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

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the official option holder – to disguise RenTec’s control over the option holder as well as the
option’s trading activity. 297
Fronting for the Hedge Fund. Not every Deutsche Bank affiliate felt comfortable using
MAPS options. According to one Deutsche Bank employee, the bank’s U.K. affiliate declined
due to concerns that the MAPS structure involved the bank “fronting” for a hedge fund that was
actually “actively trading” the assets in the option account. 298
In a May 2008 email exchange involving Adrienne Browning, a Deutsche Bank tax
counsel who was located in the United States and was handling the MAPS issue, and Steven
Purvis, a Deutsche Bank colleague located in the United Kingdom, Ms. Browning asked if he
remembered the rationale for Deutsche Bank UK deciding not to move ahead with a MAPS
option that sounded very similar to the MAPS options used by RenTec. Ms. Browning wrote:
“Do you remember … What the analysis was for the following proposal: a MAPS
(managed account) option, where the underlying assets were CFDs [Contract for
Differences, a contract similar to a Total Return Swap] traded by DBL/UK. DBL would
hire an investment advisor to trade the account, the assets of which are CFDs, and write
an option on the account to a hedge fund. It is my understanding that we didn’t do the
trade due to UK regulatory/tax restrictions. Do you recall the rationale?” 299
Mr. Purvis responded:
“[W]hat you described faced some general objection where DB could be argued to have
been effectively fronting for an unregulated fund, i.e., trading carried ostensibly in the
name of DB as counterparty but the reality being that a third party fund was (a) actively
trading and (b) DB on limited risk and (c) manager only partially subject to DB oversight.
Not thought to be a good idea then and following the Soc. Gen. fiasco I imagine there
would be even more twitching now.” 300
(ii) Informing Auditor of RenTec Control
At Barclays, some of the clearest and most direct evidence that RenTec controlled the
COLT option accounts and bore the related rewards and risks from the trading in those accounts
was Barclays’ decision to remove the account assets from its balance sheet. Barclays carried out
its decision by removing from its balance sheet the special purpose entity it had established,
called Palomino Ltd., to hold the COLT basket option accounts on behalf of the bank.
297 Franconia Equities Ltd. made a similar representation in earlier MAPS options, stating that “the Buyer [of the
option, Franconia] agrees that it shall not contact directly the Investment Advisor regarding the terms or subject
matter of this Transaction.” 3/14/2002 “’OUTPERFORMANCE’ BARRIER OPTION TRANSACTION – Cash
Settled, Linear Amortizing Premium – DBSI Reference No. 1244131,” DB_PSI 00123196-208, at 206. Since
Franconia was a shell corporation under RenTec’s control, its statement that it would not contact the Investment
Advisor – RenTec – does not seem possible. Like the Mosel representation, it was a fiction disguising RenTec’s
control over the option holder as well as the option’s trading activity.
298 2/5/2008 email from Adrienne Browning, Deutsche Bank, to Steven Purvis, Deutsche Bank, “do you
remember…….,” RT-PSI-00062957-959, at 959.
299 Id.
300 2/5/2008 email from Steven Purvis, Deutsche Bank, to Adrienne Browning, Deutsche Bank, “do you
remember…….,” RT-PSI-00062957-959, at 958.