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

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protection. 357 He explained that it also made sense to be able to journal from a business
perspective because, under the new MAPS structure, Deutsche was charging RenTec an “upfront
20% of the premium as prepaid financing,” incentivizing RenTec to start with high leverage
because they were already paying for it. 358
RenTec used the journal process frequently to transfer positions between Deutsche Bank
subaccounts when a new option was opened or an older option was exercised. 359 At the
Subcommittee’s request, RenTec provided a listing of journal entries it had made in preparation
for the exercise of an option or the initiation of a new option. The list shows that, after 2008,
journaling was used to transfer assets at all but one European style option at Deutsche Bank. 360
The list also indicates that the journals were used to transfer between 14% and 100% of the
assets in a particular option subaccount. 361 Of the ten journals RenTec identified for the
Subcommittee as undertaken in anticipation of an option exercise, two transferred 100% of the
assets in the option that was about to be exercised, and two more transferred 99% of the assets in
the option about to be exercised. 362 The average value of each of those ten journal entries
represented over $800 million in positions, and RenTec used those journals to transfer those
positions to other option subaccounts it controlled, before exercising the options that referenced
those positions. 363 The data indicates that RenTec also used journals at other points in the life of
an option contract: many were done just prior to exercise, but a few journals transferred assets
more than three months prior to the exercise of the option from which they were journaled. 364 In
2011, RenTec conducted a pair of journals after an option had already been exercised but prior to
its final valuation. 365
A 2008 RenTec email also noted that the process could be used to “reshuffle” assets
among options at the end of a trading day. As James Rowen, RenTec’s COO stated in an email
to another RenTec executive: “[T]here is no prohibition against end-of-day transfers in our new
MAPS documentation. We may reshuffle the constituents of the underlying options at the end of
the day, at the current closing price.” 366 Mr. Rowen also advised in the email that Mark Silber,
RenTec’s legal and compliance head, was involved in the planning to keep the reshuffling
“manageable” and “below the radar of DB.” 367 When asked about his email, Dr. Brown told the
Subcommittee that RenTec did not actually make any journal entries simply to reshuffle assets
357 Subcommittee interview of Peter Brown, RenTec (6/4/2014).
358 Id.
359 See 7/31/13 letter from RenTec to the Subcommittee listing journaling transfers between subaccounts, RT-PSI-
00384749-761.
360 See 8/30/2013 chart, “Journal Entry Dates,” prepared by RenTec for the Subcommittee, RT-PSI-00384762.
361 7/31/2013 letter from RenTec to the Subcommittee describing journaling between sub-accounts, RT-PSI-
00384749.
362 Id.
363 Statistics prepared by Subcommittee from data taken from 8/30/2013 chart, “Journal Entry Dates,” prepared by
RenTec for the Subcommittee, RT-PSI-00384762.
364 Id.
365 Id.
366 9/10/2008 email from James Rowen to Peter Brown of RenTec, “Re-shuffle- Follow-up,” RT-PSI-00068362. See
also “Deutsche Bank Maps: New Process/Procedures As of May 15, 2008,” prepared by RenTec, RT-PSI-
00002319-322, at 321.
367 9/10/2008 email from James Rowen to Peter Brown of RenTec, “Re-shuffle- Follow-up,” RT-PSI-00068362.