Dividend-Tax Trades Were Criminal Act and ‘Blatant’ Money Grab, Court Says

(Bloomberg) -- The Cum-Ex trading practice blamed for costing German taxpayers billions of euros was illegal and can be punished as crimes, the country’s top criminal court ruled.

In the first case about the controversial tax strategy to reach the top tribunal, the Federal Court of Justice backed the conviction last year of two former London investment bankers, according to the verdict Wednesday in Karlsruhe. The judges also upheld the seizure of 176 million euros ($208 million) from M.M. Warburg Group, the profit that the private lender made from these transactions.

“This was no loophole,” Rolf Raum, the presiding judge, said in explaining the decision. “It was a blatant grab from the bag that holds all taxpayers’ contributions.”

Throwing out the appeal boosts the prospects of probes still pending into more than 1,000 suspects and dozens of banks across the global financial industry that prosecutors say benefited from the trades. The scandal has engulfed large parts of the finance sector because setting up the transactions required the help of multiple players, from traders to brokers to lawyers.

It’s the first time top judges ruled on the legality of the trades. The case targeted the verdict that a court in Bonn issued in March 2020, when the tribunal convicted two former London investment bankers, Martin Shields and Nicholas Diable. Both avoided jail time by cooperating with prosecutors. They were on trial for what the charges said amounted to a 400 million-euro tax evasion.

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In Cum-Ex deals -- named after the Latin terms for with-without -- shares rapidly changed hands to earn duplicate refunds on dividend tax. Lawmakers estimate that the scheme may have cost taxpayers more than 10 billion euros by the time Germany revised the rules in 2012 to close down the practice.

In the Bonn case, Shields got a suspended sentence of one year and 10 months and was ordered to repay 14 million euros. He accepted his conviction but asked the appeals judges to overturn the seizure of the money.

Diable, who was acquitted from some parts of the charges, received a one-year term that was also suspended. He appealed his conviction.

Warburg told the top judges at a hearing in the case in June that it was unfairly turned into a scapegoat in the Cum-Ex affair. The lender sought to overturn the seizure of the profit that Warburg reaped, according to the Bonn verdict.

In a statement following the Karlsruhe ruling, the Hamburg-based bank said it was “disappointed” by the outcome and that it hadn’t been given a fair chance to defend itself the seizure of the money. Warburg will now consider its next legal steps, it said.

Prosecutors had appealed to make the court change some technical language in the verdict on how profits can be seized from individuals involved in the trades. The Bonn ruling allowed prosecutors to go after profits of any participant only until they have recouped the total tax loss in the case. Instead, prosecutors wanted to be able to target anything a perpetrator received, without regard for that limit.

The case is BGH, 1 StR 519/20.

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