Ex-UK bankers stand trial in first German tax fraud case

Bloomberg

Two former London investment bankers appeared in court in Germany’s first trial targeting a complex trading strategy that racked up massive tax losses for the nation’s treasury.
The British men, who can only be identified as Martin S, 41, and Nicholas D, 38, appeared in a court in the city of Bonn, charged with helping to orchestrate so called Cum-Ex share transactions from 2006 to 2011 that robbed the state of more than 400 million euros ($440 million). They have been cooperating with authorities in a bid to avoid jail.
In 2006 the pair joined a group of other investment bankers to set up Cum-Ex trades aimed at getting double refunds on dividends tax, Cologne prosecutor Anne Brorhilker said when reading the indictment.
Profit wasn’t generated from bets on how markets would evolve, Brorhilker told the five judges hearing the case. Instead it was “based on fraudulent grabbing of tax money.”
Cum-Ex trades exploited an interpretation of tax laws that seemed to enable multiple people to claim ownership of the same shares and the right to a refund of taxes withheld from dividends. Short selling of stock allowed more than one investor to claim a refund while the tax was paid only once, according to the authorities.
The practice was named after the Latin terms “cum/ex” meaning “with/without” because the stock was sold with, but delivered without, a dividend payment. The deals ended in 2012 when Germany revised its rules, and lawmakers estimate the government may have lost out on at least 10 billion euros in tax revenues.
As the strategy entailed “high-volume circle share trades,” many financial-industry players cooperated in various roles, as buyers, short sellers, share lenders and brokers, Brorhilker said. Profits were distributed via futures. Derivatives hedged against market movements.
Representatives for the two men declined to comment before the trial opening. The accused can only be identified by their first names and initials due to German press law.
Martin S and Nick D were traders at UniCredit SpA’s HVB unit where they started to work on Cum-Ex in 2006.
Martin S left the investment bank in 2008 together with a superior to found Ballance Group, a company that arranged the deals for its business partners.
The 34 cases Martin S and Nick D are charged with in Bonn cover some of their activities at HVB but for the most part relate to their time at Ballance, which Nick D joined in 2009.
Lawyers for Bank of New York Mellon Corp, Societe Generale SA and MM Warburg & Co also appeared in court on Wednesday but said they wouldn’t comment for now.