Merrill Lynch Hid Profits From Cum-Ex Deals, Ex-Trader Tells Court

(Bloomberg) -- Bank of America Corp.’s Merrill Lynch unit was among lenders getting a share of the profit of clients’ so-called Cum-Ex trades, and tried to hide payments linked to the controversial tax-driven practice by masking them via unrelated future transactions, a former trader said in a German court.

Like other investment banks acting as prime brokers for Cum-Ex investors, Merrill Lynch charged the “industry standard” of 4% of the money generated through the double tax refunds, the ex-trader said Wednesday. The man, referred to as Darren T. because he can’t be identified under local law, appeared as a witness at a Bonn court in the case against two former bankers charged over the trades.

While always collecting “precisely 4%,” the banks didn’t treat the amount as a share of the profit but hid the money as service fees, such as charges for custody, clearing and leverage, he said. Merrill Lynch didn’t even want to charge regular fees, instead having customers pay it via an unrelated futures contract, Darren T. said.

“I think this way Merrill Lynch was not only hiding and veiling this to the outside world but probably internal groups were hiding it from each other,” the former trader said.

The testimony is part of the first criminal trial over Cum-Ex in Germany, where the scandal -- orchestrated mainly by London investment bankers -- is the biggest tax heist in the country’s history. The 45-year-old is the initial witness in the trial against former bankers Martin Shields and Nicholas Diable. They are charged with helping to organize deals that led to more than 400 million euros ($437 million) in lost taxes.

Bill Halldin, a spokesman for Bank of America, and Macquarie spokesman Stephen Moir declined to comment.

Darren T. worked on Cum-Ex deals at Macquarie Bank from 2005 until 2009, when he joined Zeta Financial Partners. Among other roles in the deals, Macquarie acted as a prime broker for which it also charged the 4%, he said.

ZFP was a company set up by former Macquarie bankers and heavily involved in Cum-Ex. Merrill Lynch was the prime broker for a ZFP client, according to Darren T.

Macquarie would charge fees under various labels but together they would always add up to exactly 4% of the dividend, he said. Other banks had similar arrangement, he said. None of these methods were ever documented, according to the trader.

Merrill Lynch collected the fees via unrelated future transactions, he said, citing an example on derivatives related to French equities. Corresponding buy and sell futures would be traded, allowing Merrill to make a profit and the counterpart a loss.

Investec Plc also acted as a prime broker. Its interdeal broker priced in the 4% for the bank when the Cum-Ex deals were unwound and shares transferred back, the ex-trader said. Investec spokesman Luke O’Mahony declined to comment.

The Bonn trial is scheduled to last through early next year.

(An earlier version of this story was corrected to fix the relationship between Merrill and ZFP.)

--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, Benedikt Kammel

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