A Star Trader Turns Star Witness in $12 Billion Tax Scandal

For an employee who raked in millions each year, one of Duet Group’s top traders maintained fairly irregular desk hours.

Some days he wouldn’t set foot at all inside the office on the fourth floor of Al Fattan Tower in Dubai’s financial center, according to former colleagues who asked not to be identified discussing corporate life. But for a few weeks each spring, when European companies dole out dividends, the trader -- whom Bloomberg is choosing to call A. for legal reasons -- would log long days at his desk and generate huge profits for his firm.

Those deals have come back to haunt Duet, after A. turned from a star performer to a star witness for German prosecutors. A.’s story reveals the far-reaching net that continues to entangle individuals and firms who were engaged in so-called Cum-Ex transactions, almost a decade after the dividend-tax practice ended. London-based Duet at its peak had several billion dollars under management and allegedly played a key role in arranging the deals.

A., who left the firm in 2015, is one of the first traders to cooperate with an investigation into what German lawmakers say is one of the biggest tax heists in European history. He joins a handful of finance industry figures who did Cum-Ex trades at other firms and have provided testimony about former employers, colleagues and counterparties -- cooperation that has helped some of them stay out of jail.

This story is based on London court filings and an indictment against two bankers -- convicted last year -- assembled by German authorities, as well as conversations with more than a dozen people involved in the probe and familiar with Duet’s operations. They asked not to be identified because details of the case remain confidential.

A Star Trader Turns Star Witness in $12 Billion Tax Scandal

Tough Choices

Police briefly apprehended Duet co-founder Henry Gabay last year in connection with an extradition hearing. Gabay denies any wrongdoing. At least three other people with ties to Duet have faced scrutiny from the authorities. One Duet employee -- who works in operations -- lost a ruling this month challenging a German extradition request, after A.’s testimony resulted in a warrant.

Sanjay Shah, a former Cum-Ex trader with Solo Capital Partners LLP, says that those under scrutiny face a stark choice.

“Do they just want to cooperate and do what they need to do to have an easy life? It’s as simple as that,” Shah said in an interview late last year.

Last month, Danish prosecutors charged Shah and another Briton for their alleged roles in a 9.6 billion-krone ($1.6 billion) tax-fraud probe. He maintains that what he did was legal and denies any wrongdoing.

The ex-trader, A., is under investigation himself. His lawyers in Germany and the U.K. declined to comment.

New Gig

A. had never heard of Gabay’s firm when he was first approached by a headhunter about the role -- but one thing he was intimately familiar with was tax.

A qualified chartered accountant, he had worked on “tax-optimizing” ideas in the mid-2000s while at JPMorgan Chase & Co. in London. A. told prosecutors that he helped develop a Cum-Ex structure for the U.S. bank in 2008, only for the firm to abort the practice a year later because of a change in regulation, according to the indictment in the German case.

Patrick Burton, a spokesman for JPMorgan in London, declined to comment.

Read More: Why ‘Cum-Ex’ Tax Dodge Casts Shadow on Global Banks: QuickTake

A.’s testimony, which detailed Duet’s Cum-Ex operations, caught up with Gabay in an unsuspecting moment in late June. Strolling through Toulon airport in the south of France with his wife and their children for a flight back to London, he was briefly apprehended by French police at the request of German prosecutors and forced to stay at a fixed residence after posting bail.

At Gabay’s extradition hearing in Aix-en-Provence in July, a French judge said that German prosecutors believe he took part in a scheme that defrauded the state of 94 million euros ($110 million) between 2009 and 2011. Gabay complained in court that he was never summoned by authorities, and that he would have responded immediately had that been the case. But he never got an email or a phone call, he said.

‘Fully Innocent’

The Duet boss didn’t oppose extradition to Germany and he was released the same day he arrived in the country after posting a security deposit. He hasn’t been charged in any German case.

In a statement a few hours after the French hearing last summer, Gabay said he was willing to cooperate with German investigators. He also said that in 2010 he wasn’t a controlling shareholder of Duet.

Gabay said after the French hearing that he “had no role in any part of the business that dealt with dividend arbitrage strategies.” He said those sorts of transactions were run by another team. For the fund to which the allegations appear to relate, Gabay said he “never traded any stock, selected any service provider.”

“I’m fully innocent and I’m defending myself,” Gabay told a London court about the Cum-Ex probe, in an unrelated civil lawsuit in January. He declined to further comment on most aspects of this story.

The Dragnet

Gabay isn’t the only Duet alumnus affected by A.’s testimony.

Alain Schibl, one of the firm’s founders, and Osman Semerci, a former executive who joined Duet more than a decade ago after leaving Merrill Lynch & Co., have both agreed to be interviewed by Cologne prosecutors.

An attorney for Schibl declined to comment other than to confirm that both executives are cooperating with the probe. Schibl left Duet in 2013. A lawyer for Semerci declined to comment.

Another, relatively junior, Duet employee faces extradition to Germany. Vijaya Sankar, 44, lost a bid to challenge German prosecutors’ arrest warrant, which was based on A.’s testimony. The warrant also outlines the alleged roles of Schibl, Semerci and Gabay.

“Extradition would not be disproportionate taking account of the seriousness of the conduct alleged and the likely penalty in relation to the offenses,” Judge Timothy Godfrey said while ruling on Sankar’s case Feb. 9. Sankar is being sought over three counts of tax crimes.

A Star Trader Turns Star Witness in $12 Billion Tax Scandal

Like the other Duet officials, Sankar hasn’t been charged with a crime, his lawyers said.

Godfrey’s ruling said that “together with” A., Sankar assumed the planning of the transactions.

A. was in charge of setting up the deals at Duet, according to his testimony cited in the German indictment. He started to cooperate with Cologne prosecutors after he learned he was being investigated, people familiar with the situation said. His role was similar to that of other players at funds who orchestrated the transactions for investors, effectively turning the former into prime targets for the German authorities.

The move against Duet highlights how a dragnet is now being drawn through the entire Cum-Ex industry, following executives around almost a decade after the end of the controversial trading strategy.

Eager for More

The Cum-Ex scandal has touched all corners of high finance, from smaller outfits like Gabay’s firm, to storied private-banking dynasties like the Warburgs in Hamburg, and to Wall Street giants including Morgan Stanley and Bank of America Corp. Germany has secured convictions of ex-traders and settlements with institutions like Deutsche Bank AG and Unicredit SpA’s German HVB unit, and lawmakers in the country -- who claim the trades cost the state some 10 billion euros -- are eager for more.

A Star Trader Turns Star Witness in $12 Billion Tax Scandal

The transactions took advantage of a now-abandoned method of taxing dividends, which was exploited to get multiple refunds on the same batch of shares through a combination of short sales and other transactions. Those setting up the deals were typically busiest in the run-up to the dividend season, which usually lasted until the end of the second quarter, traders recall.

In Germany, the practice ended in 2012 when the country revised its rules. Many of those involved in Cum-Ex have said that they believed it was lawful at the time, and they received legal advice saying as much.

The probes have spread beyond Germany, and several European countries are pursuing finance professionals with ties to the U.K. Denmark is targeting Shah, while a former trader at his Solo Capital lost a bid in January to block a Belgian extradition request in that country’s probe.

“Cum-Ex trading was embraced by many market participants, including investment banks, asset managers and brokers, supported by their lawyers and accountants,” said Neil Swift, a partner at law firm Peters & Peters in London. “In order to work effectively, it needed the many and varied cast to work together, satisfied that what they were doing was above board.”

Colorful Career

Duet executives began embracing various kinds of dividend-tax deals with the 2008 arrival of Salim Mohamed, a former Merrill Lynch trader, who hasn’t been charged with wrongdoing and didn’t respond to multiple requests for comment. He left after just a year. Gabay and his colleagues went looking for a replacement -- and found A.

Duet partners were informed about all of A.’s activities, not least because of the high profits, according to the European warrant filed against Sankar. A. structured the deals and Sankar executed them, according to the warrant, which was released by the London court overseeing the extradition request.

For Gabay, an ex-Wall Street banker, his arrest over the summer was a low point in a colorful career that saw him linked last year with a potential investment in English soccer club Derby County FC.

A Turkish-born Swiss national, Gabay started his finance career in the 1990s at Merrill Lynch before he moved to Credit Suisse Group AG, where he became head of Israeli and Turkish investment banking. He left in 2000 and helped to found Duet soon after as an operator of hedge funds and private-equity funds.

Read More: Why ‘Cum-Ex’ Tax Dodge Casts Shadow on Global Banks: QuickTake

Cum-Ex is also causing Duet trouble in civil court in Germany. Credit Agricole SA’s CACEIS unit is suing Duet, Gabay, Schibl, Semerci as well as A. as part of a bid to recoup more than 300 million euros linked to Cum-Ex trades.

‘Upside Down’

Gabay, in an email, said the lawsuit wasn’t well founded and emphasized that Duet was among more than two dozen defendants, including global financial institutions. A lawyer for Schibl said the suit is without merit and the court was asked to dismiss it. Semerci hasn’t received any filing. At least two lawyers who were involved in Cum-Ex transactions were also sued in the case.

Gabay says he’s experienced the strain that the Cum-Ex probes had caused.

“Since July, my life has been upside down,” he told the London court in the unrelated case in January.

For his part, A. returned to London after leaving Duet. He now runs a firm that offers residence in the European Union to overseas investors through so-called golden-visa investments.

In 2017, he was contacted by a lawyer heavily involved in Cum-Ex and going by the fake name of “Benjamin Frey,” who was the first person to cooperate with prosecutors in Cologne probing the trades. He warned A. that he was also under investigation.

Soon after, A. became one of the first traders to cooperate and talk to prosecutors.

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