Ex-London Bankers Appear in First German Tax Scandal Trial

(Bloomberg) -- Two former London investment bankers appeared in court on Wednesday in Germany’s first trial targeting a complex trading strategy that racked up massive tax losses for the nation’s treasury.

Martin S., 41, and Nicholas D., 38, appeared in court in Bonn, charged with orchestrating so-called Cum-Ex transactions from 2006 to 2011 that allegedly robbed the state of more than 400 million euros ($440 million). While they must stand trial under German law, they’ve been cooperating in a bid to avoid jail.

The pair, who can’t be identified by their full name due to German law, worked with others on transactions aimed at getting tax refunds twice, Cologne prosecutor Anne Brorhilker said when reading the indictment.

Profit wasn’t generated from bets on how markets would evolve, Brorhilker told the five judges. Instead it was “based on fraudulent grabbing of tax money.”

Cum-Ex trades exploited an interpretation of tax laws that seemed to enable multiple people to claim ownership of the same shares and the right to a refund of taxes withheld from dividends. Short selling of stock led to more than one investor claiming a refund while the tax was paid only once, according to the authorities.

The deals ended in 2012 when Germany revised its rules, and lawmakers estimate the government may have lost out on at least 10 billion euros in tax revenues.

As the strategy entailed “high-volume circle share trades,” many financial-industry players participated in various roles, as buyers, short sellers, share lenders and brokers, Brorhilker said. Profits were distributed via futures. Derivatives hedged against market movements.

Hellen Schilling, Martin S.’s defense lawyer, said her client made a “difficult and brave decision” to waive his right to remain silent in favor of telling prosecutors what he knows.

Hidden Details

He helped them understand and uncover previously hidden details and the indictment is substantially based on his statements. While he’s one of the first to be tried, he’s not the only person involved in Cum-Ex and he’s also not the central one, she told the court.

“He does not deny his role,” she said. “But he wants to put it in the accurate context, in the interest of a truthful and complete statement."

Brorhilker told the court that prosecutors have been aided by Martin S.’s testimony during their probe, which also helped to speed up the investigation significantly.

Nicholas D.’s lawyer, Stefan Kirsch, told the judges that his client didn’t want to make a statement at this stage.

Ballance Group

Martin S. and Nicholas D. were traders at UniCredit SpA’s HVB unit where they started to work on Cum-Ex in 2006. Martin S. left the investment bank in 2008 together with his superior Paul Mora, a New Zealander, to start Ballance Group, a company that arranged the deals for its business partners.

Martin S. and Nicholas D. were previously indicted in Frankfurt in 2017, alongside Mora, two other former HVB bankers and Hanno Berger, a renowned tax lawyer. That case involves deals from 2006 and 2008 alleged to have cost 106 million euros in lost taxes. Martin S. and Nicholas D. have asked to have the Frankfurt charges heard separately.

Berger and Mora are fighting the indictment. Berger’s lawyer didn’t reply to an emailed request for comment. Mora’s attorney said his client isn’t charged in Cologne and has asked for dismissal of the Frankfurt charges.

The charges Martin S. and Nicholas D. face in Bonn cover some of their activities at HVB but for the most part relate to their time at Ballance, which Nicholas D. joined in 2009.

Excel Spreadsheets

Martin S. and Nicholas D. organized the trades, which were discussed among the participants, who were buyers, loaners of shares, short sellers and brokers, according to the prosecutor. The accused then wrote up Excel spreadsheets outlining the details.

At times, the same set of shares was “recycled” several times. Once they were used in a trade where they were delivered to a buyer, they were returned and on the same day used to settle a second set of short sales, according to Brorhilker.

Lawyers for Bank of New York Mellon Corp., Societe Generale SA and M.M. Warburg & Co. also appeared in court on Wednesday but said they wouldn’t comment for now. Two weeks ago, they were ordered to participate in the case because the judges may seize funds they obtained because of their roles in Cum-Ex transactions. Under German law, businesses can’t be formally charged with crimes.

The next hearing in Bonn is scheduled for Sept. 18.

©2019 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.