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

74
collateral. 386 Mr. Doucette noted that founder, George Weiss, had enough funds personally to
cover the borrowed funds. 387
When Deutsche Bank restructured the MAPS option in 2008, it indicated to George
Weiss that it wanted to limit or remove the ability to use the options as collateral in other
transactions. 388 During negotiations over a proposed term sheet for the restructured MAPS
option, a George Weiss employee noted in an email: “As the draft is written, the failure to fund
the collateral does not trigger our ability to terminate the IMA [Investment Management
Agreement] and the option. In our view it should .…” 389 In another email to Deutsche Bank,
George Weiss noted that the lack of cross-collateralization could reduce George Weiss’ MAPS
investments by as much as 60%, because the hedge fund would have to find additional liquidity
structures elsewhere to finance its business operations. 390 When Deutsche Bank declined to
allow the restructured MAPS option accounts to be used as collateral in other financial
transactions, it contributed to the decision of George Weiss to discontinue its involvement with
MAPS. 391
Mr. Doucette told the Subcommittee that Deutsche Bank indicated that it was
restructuring MAPS, in part, because of tax concerns. 392 He further noted that, because of the
increased costs associated with the new structure, George Weiss declined to use it and, instead,
decided to use its own prime brokerage accounts to execute the same trading strategies. 393
(3) Claiming a Business Purpose
Deutsche Bank, Barclays, George Weiss and RenTec all claimed that the motivation for
using basket options was that it offered increased leverage to the option buyer as well as
downside loss protection which was capped at the initial premium. They all claimed that tax
avoidance was not a key motivator for the transactions. 394 Other evidence shows, however, that
tax avoidance was a key aspect motivating the basket option structure. In addition, as indicated
earlier, SEC examination reports determined that basket options appear to have enabled a
handful of hedge funds, in less than five years, to avoid paying taxes totaling an estimated $915
million, while other data suggests that total tax avoidance could exceed $6 billion.
386 Id.
387 Id.
388 See, e.g., 10/26/2009 email from Jeffrey Dillabough, GWA, to Frank Nelson, Deutsche Bank, “DB/Weiss MAPS
option,” DB-PSI-00036700 (indicating that under the new structure, cross-collateralization would be limited to 25%
of the option value).
389 8/16/2010 email from Jeffrey Dillabough, GWA, to Peter Brophy and Frank Nelson, Deutsche Bank, “RE: New
MAPs Term Sheet,” GWALLC-PSI-0009484.
390 2/26/2009 email from Federick Doucette, GWA, to Frank Nelson, Deutsche Bank, “MAPS comments,” DB-PSI-
00033762, at 763-764 (listing George Weiss concerns with proposed new MAPS structure).
391 2/25/2009 email from Federick Doucette, GWA, to Frank Nelson, Deutsche Bank, “MAPs comments,” DB-PSI-
00033762-765, at 763.
392 Subcommittee interview of Frederick Doucette, GWA (5/23/2014).
393 Id.
394 Subcommittee interviews of Peter Brown, RenTec (6/3/2014), Mark Silber, RenTec (6/10/2014); and James
Rowen, RenTec (5/20/2014); 6/30/2014 briefing by Deutsche Bank attorneys to the Subcommittee; Subcommittee
interview of Frederick Doucette, GWA (5/23/2014).