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

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Within the bank, some executives expressed reluctance to accept the IRS’ analysis and
stop offering the product. One Deutsche Bank official wrote in an email: “GLAM is not of
precedential value [and] merely represents the current view of the IRS chief counsel office of a
particular set of facts.” 464 Deutsche Bank representatives explained to the Subcommittee that
some in the bank viewed the MAPS option, which had been significantly restructured in 2008, as
sufficiently different from the option described in the GLAM to allow it to continue, but others
were “especially sensitive” to any issues related to tax, given the NPA, which was why the bank
chose to suspend offering the options. 465
In 2012, Deutsche Bank resumed issuing MAPS options, but with a new requirement that
the option term be less than 12 months and the option agreement include a provision requiring
the option buyer to treat the option proceeds as short term capital gains. 466
The NPA. As discussed above, Deutsche Bank had been under investigation by DOJ for
its involvement with abusive tax shelters and had been in the process of negotiating the Non-
Prosecution Agreement (NPA) for several years. The NPA was finally issued on December 21,
2010, a month after the GLAM was released. Among other measures, the NPA imposed an
affirmative disclosure obligation on the bank, requiring Deutsche Bank to bring to the attention
of DOJ: “products or transactions that may run afoul of U.S. federal income tax laws, rules, and
regulations.” 467 Failure to comply with that requirement, among other terms of the NPA, could
have subjected the bank to criminal prosecution. 468 In addition, Deutsche Bank was required to
engage an independent expert to review the bank’s compliance systems and ensure its
compliance with the NPA, including steering clear of abusive tax transactions. 469
About six weeks later, on February 3, 2011, the bank met with the independent expert,
Bart Schwartz, who had been hired by the bank to oversee the bank’s compliance with the
NPA. 470 The Subcommittee has received conflicting accounts about whether Deutsche Bank
informed the independent examiner, as required by the NPA, about its involvement with the
MAPS options. According to Mr. Schwartz, neither he nor anyone on his team recalled
Deutsche Bank ever informing them about the MAPS transactions, in 2011 or later. 471 Mr.
Schwartz told the Subcommittee that MAPS was the “kind of transaction that he expected to
know about” and he was surprised that the Bank had not informed him of it. 472 In contrast,
Deutsche Bank representatives told the Subcommittee that the bank had, in fact, discussed the
MAPS transaction with Mr. Schwartz and team members working directly for him, after a
464 10/26/2011 email from Mark Meachen to Anthony Tuths of Deutsche Bank, “Rentec [I],”DB-PSI 00019248-50,
at 49.
465 6/30/2014 briefing by Deutsche Bank attorneys to the Subcommittee.
466 See, e.g., undated letter from Deutsche Bank to Mosel Equities LP, “Barrier Option Transaction – Cash Settled-
DBSI Reference No. 941-50340,” DB-PSI 00047768.
467 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 2,
http://www.gibsondunn.com/publications/Documents/DeutscheNPA.pdf.
468 Id. at 4.
469 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 5,
http://www.gibsondunn.com/publications/Documents/DeutscheNPA.pdf.
470 Subcommittee briefing by Bart Schwartz, independent expert for Deutsche Bank (10/8/2013).
471 Id.
472 Subcommittee briefing by Bart Schwartz, independent expert for Deutsche Bank (7/16/2014).