Manhattan U.S. Attorney Announces $95 Million Recovery From Deutsche Bank In Fraudulent Conveyance Case Related To Federal Income Tax Avoidance

   Preet Bharara, the United States Attorney for the Southern District of New York, announced a settlement between the United States of America and DEUTSCHE BANK, A.G., DB U.S. FINANCIAL MARKETS HOLDING CORP., and DEUTSCHE BANK SECURITIES, INC. (“DEUTSCHE BANK”), resolving a civil lawsuit in which the United States alleges that DEUTSCHE BANK participated in a series of transactions that amounted to fraudulent conveyances carried out with the purpose and effect of evading tens of millions of dollars in federal tax liability. 

Manhattan U.S. Attorney Preet Bharara said:  “Using a web of shell companies and series of calculated transactions, Deutsche Bank sought to escape liability for tens of millions of dollars in taxes.  The Government, through this action and settlement, has made Deutsche Bank admit to its actions designed to avoid taxes and pay $95 million to the United States to account for this conduct.”

According to the allegations of the Complaint previously filed by this Office against DEUTSCHE BANK in Manhattan federal court:

In 2000, DEUTSCHE BANK acquired a corporation that held stock with a very low cost basis, meaning that when this stock was subsequently sold, significant taxable income would be incurred.  In order to dispose of the stock without paying the taxes that would be due on this transaction, DEUTSCHE BANK entered into a fraudulent plan with a tax shelter promoter.  Pursuant to this plan, DEUTSCHE BANK transferred the shares of the acquired corporation to a shell company (“BMY”) created by the promoter, which then transferred the stock back to DEUTSCHE BANK in such a way as to cause the shell company to get stuck with the tax bill.  DEUTSCHE BANK and the promoter structured this transaction (the “May 2000 Transaction”) so that the shell company would have little or no assets and would be unable to pay the taxes due.  The net result:  DEUTSCHE BANK would be able to cleanse the stock of its low cost basis and purport to leave the tax liability with a “taxpayer” – the shell company – that would be unable to pay the tax.  Ultimately, this transaction left the shell company BMY with a liability of more than $52 million in taxes, plus interest and penalties.  

Pursuant to the Settlement Agreement approved today by the United States District Court for the Southern District of New York, DEUTSCHE BANK agrees to pay the United States $95 million to resolve the claims in the Complaint. 

In the Settlement Agreement, DEUTSCHE BANK also “admits, acknowledges, and accepts responsibility for” certain key facts related to the Government’s allegations in the complaint, including the following:

• “DEUTSCHE BANK engaged in the May 2000 Transaction in order to avoid having to pay the built-in tax liability associated with” the stock.
  
  
• “Each aspect of the May 2000 Transaction was pre-planned” and “[a]s a result of the May 2000 Transaction, BMY realized substantial taxable gain.”
  
  
• “Deutsche Bank knew or, had it made reasonable inquiries, would have known that BMY did not have legitimate tax losses to offset this gain.”

• BMY nonetheless “claimed [to the IRS] that no tax was due because the income was offset by unrelated foreign currency transaction losses” that “were attributable to a tax shelter known as a Currency Option Investment Strategy (‘COINS’) tax shelter.”

• DEUTSCHE BANK itself had “participated in this COINS tax shelter,” and, “[a]s Deutsche Bank admitted in 2010” in a statement of facts accompanying a non-prosecution agreement entered into by this Office’s Criminal Division, “the COINS shelter, in which it participated willfully and knowingly, was a fraudulent tax shelter, and it was unlawful for Deutsche Bank to have participated in the COINS tax shelter.”
  
  
• “IRS disallowed [these] claimed foreign currency transaction losses and assessed BMY tens of millions of dollars of tax (plus interest and penalties) resulting from the sale of” the stock.

• “Deutsche Bank knew that BMY had no material assets and no operating business,” and “Deutsche Bank knew or should have known that as a result of the May 2000 Transaction, BMY lacked the funds necessary to pay the substantial taxes resulting from the sale of” the stock.
  
  

Mr. Bharara thanked Frederick C. Mutter of the Office of Chief Counsel, Internal Revenue Service, for his extraordinary assistance on this matter.