A Hedge Fund, a Jewish School and $1.1 Billion in Cum-Ex Trades
(Bloomberg) -- Sanjay Shah, a former hedge fund manager charged in two countries over the Cum-Ex scandal, is accused by German prosecutors of using a Jewish school in New York to execute trades totaling 920 million euros ($1.1 billion) as part of a plan to deceive tax authorities.
Shah and a partner at his Solo Capital Partners LLP in 2011 sought to take advantage of the tax-exempt status of Ezra Academy in Queens for the trades, Hamburg prosecutors said in a February indictment seen by Bloomberg News. The men used “purportedly authentic” documents to buy shares on behalf of the school and claim refunds, prosecutors said.
The allegations are the latest revelations tied to what prosecutors allege was Shah’s role in the tax-fraud scandal that has engulfed multiple European countries. More than 25 bankers, traders and lawyers have been charged in Denmark and Germany over the use of Cum-Ex trades to obtain millions of euros worth of duplicate tax refunds.
The German indictment depicts how Shah and others discovered that religious institutions in the U.S. were tax exempt under a treaty between the U.S. and Germany. Together with a New York notary, they used the documents claiming that Ezra Academy authorized them to buy German shares and have an agent reclaim tax on the school’s behalf, prosecutors said.
Prosecutors in the indictment say there are “serious doubts about the authenticity of the documents” and that the school “presumably wasn’t informed” about the alleged scam, citing the school’s non-profit status and the fact that its 2011 tax filings only list $10 in the section for income from investments.
The alleged plot was foiled after German tax authorities in 2012 threatened to directly contact Ezra Academy about the transactions.
The tax claims were then suddenly retracted, prosecutors said.
Jack Irvine, a spokesman for Shah, said while Solo Capital “onboarded” a New York academy, there was “certainly no fraud or fake documents” and no withholding tax applications were made on behalf of the school.
The law firm representing Shah’s co-defendant, who also worked at Solo Capital, declined to comment.
Ezra Academy, a private junior and senior high school in Queens, didn’t reply to multiple emails and calls seeking comment over three days. An assistant taking calls for the school’s administration said there was no one who could answer any questions.
The school provides “an affordable quality general studies education matched with a personalized, multi-level Judaic studies education,” according to its website.
Cum-Ex was a controversial trading strategy designed to obtain duplicate refunds by taking advantage of how dividend taxes were collected and regulated. Germany is looking at more than 1,000 suspects from across the financial industry in probes linked to the practice.
The legal status of the practice is still being contested, and at the time, lawyers signed off on the transactions. When Germany clamped down on Cum-Ex at the end of 2011, some traders moved to Denmark and Belgium to establish similar strategies.
Danish prosecutors said earlier this year that Shah, who founded Solo Capital, was the mastermind behind a a 9.6 billion-krone ($1.6 billion) tax-fraud case. Shortly after that, Shah and six others were indicted by Hamburg prosecutors over more than 50 cases of money laundering relating to Cum-Ex trades in Denmark and Belgium that went through German accounts.
Shah has consistently said he did nothing wrong other than take advantage of loopholes in national laws.
In the Hamburg case involving the school, share purchases totaling 920 million euros were commissioned, though less capital was needed because of structure of the transactions. After the deals were completed, a service agent was prompted to ask German tax officials for a 7.4 million-euro refund on dividend taxes, according to the indictment.
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