ICAP Memos Reveal Inner Workings of Now Notorious Cum-Ex Era

ICAP Plc’s rules for running trades that enabled what German lawmakers have called one of the costliest tax dodges in history were clear: don’t ask, don’t tell.

“Do not enquire after the tax analysis of the German counterparty,” notes a 2008 memo signed off by a group of top officials at the brokerage. “Do not tell the counterparty to the German stock trade that we have sold short,” runs another directive.

The document, part of a Hamburg court case filed in January, highlights the tripwires that brokers on the firm’s structured-products desk had to navigate to enter into the trades. That dexterity helped make the deals a profitable niche for ICAP: the transactions pulled in 28 million pounds ($38 million) of revenue for the broker in 2006, or about 3% of the group total that year, according to another memo.

The filings also flag potential pitfalls if the procedures weren’t followed, including the risk of being drawn into a German tax evasion investigation.

That’s proved prescient as regulators across Europe today probe multiple finance firms that allegedly took part in the practice, which became known as Cum-Ex, a Latin term that means “with/without.” The strategy took advantage of loopholes to let multiple people claim ownership of the same stock and the right to a refund of taxes withheld from dividends. It is widely reported to have cost German taxpayers alone more than 10 billion euros ($12 billion).

Although it is contested whether such deals were illegal at the time, authorities in Germany and other nations affected now brand them as criminal and those investigations have drawn in banks like Deutsche Bank AG, Barclays Plc and Macquarie Group Ltd. as well as investment funds such as Duet Group. More than 20 people have been charged with various crimes.

And TP ICAP Group Plc, the company created after Tullett Prebon Plc bought ICAP’s voice-broking operations in 2016, says it has inherited a mounting pile of investigations and litigation.

As well as the civil lawsuit featuring the memos, which was filed against the firm by M.M. Warburg & Co., London-based TP ICAP says it’s aware of probes and proceedings involving the German Federal Tax Office, as well as prosecutors in Frankfurt and Cologne, and may face potential further civil cases. The broker has hired external lawyers and is carrying out its own investigation of “the relevant desk from 2006-2009,” according to the company’s 2020 annual report.

ICAP is also mentioned more than 800 times -- more than any other broker -- in the indictment of five former traders at UniCredit SpA’s German unit who are facing prosecution as part of another Cum-Ex case that began last month in the city of Wiesbaden.

Pivotal Role

The various cases underscore how ICAP and other interdealer brokers -- intermediaries in the financial markets that match buyers and sellers -- stood at the center of these now-notorious deals. Martin Shields, one of the former UniCredit traders facing charges who was also convicted in a separate trial last March, described them as “the glue that held the system together.”

Along with ICAP, the “most significant” players also included Equinet Bank AG, Novus Capital Markets Ltd. and Tullett Prebon itself, according to Shields’ testimony.

“Interdealer brokers were effectively bringing a market ‘cloak’ over the whole thing,” said Richard Collier, a University of Oxford lecturer who recently published a book on the scandal. “The chief benefit in a large number of cases was to allow the parties to deal with each other, without it being obvious that they were dealing with each other.”

A typical Cum-Ex deal was a delicate balancing act -- timed around the once-a-year dividend payment typical of companies in continental Europe -- that required an array of parties to work together and leave nothing to chance in terms of price and timing, Collier said. An inter-dealer broker, supposedly an independent third party, could provide a layer of credibility to anyone examining the trade, he said.

Trading Strategy

At ICAP, the trading strategy was reviewed at some of the highest levels of the firm. At least nine executives signed off on the 2008 memo, for instance, including then-EMEA general counsel Duncan Wales and board member and chief operating officer Mark Yallop. No one approving or named in the memo has been sued or charged with any wrongdoing.

The memos don’t show any involvement from Michael Spencer, who built the firm over three decades before selling off the voice-broking operations in 2016, and the remaining electronic-trading operations to CME Group Inc. two years later. The billionaire is now a member of the U.K. parliament’s upper chamber.

Spencer declined requests for an interview. Wales and Yallop declined to comment.

Calm Desk

At ICAP’s headquarters in the City of London, the structured-products group was responsible for carrying out the transactions. The desk stood out for its calm amid the often-raucous trading floor, according to former colleagues who requested anonymity discussing private information. They spent much of their time arranging large, complex transactions and traded infrequently, unlike many of their counterparts who hustled for hours for low-commission trades on bonds and derivatives.

Desk head Shaun Miell and his team had close connections to some of the Cum-Ex industry’s best known figures, according to court documents and company filings.

Miell funneled some of his wealth into an upmarket Indian restaurant near the U.K. parliament called the Cinnamon Club, a popular hangout for both political insiders and dividend traders. One of his fellow investors in the venture was Paul Mora, another of the former UniCredit traders who are facing charges in Germany linked to Cum-Ex trades and who was placed on Interpol’s Most-Wanted list in February. Mora, who is now based in New Zealand and has previously denied any wrongdoing, declined to comment.

ICAP Memos Reveal Inner Workings of Now Notorious Cum-Ex Era

ICAP invited Shields and Mora away on skiing weekends, court filings show. Neil Plumpton, a senior broker on the ICAP desk, attended Oktoberfest -- Munich’s legendary beer festival -- with them and later briefly joined Arunvill, the Cum-Ex-focused hedge fund the pair founded after leaving UniCredit.

Miell declined to comment through a spokesman for London Stock Exchange Group Plc, where he now works. Plumpton declined to comment. Neither have been sued or charged with any wrongdoing.

Dividend Alchemy

The memos that detail the procedures for running the trades outline the lucrative alchemy Miell and his team would carry out. Over a three-day period, ICAP brokers would buy derivatives linked to a Germany company’s shares about to pay dividends, borrow its stock and sell it -- also known as a short sale -- and then buy its shares back again.

When all the various trades ended, the firm could walk away with as much as 6.5% of the dividend, a 2009 memo shows. The higher the tax rate on dividends, the bigger the potential tax refund that could be claimed by multiple investors and the more that could be made off the transaction.

“As the withholding tax has gone up, there is more ‘juice’ in the trade,” according to the 2009 memo.

The brokerage’s trades involved dividends paid by some of the biggest and most established German companies, including Deutsche Telekom AG, Allianz SE and Volkswagen AG, the memos showed.

Arm’s Length

ICAP received advice from the Frankfurt offices of Freshfields Bruckhaus Deringer and Clifford Chance, two of the world’s biggest law firms, that said its actions weren’t abusive, the broker’s memos note. Clifford Chance’s advice included the need for transactions to take place on an arm’s length basis and for there to be no collusion between the counterparties, one of the court filings shows.

Christoph Tillmanns, a spokesman for Clifford Chance in Frankfurt, declined to comment on specific clients citing company policy. The law firm hasn’t given any opinions “endorsing cum-ex structures,” he said in an emailed statement.

“On the very few occasions we actually advised clients on cum-ex structures, our advice was conservative,” Tillmanns said. “We took the view that given the fact that the legal tax situation of cum-ex transactions was unclear (and had been for some time), that tax-structuring models based on this lack of clarity were inadvisable.”

Freshfields declined to comment.

Other Cases

Any precautions that ICAP’s brokers took haven’t stopped the increased legal scrutiny. The firm’s alleged involvement in Cum-Ex trades doesn’t only loom large over the Hamburg and Wiesbaden cases but also over a 2019 indictment assembled by Cologne prosecutors for a landmark tax-evasion case against Shields and another UniCredit trader, who both cooperated with prosecutors. ICAP is mentioned more than 100 times in the case documents.

Another legal dispute emerged in London in November between the companies that acquired the two sides of Spencer’s empire: voice-broker buyer TP ICAP and CME Group, the purchaser of the electronic trading business. TP ICAP is suing a CME subsidiary, claiming that it wasn’t informed of the looming threat of Cum-Ex and that it has unwittingly inherited a mess of litigation. The CME unit has sought to have all or significant elements of the case dismissed.

TP ICAP claims in that suit that it’s being probed by German investigators who have zeroed in on unidentified members of staff involved in “planning, handling and organizing” Cum-Ex trades despite being “aware of the criminal nature of such transactions.”

“We’re cooperating with German authorities on this matter,” TP ICAP CEO Nicolas Breteau said in a March interview. “This all happened a long time before TP bought ICAP.”

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