A Banker’s Long Prison Sentence Puts Industry on Alert
(Bloomberg) -- The sentencing of a former banker at M.M. Warburg & Co. to 5 1/2 years in German prison for his role in the controversial Cum-Ex trading scheme is set to send shock waves through the financial industry, where about 1,000 other suspects in the wide-ranging probe await their fate.
Late on Tuesday, judges in Bonn convicted the man who can only be identified as Christian S. of aggravated tax evasion. They also ordered 100,000 euros ($121,810) of his own money be seized to undo part of the tax loss. While his defense team sought an acquittal, prosecutors pushed for an even harsher penalty, asking the judges to sentence Christian S. to 10 years.
Unless the man can overturn the verdict on appeal, he would be the first banker to serve actual time over the Cum-Ex practice. The Cum-Ex scandal has engulfed wide swathes of the finance industry because it required the participation of multiple players, from traders to brokers to lawyers. Investors rapidly traded shares to earn duplicate tax refunds on dividend payments, a schemes that may have cost taxpayers more than 10 billion euros by the time Germany revised its tax rules in 2012.
“This is a crucial milestone in the scandal,” said Gerhard Schick, head of German political action group Finanzwende. “He shouldn’t be the last one. Today’s ruling is a powerful signal that financial players aren’t above the law.”
The man had been on trial since November over an alleged 13 cases of tax evasion from 2006 to 2013 that allegedly caused a tax loss of 326 million euros ($397 million). He was the “right-hand man” of then-Warburg Chairman Christian Olearius and knew that the controversial tax deals were improper, according to the charges.
In the German criminal system, conviction and sentencing are always done the same day. The defense was able to get the court to drop eight of the 13 cases for which Christian S. was originally charged, Alexandra Schmitz, his defense lawyer, said in an emailed statement. The verdict is wrong and will be appealed, she said.
Under German law, the maximum term for one count of aggravated tax evasion is 10 years. If an accused is convicted of more than one count, the court can increase the maximum to 15 years. Since Cum-Ex trades, named after the Latin terms for with-without, were typically done over the shares of various companies around their respective dividend days, suspects are usually charged with multiple counts.
There are currently two other Cum-Ex trials pending in Germany. A Wiesbaden court is hearing the case against two former bankers at Unicredit SpA’s HVB unit. In Frankfurt, a tribunal is trying five bankers who are charged with doing Cum-Ex at now defunct Maple Bank GmbH.
Prosecutors in Frankfurt and Cologne have filed more indictments against bankers and lawyers over their roles in the trades. The Bonn court has expanded its staff to be able to handle the expected wave of Cum-Ex cases from Cologne prosecutors. Germany also issued arrest warrants to get hold of people outside the country who are set to be tried.
The first German Cum-Ex trial ended in March 2020 with the conviction of two London investment bankers, which also focused on Warburg-related trades. They both cooperated with prosecutors and the court, sparing them jail time. In total, more than 1,000 suspects in the financial industry are being probed across Germany.
Warburg, a German private bank with a storied history stretching back more than a century, has repeatedly said it never intended to participate in illegal transactions, mislead authorities or seek unjustified tax refunds.
The ruling has no financial impact on Warburg, the Hamburg-based lender said in an emailed statement. The bank appealed the March 2020 judgment, which seized the profits the bank allegedly made with Cum-Ex. The bank said that the new verdict isn’t a surprise, given the 2020 ruling by the same court.
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