Manhattan U.S. Attorney Files Lawsuit Against Deutsche Bank And Other Entities For Engaging In An Abusive Scheme To Avoid Federal Income Taxes
Fraudulent Conveyance Suit Alleges That In 2000 Deutsche Bank Used Underfunded Shell Companies To Evade Significant Tax Liabilities
Suit Seeks to Recover More than $190 Million in Taxes, Penalties, and Interest
Preet Bharara, the United States Attorney for the Southern District of New York, announced today that the United States has filed a lawsuit against DEUTSCHE BANK, A.G., DB U.S. FINANCIAL MARKETS HOLDING CORP., DEUTSCHE BANK SECURITIES, INC., BMY ACQUISITION CORP., BMY ACQUISITION LLC, BMY STATUTORY TRUST, and FIRST UNION NATIONAL BANK, now known as WELLS FARGO BANK, N.A., as trustee of BMY STATUTORY TRUST, alleging that these parties participated in a series of transactions that amounted to fraudulent conveyances done with the purpose and effect of leaving the United States Treasury with a significant, uncollectable tax bill. The lawsuit seeks to recover those funds, along with appropriate penalties and interest.
Manhattan U.S. Attorney Preet Bharara said: “Through fraudulent conveyances involving shell companies, Deutsche Bank tried to make its potential tax liabilities disappear. This was nothing more than a shell game. This lawsuit seeks to hold Deutsche Bank and the other defendants liable for $190 million in taxes, penalties, and interest owed to the United States taxpayers.”
The following allegations are based on the Complaint filed today in Manhattan Federal court:
Deutsche Bank acquired a corporation in the fall of 1999 that held stock with a very low cost-basis, such that the sale of this stock would trigger more than $100 million in taxable gain as a result of the appreciation in value of the stock. In order to avoid paying taxes on the stock’s built-in gain, Deutsche Bank entered into an arrangement with a firm that created three shell companies: defendants BMY Acquisition Corp. (“BMY Corp.”), BMY Acquisition LLC (“BMY LLC”), and BMY Statutory Trust (“BMY Trust” and, collectively with BMY Corp. and BMY LLC, “BMY”). These shell corporations collectively served as an underfunded special-purpose vehicle with no function other than to be stuck with a tax bill that it could never pay.
To carry out the scheme, the Deutsche Bank and BMY entities executed a series of pre-planned transactions in the spring of 2000. First, a Deutsche Bank entity sold the corporation holding the appreciated stock to BMY for a price that did not represent fair value for it in light of, at a minimum, the tens of millions of dollars of tax liabilities on the built-in gains. BMY paid for the stock using a short-term loan conditioned on the completion of the pre-planned transaction. Immediately after purchasing the stock, BMY sold it to a different Deutsche Bank entity. At the time of this sale, the tax liability on the built-in gains of the stock was triggered on the part of BMY. BMY then paid back its loan and other expenses, leaving it with insufficient funds to pay the tax liability. Meanwhile, Deutsche Bank profited from this transaction by selling the stock with a stepped-up cost basis and without paying the resulting tax liability.
The Internal Revenue Service (“IRS”) has determined that as a result of these transactions the current unpaid federal tax liability, with penalties and interest that resided with the BMY shell company, is greater than $190 million.
The Complaint seeks recovery of the full amount of the unpaid federal tax liability.
The case is being handled by the Tax and Bankruptcy Unit of the Office’s Civil Division. Assistant U.S. Attorneys Robert William Yalen and Ellen London are in charge of the litigation.