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Deutsche Bank's Ritchie Said to Be Among Staff in Tax Refund Probe

Deutsche Bank's Ritchie Said to Be Among Staff in Tax Refund Probe

(Bloomberg) -- Deutsche Bank AG investment-banking head Garth Ritchie and former co-Chief Executive Officer Anshu Jain were swept into a widening German probe on dividend tax payments, adding to strain on top leadership as the shares hover near record lows.

Ritchie and Jain joined a growing list of potential targets for prosecutors investigating the so-called Cum-ex tax scandal that’s rocked Germany’s financial industry, people familiar with the matter said. Ritchie is already contending with the lowest shareholder backing among top management and the prospect of massive cuts to his division. Ex-CEO Josef Ackermann also faces scrutiny, German media reported.

Deutsche Bank's Ritchie Said to Be Among Staff in Tax Refund Probe

Deutsche Bank confirmed Thursday that prosecutors in Cologne widened the investigation to include a list of current and former staff and some members of the management board. The decision to expand the inquiry was prompted “purely” by a statute of limitations, and Deutsche Bank doesn’t assume the prosecutor’s assessment of the facts has changed, it said in a statement that didn’t name Ritchie or Jain.

A call to Ritchie’s office was referred to the company’s press office, where a spokesman declined to comment. A spokesman for Jain also declined to comment.

Prosecutors have been conducting a criminal probe into some of the biggest names in European and U.S. finance, looking at the roles banks, law firms and others played in so-called cum-ex trades. The Latin phrase, meaning “with-without,” refers to a strategy that made dividend payments appear to vanish, potentially costing Germany’s coffers billions of euros in taxes.

The widening investigation includes banks that didn’t initiate deals for clients themselves but may have provided services that helped to carry them out.

Deutsche Bank's Ritchie Said to Be Among Staff in Tax Refund Probe

Sueddeutsche Zeitung reported on Thursday that about 70 current and former employees at Deutsche Bank are facing scrutiny, though it has yet to be seen whether investigators’ suspicions will be borne out. Among the names mentioned by the paper was ex-CEOAckermann. At least two big U.S. banks also are being examined.

Eberhard Kempf, a lawyer who’s represented Ackermann in the past, didn’t reply to a message from Bloomberg seeking comment.

The bank said at its annual shareholder meeting last month that an internal review found Ritchie was among recipients of an email in 2007 that explained how trades could take advantage of German tax laws, and that a meeting to discuss cum-ex transactions was once held in Ritchie’s office.

Deals being reviewed by Cologne prosecutors took place roughly between 2007 and 2012, overlapping the period when Jain was responsible for the investment-banking arm of the German lender. Ritchie now heads the division, which has been at the center of many of the lender’s woes.

He and fellow management board member Sylvie Matherat received the lowest approval votes at the AGM. That has fueled speculation the two might be among the management board members that may get replaced when Chief Executive Officer Christian Sewing unveils a new restructuring plan, which is expected to happen by the end of next month, people familiar with the matter have said.

‘Common Practice’

The widening of the years-long inquiry “is a common practice and the prosecutor has proceeded in the same way with other banks,” Deutsche Bank said in its statement on Thursday. “The bank does not assume that this procedural measure is based on a changed assessment of the facts by the public prosecutor.”

The company said it didn’t “participate in an organized cum/ex market, neither as short seller nor as Cum/Ex purchaser.”

Cum-ex transactions took advantage of a now abandoned German practice for tax refunds on dividends. At the time, a corporation paying dividends automatically withheld the tax but the tax payment was certified by the shareholder’s bank.

Cum-ex deals were set up around dividend day in a way that enabled a buyer in a short sale and the actual stock owner to both get a certificate stating that the dividend tax was paid. While the tax was paid only once, both could use the certificates to claim full refunds. The practice ended in 2012 when Germany revised its rules, and lawmakers estimate the government may have lost out on at least 10 billion euros ($11.3 billion) in tax revenues.

First Indictment

Cologne prosecutors filed their first indictment in the criminal probe in April, in which they charged two former investment bankers. The document lists several cases in which Deutsche Bank acted as a prime broker for cum-ex traders, providing them with loans and other services around the transactions, people familiar with the case have said. The lender also acted as a custodian bank and issued tax certificates which were crucial for the deals.

Deutsche Bank was the prime broker for several funds which invested in cum-ex deals, according to an internal investigation commissioned by the bank and handed over to prosecutors. The lender also worked closely with Ballance Group, a company that was key in orchestrating cum-ex deals, according to people familiar with the case.

In 2009, several Deutsche Bank employees left the bank to join Ballance where they in turn worked closely with staff at Deutsche Bank who are also being probed. Deutsche Bank provided loans of up to up to almost 1 billion euros for funds whose sole investment were cum-ex trades, the people have said.

--With assistance from Stefan Nicola.

To contact the reporters on this story: Steven Arons in Frankfurt at sarons@bloomberg.net;Sonali Basak in New York at sbasak7@bloomberg.net;Karin Matussek in Berlin at kmatussek@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Christian Baumgaertel, Dale Crofts

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