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

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George Weiss told the Subcommittee that Deutsche Bank personnel also told its
representatives that tax considerations drove a number of the 2008 changes to the MAPS
structure. 409 George Weiss CEO Frederick Doucette stated that, when the hedge fund entered
into negotiations with Deutsche Bank over the MAPS restructuring, Deutsche Bank had
explained that most of the new provisions in the option were necessary “for tax purposes.” 410 At
another point during the negotiations, George Weiss raised concerns that a 2009 codification of
the economic substance doctrine by Congress could pose a problem for the structure, noting in an
email that the codification “could have serious implications with respect to the DB option
transaction.” 411
During the negotiations on the MAPS restructuring, RenTec also appeared to insist on
certain features for tax reasons. For example, on a telephone call with Deutsche Bank personnel
who were discussing the possibility of lowering the available leverage offered by the MAPS
options, RenTec’scounsel Jonathan Mayers explained that a high initial leverage was a
requirement for the structure by RenTec counsel. 412 Presumably, RenTec viewed the provision
of high leverage levels as a defensible business justification for MAPS and wanted to be able to
point to that feature aside from the option’s tax benefits.
Together, the statements made by Barclays, Deutche Bank, George Weiss, and RenTec
personnel provide strong evidence that tax considerations were a key driver in the original
development and later restructuring of the basket options.
Delayed Disclosure of the Basket Options to DOJ. In 2010, as described above, after
being caught participating in a number of abusive tax shelters, Deustche Bank entered into a
Non-Prosecution Agreement (NPA) with the Department of Justice (DOJ) promising to stop
“participat[ing] in and implement[ing] fraudulent tax shelters.” 413 In addition, as part of the
NPA, Deutsche Bank agreed to bring to the attention of DOJ: “products or transactions that may
run afoul of U.S. federal income tax laws, rules, and regulations.” 414 Despite negotiations on the
NPA that lasted several years and the affirmative disclosure requirement in the final agreement,
Deutsche Bank apparently did not, during the negotiations, notify federal prosecutors about the
basket options product the bank had been selling to hedge fund clients for years. 415
During the negotiations and while the NPA was in force, Deutsche Bank issued dozens of
new basket options. 416 Deutsche Bank told the Subcommittee that, because it had obtained a
designed to ensure the bank received a financing fee equal to 20-25% of the premium, instead of calculating a
premium that reflected the value of the so-called “option.”
409 Subcommittee interview of Frederick Doucette, GWA (5/23/2014).
410 Id.
411 10/6/2009 email from Steve Kleinman to Federick Doucette of GWA, “DB Option – possible new development,”
DB-PSI 00036241, at 242.
412 Audio recording of 12/1/2008 telephone call among Satish Ramakrishna, Deutsche Bank, and Jonathan Mayers,
and Thomas Kerns of RenTec, DB-PSI 00122467.
413 12/21/2010 letter from U.S. Attorney’s Office for the Southern District of New York to Deutsche Bank,
“Deutsche Bank AG – Non-Prosecution Agreement,” at 1,
http://www.gibsondunn.com/publications/Documents/DeutscheNPA.pdf.
414 Id. at 2.
415 See undated spreadsheet, “MAPS Transactions,” prepared by Deutsche Bank, DB-PSI 00052577-582, at 577.
416 Id. See also 9/2008 “GPF Business Development: CTB Program Portfolio,” prepared by Deutsche Bank, DB-PSI
00116157-185.