Barclays, Merrill Resurface in Third German Tax Indictment

(Bloomberg) -- Barclays Plc and Bank of America Corp.’s Merrill Lynch have been caught up once more in Germany’s expanding Cum-Ex dividend scandal, with prosecutors in a third criminal case saying they provided crucial elements in some transactions.

The banks were among several companies used by the now defunct Maple Bank as short sellers or brokers to expand profits and “better veil” the controversial transactions, Frankfurt prosecutors said in an indictment seen by Bloomberg News. The two banks aren’t charged with a crime as prosecutors are targeting six former Maple bankers and an ex-lawyer at the law firm Freshfields in the case.

The Cum-Ex scandal has led to a plethora of probes ensnaring multiple financial institutions, including Deutsche Bank AG, Bank of New York Mellon Corp. and Morgan Stanley. The transactions took advantage of how Germany taxed dividends, abusing the system to claim multiple refunds on a tax paid only once, according to investigators. The practice cost the German government more than 10 billion euros ($11 billion) in lost revenue, lawmakers say.

The Frankfurt Maple case, if allowed to go to trial, will expose Barclays and Bank of America to another round of public scrutiny as the deals will then be reviewed in detail in open court. The indictment by prosecutors in Frankfurt was filed in December, while the first case that went to trial is currently underway at a court in Bonn.

In that case, prosecutors have focused on the role of various traders and investment banks in the process, leading to a flurry of headlines on top names from the financial community.

William Halldin, a spokesman for Bank of America, declined to comment as did Simon Hailes at Barclays.

Maple Bank

Maple Bank was the first banking casualty of Cum-Ex, with the scandal taking down both the German unit as well as the Canadian parent company in the year after prosecutors first raids in 2015 tied to the long-running probe.

Maple Bank generated 243 million euros in tax refunds via all of its deals in 2008 alone, the year Barclays and Merrill Lynch were involved, prosecutors said in the Frankfurt indictment. The overall tax loss in the case, which covers Maple deals between 2006 and 2009, was stated to be 388.6 million euros. A Frankfurt court still has to determine whether the charges may go to trial. Two bankers who were arrested in the case in December for being flight risks are still in custody.

But the indictment lays out the role of lenders that helped Maple process its Cum-Ex transactions a decade ago. Barclays and Merrill were both identified by name as selling options that permitted the purchase of stock from short-sellers, a key element to the deals.

Prosecutors claim that Barclays and Merrill Lynch were among the firms used by the Maple bankers to arrange deals with the sole purpose of generating certificates that allowed them to claim the disputed tax refunds. Equinet Bank AG, Fortis Bank Nederland NV and IMC Trading B.V. also had similar roles as short-sellers or brokers in the Maple deals.

Pre-Arranged Trades

The options contracts were sold in “pre-arranged trades” and priced “unattractively” to make sure they were matched by Maple offers only, prosecutors wrote.

In conventional short sales, investors sell stock they don’t own, hoping to profit by repurchasing it later at a lower price. In Cum-Ex deals, stocks were key for a different reason: the stock was sold short before or on dividend day and delivered only after it without the dividend payment. That way the buyer could claim a refund without paying the tax on the dividend, prosecutors say. The deals were hedged from market volatility.

Merrill Lynch & Co. was once one of the most powerful brokerages on Wall Street, yet floundered during the financial crisis and was taken over by Bank of America in January 2009. Its trading operations continued within the newly-enlarged lender.

Fortis was the legal predecessor of ABN Amro. ABN referred to a 2018 statement on its website that said Fortis Bank and some former subsidiaries have been involved in “a number of these transactions” and that the bank now has a zero tolerance policy as to dividend stripping. It declined to comment on the Maple indictment. IMC Trading also declined to comment.

Equinet’s business was merged into Pareto Securities AS in 2018. Pareto says as it only took over the assets, it cannot comment on the issue. Equinet Bank AG itself wasn’t transferred to Pareto, it said.

In 2009, Maple Bank only did two transactions. An initiative by Germany’s Finance Ministry to clamp down in the deals prompted the bank’s management to drop the strategy. The indictment cites a trader call in April 2009 by one of the charged bankers with “his discussion partner” at Barclays in London, informing him about Maple’s decision to drop Cum-Ex transactions.

Both Barclays and Merrill have come up at the current Cum-Ex trial in Bonn.

During his first day of testimony, Martin Shields, one of the bankers on trial for setting up the deals, rattled off the names of financial institutions he said took part in the practice. He described a network of companies, individuals and entities acting in different roles and often competing with one another, including Barclays, TP ICAP Plc, Commerzbank AG, Sweden’s SEB AB and more than half a dozen others.

Merrill’s role as a prime broker, which financed funds that did the trades, was also mentioned by witnesses in the case. A lawyer involved in Cum-Ex who testified at the trial said that prime brokers such as Merrill watched Cum-Ex trades “like hawks” to make sure the refunds were booked properly. A former trader testified that Merrill Lynch hid payments for Cum-Ex related services by masking them via unrelated future transactions.

In the Bonn indictment, Barclays and Merrill Lynch were also cited as short sellers in Cum-Ex transactions and are mentioned among the group of so called “ex-ex-providers,” that delivered the stock after the dividend day.

--With assistance from Donal Griffin.

To contact the reporter on this story: Karin Matussek in Berlin at kmatussek@bloomberg.net

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net, Christopher Elser

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