Three London Bankers Face Trial in Germany Over Tax Scandal
Three London Bankers Face Trial in Germany Over Tax Scandal
(Bloomberg) -- A German court paved the way for the trial of six people including three former London investment bankers for their role in the Cum-Ex tax scandal.
The ruling by a court in the city of Wiesbaden sets up the second trial in the country over the trading strategy that’s triggered multiple probes by German prosecutors involving about 500 suspects. Another case is being tried in Bonn, and the court there has said that Cum-Ex trades were criminal.
The indictment in the Wiesbaden case focuses on a group of former bankers at UniCredit SpA’s HVB unit and Hanno Berger, once Germany’s most profitable tax attorney, according to a copy of the charges viewed by Bloomberg News. Prosecutors see Berger as the brains behind the tax strategy they say crossed the line to tax evasion.
Among the bankers charged are Martin Shields and Nicholas Diable, who both are on trial in Bonn. In the Wiesbaden case, their former boss, Paul Mora -- a New Zealander -- is also being charged. The trio worked in London and allegedly set up the trades at HVB’s investment bank unit. The indictment targets also two Germans who worked at HVB. All have left the bank.
There are several lenders caught up in the growing scandal roiling Germany and the financial industry. Lawmakers say the Cum-ex trades cost the government 10 billion euros ($11.2 billion) in lost revenue.
The transactions relied on language in German tax laws that seemed to allow both the actual holders of shares and someone who bought them from a short seller to claim tax credits on a dividend that was paid only once. The strategy made use of tax certificates issued by custodian banks for the buyers. While Germany eliminated the rules in 2012, there’s debate whether they were legal at the time.
The Wiesbaden court will set hearing dates in the first quarter, making it unlikely that the trial will start before the end of March. Meanwhile, the case in Bonn is moving toward its end as the judges there have said they have heard all available witnesses they wanted to question. The next hearing in the Bonn case is scheduled for Jan. 14.
“Our client will continue to actively co-operate with the Cologne prosecutors’ office and the Bonn Court to clarify the facts,” Hellen Schilling, Shields’ defense lawyer, said in response to the Wiesbaden ruling.
Both Shields and Dibale have been cooperating with the authorities in a hope to dodge prison terms. The Bonn court has said that while the trades were criminal, the judges still have to decide upon possible consequences on the pair, and that their cooperation will be taken into account in their favor.
HVB and an attorney for Diable declined to comment.
Berger as well as lawyers for Mora didn’t immediately reply to emails seeking comments. Berger has repeatedly defended the strategy as legal, citing a 1999 ruling by Germany’s top tax court on taxation of dividend payments in short sales.
The pressure is mounting on the various Cum-Ex actors. Last week, Frankfurt prosecutors arrested two former Maple bankers just two weeks after former top Freshfields tax lawyer Ulf Johannemann was taken into custody. Charges on their case have now been filed, a person familiar with the case has said. In the Bonn trial, the court has said that anyone who got money generated via the trades may have to pick up the tab, threatening various banks and investment companies with huge potential bills.
While the Bonn case covers tax losses of about 400 million euros, the charges in the Wiesbaden case cover 61 short sales of shares done between 2006 and 2008 and valued at 15.8 billion euros, costing tax authorities 106 million euros.
In the arrangement described by Frankfurt prosecutors, TP ICAP Plc participated in the deals, selling volumes of shares of companies listed on Germany’s DAX index to late German businessman Rafael Roth.
The stock was sold shortly before the dividend payment day, but delivered only after it was paid. Roth received compensation for the missed dividend payout. As this amount was the same as a net dividend payment, Roth received a certificate for a refund on a tax he never paid, according to the charges.
The shares used in the deal were for the most part delivered by HVB to ICAP. After Roth received the necessary certificate, he returned the stock to ICAP, which resold it to HVB. Prosecutors call the set up a “circular deal” that avoided any real market situation and that was only done to generate the tax certificates. Without them, no one would have made any profit, according to the indictment. HVB, which also provided financing for the transactions, was also Roth’s custodian bank that issued the tax certificates.
TP ICAP declined to comment.
At the beginning of each year, the HVB bankers set up a plan for the upcoming dividend dates, according to the indictment. The profits were shared through futures contracts that helped to veil the action, prosecutors say.
Authorities probed Roth’s dealing, and in 2011 they annulled all the tax refunds. Roth then sued the bank, and HVB later in turn sued Roth and ICAP for damages. The parties settled in 2014. As part of the settlement, Roth and HVB repaid the tax. Roth, who was also a suspect in the Frankfurt criminal probe, died before charges were filed.
The case is: LG Wiesbaden, 6 KLs – 1111 Js 27125/12.
--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
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