At the same time, in the basket option transactions, RenTec served as the investment
advisor for the Deutsche Bank accounts. In that role, RenTec determined what assets would be
placed in the Deutsche Bank account which served as the reference for the option payoff, with
full power to “supervise and direct the investment … of all assets in the [Deutsche Bank]
Account … without prior consultation.” 295
The result was that Mosel, through its agent, RenTec, controlled the selection of assets
for the account of the option seller, Deutsche Bank. However, in the option confirmations
executed as part of the basket option transactions, Mosel represented that it would “not attempt
to direct or influence the choice of investments in the Basket” of assets to be held in the
Deutsche Bank option account. 296 But, as noted above, Mosel did “direct” the choice of
investments through its agent RenTec. The representations made by Mosel in the confirmations
for each transaction were fictions, using the formal structure of the transaction – Mosel’s role as
293 See 5/21/2008 email from Thomas Kerns to Mark Silber of RenTec, “Legal Entity Org Chart Powerpoint,” RT-
PSI-00363679-717, at 681 and 695; Subcommittee interview of Jonathan Mayers, RenTec (5/28/2014).
294 Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, 724 F.3d 129, 146–47
(1 st Cir. 2013) (citing Del. Code. Ann. tit. 6 § 15-301 (West 2000)). Additionally, the option confirmations included
“any investment advisor fees accrued during such period, whether or not actually paid by Seller” as a component of
the “Basket Expenses” that had to be paid from the account profits. 10/8/2009 Deutsche Bank letter agreement with
Mosel Equities L.P., “BARRIER OPTION TRANSACTION—Cash Settled—DBSI Reference No. 941-50310,”
DB-PSI 00000181-209, at 191.
295 12/15/2008 “Master Investment Advisory Agreement,” between Deutsche Bank London and RenTec, DB-PSI
00000001-047, at 001-002.
296 10/8/2009 Deutsche Bank letter agreement with Mosel Equities L.P., “BARRIER OPTION TRANSACTION—
Cash Settled—DBSI Reference No. 941-50310,” DB-PSI 00000181-209, at 201.