A Banker Drew Macquarie Into a German Tax Scandal. It Became a Costly Bargain

(Bloomberg) -- In 2005, as Macquarie Group Ltd. executives plotted an aggressive expansion to transform the Australian infrastructure investor into a global financial force, a banker in London pitched them an idea.

Kaushik ‘Kush’ Obhrai, looking for his next assignment after leaving Morgan Stanley and Deutsche Bank AG, proposed a form of stock trade that exploited European dividend-tax laws. Executives at Sydney-based Macquarie hired him and forged ahead with the plan, later promoting him and praising his group as the deals paid off. The name of the strategy: Cum-Ex.

Yet Macquarie’s pursuit of such tax trades more than a decade ago has come back to haunt the bank, saddling a firm better known as an infrastructure investor with probes, litigation and unhappy clients. Obhrai, now 50, left the Australian lender in 2009 and hasn’t been accused of any wrongdoing. He declined to comment.

Macquarie is under the glare of a sweeping German investigation into Cum-Ex trades that lawmakers say deprived the state of 10 billion euros ($11 billion) in lost tax revenue. The company faces litigation from former customers as well as a government backlash in Denmark, where a similar $2 billion scandal has roused anger. The saga underscores the risks posed by lucrative yet esoteric trades, especially for a firm that counts governments and pension funds among its most prized clients.

“Macquarie should have said ‘thanks but no thanks,’” said Ronald Colombo, a former counsel to Morgan Stanley and now a law professor at Hofstra University in Hempstead, New York. “Risk that might seem modest at one point in time can turn out to be much more serious. But hindsight is famously 20-20.”

Eye-Popping Trades

Scores of individuals across the industry are under potential investigation in the German probe, including Macquarie Chief Executive Officer Shemara Wikramanayake and her predecessor Nicholas Moore -- one of the architects of Macquarie’s expansion in the 2000s. Rival lenders from Barclays Plc in London to Bank of America Corp. in Charlotte, North Carolina are also being probed.

Stephen Moir, a spokesman for Macquarie in London, Wikramanayake and Moore all declined to comment. According to a 2018 statement on the German probe, the firm “received extensive external legal advice in relation to its involvement and believed that it was acting lawfully.”

Obhrai’s role has surfaced at a trial where the court has heard from witnesses to explain how the industry worked and identify participants. The Bonn case centers on two ex-UniCredit SpA traders charged with causing a tax loss of more than 400 million euros through Cum-Ex trades. Neither man is challenging the facts prosecutors have assembled.

In a preliminary assessment of the case, the presiding judge said on Dec. 4 that the deals presented in trial were criminal. The court still needs to weigh the consequences for the two accused, whose extensive collaboration will likely be viewed favorably.

Macquarie Accused in Lawsuit of ‘Lusting’ After Cum-Ex Deals

No one at Macquarie knew much about Cum-Ex trades before Obhrai’s arrival. Yet the returns were eye-popping, a former colleague at the bank said in testimony in Bonn.

Tax Expertise

“I was reconciling the profit of a particular trade, and that profit was more than 10 times of what I had seen before,” the ex-Macquarie trader told judges. “That was the first Cum-Ex transaction.”

Cum-Ex trades, named for the Latin term for “With-Without,” took advantage of German tax laws and allowed multiple investors to claim refunds on a dividend levy that was paid only once. The government moved to abolish the maneuver in 2012.

Read More: The German Tax-Dodge Probe That’s Roiling Banks: QuickTake

According to testimony in the Bonn trial, the bank often took on the role of short-seller in these deals, a key element in Cum-Ex. The trades required the approval of 13 separate units within Macquarie, the judges heard. They also needed to be re-approved each year, according to testimony.

Obhrai developed an expertise for dividend-tax trades while at Morgan Stanley in the early 2000s, according to former colleagues who requested anonymity. He also gained a reputation for what some former colleagues considered confrontational behavior at the Wall Street firm, and he left after a disciplinary issue in 2003, said the people, though it is unclear what, if any, determination was ever made. Tom Walton, a spokesman in London, declined to comment.

Deutsche Bank hired Obhrai soon after and he continued to focus on trades related to dividend tax, the people said. He left in late 2004.

‘Very Critical View’

Charlie Olivier, a spokesman for Deutsche Bank in London, declined to comment on Obhrai’s time there. The Frankfurt-based lender has previously admitted to helping clients take part in Cum-Ex deals including “financing securities transactions,” he said in a statement.

“Today, the bank takes a very critical view of these financing transactions and cooperates with the investigating authorities on this matter,” Olivier said.

Obhrai then made his pitch to Macquarie during several interviews in 2005, one of the people said. At the time, then-CEO Allan Moss was pushing an expansion that would change it “from an Australian institution growing internationally to a global institution headquartered in Australia,” a 2007 presentation shows.

Read More: Macquarie Spawns Copycats as It Thrives Buying Roads

Moreover, banks were becoming increasingly attracted to businesses that sought out profitable gaps in tax laws, according to Peter Hahn, a former Citigroup Inc. banker and professor at the London Institute of Banking & Finance.

“Tax was seen as a vast opportunity before the financial crisis,” said Hahn.

Rising Status

Overall equities-trading revenue at Macquarie surged 45% in the year through March 2007 to A$765 million ($525 million), driven by “substantial growth” at the global equity finance desk, a company presentation at the time shows. For the year through March 2009, the structured equity finance unit in Europe was among a group of new businesses that contributed 73% of operating income at the bank’s trading unit, another presentation shows.

Obhrai’s own stature also rose. He joined the board of a subsidiary called Macquarie European Investment Holdings Ltd. and became head of global equity finance and structuring, a 2007 filing shows. In 2008, he purchased a house in Barnet, a neighborhood in north London, for 4 million pounds, according to property records. He had previously invested in the Cinnamon Club, a fashionable Indian restaurant close to Westminster that was popular among players in the Cum-Ex industry, company filings show.

He left the bank in 2009. Two years later, he moved to Dubai to start a company called Indus Valley Capital Ltd. that he co-founded with two ex-Macquarie traders. The business closed in 2015, according to the public register for the Dubai International Financial Center.

Today, German prosecutors in Cologne are investigating dividend-tax transactions linked to Macquarie that occurred in 2011. The bank said the probe relates to its lending to a “group of independent investment funds” trading stocks around the time of dividend-payment dates and that hoped to benefit from tax credits. The lender has already “resolved” two separate matters involving German dividend trades between 2006 and 2009, it said.

In Denmark, the bank has apologized for its role in Cum-Ex. The company, which holds a stake in Denmark’s main phone company, was frozen out by some of the biggest pension funds in the country in the wake of the investigation.

Read More: Macquarie’s Pledge to Drop Tax Speculation Wins Over Danish Fund

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