Ex-Bankers Face Snap Verdict in Cum-Ex Trial Rushed by Virus
Ex-Bankers Face Snap Verdict in Cum-Ex Trial Pushed by Virus
(Bloomberg) -- A German court will deliver the verdict in the first trial over controversial Cum-Ex transactions Wednesday evening in a case that could lead to a “cascade” of indictments against bankers.
Before global events were upended by the coronavirus, the Cum-Ex case was seen as a key moment for the banking industry, which had been swept up in a scandal over the use of rapid stock sales to obtain duplicate tax deductions.
Former investment bankers Martin Shields, 42, and Nicholas Diable, 40, are accused of helping organize deals that led to more than 400 million euros ($439 million) in lost taxes on dividends.
The trial had been scheduled to last into April, but the court in Bonn, Germany, has dramatically streamlined the case this week so it could issue a ruling before additional travel restrictions are imposed in the country.
The five judges held a hearing into the evening Tuesday to wrap up the evidence phase of the trial. Prosecutors and defense attorneys delivered closing arguments Wednesday and the court has scheduled the verdict for 7:30 p.m. local time.
“The damage caused to the German taxpayer and the credibility of the financial industry as a whole has been significant,” Shields told the judges before they took a break for deliberations. “I regret my role in that damage and I feel the obligation to make what amends I can for my past mistakes.”
Prosecutor Anne Brorhilker, who has built her case on a array of cooperating witnesses, including the two bankers, sought lenient sentences. She recommended that both Shields and Diable receive suspended sentences that would spare them time in prison. They were only two of hundreds involved in the scheme, she said.
“You can’t turn individuals into scapegoats and punish them in place of others,” Brorhilker said.
Financial Penalty
But she did call for a financial penalty that would force Shields to give up the money he made from the deals. At a hearing last month, that amount was estimated to be 14.7 million euros.
Neither man is challenging the facts Brorhilker has assembled and have cooperated in a bid to avoid prison.
Hellen Schilling, Shields’ defense attorney, also asked for leniency.
Shields “sees his mistakes and he recognizes them,” Schilling told the court, according to a statement. “We’re asking for a mild ruling, which doesn’t destroy the life of a man who decided to no longer be part of the problem but part of the solution.”
Diable’s lawyer, Stefan Kirsch, also highlighted his client’s cooperation with prosecutors. The case has already taken a heavy toll, making it almost impossible for him to find a job or even open a bank account, Kirsch said.
Cum-Ex transactions took advantage of a now-abandoned method of taxing dividends, which made it possible to get multiple refunds through a combination of short sales and other transactions. The practice ended in 2012 when Germany revised its rules, but Cum-Ex may have cost taxpayers more than 10 billion euros.
The importance of the case to the financial industry could be seen each day as an army of well-dressed lawyers sat in the audience taking copious note for banking clients.
The verdict is likely to be the starting point for a wave of new charges from German prosecutors. Cologne officials are probing more than 500 people. Justice Minister Peter Biesenbach in North-Rhine Westphalia, where Cologne is located, has said he’s expecting a “cascade of indictments” in the Cum-Ex probe.
Since the start of the trial in September, the court has looked into how the two bankers orchestrated scores of deals involving the short-selling of German stock around dividend day. The deals took place from 2007 to 2010, split up into 34 groups.
The strategy, as both men and several witnesses told the court, had the sole purpose of generating bank certificates which could be used to claim refunds on a tax that had never been paid.
The testimony was instrumental to understand the details of how the transactions were set up -- and how prominent players of the financial industry, from Deutsche Bank AG to Bank of America Corp.’s Merrill Lynch, ICAP Plc, BNP Paribas SA and many others were involved.
In a preliminary comment in December, the judges said they consider the deals to be criminal and that Shields and Diable would likely be convicted. No one expects them to deviate from that view in their verdict.
The only question is what sanction they will impose and whether the two bankers will go to jail.
Under German law, tax evasion of 1 million euros or more normally rules out a suspended sentence. But the criminal code also allows for judges to recognize defendants’ cooperation in an investigation and even waive any penalty.
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