On 18th March 2020, the same day as Covid-19 brought the first steps to a lockdown in London, the German court in the trial of two former bankers for tax evasion for CumEx trading expedited their ruling.

Following its interim ruling that CumEx trading was per se illegal, the two former London investment bankers were convicted of tax evasion at Germany’s first trial over so-called Cum-Ex trades in a landmark ruling that could lead to hundreds more cases.  It is noteworthy that the court system in Germany does not have a formal plea system.

Martin S. Nicholas D. were able to avoid jail by cooperating with prosecutors. The Bonn court gave them both suspended prison terms.

The trial alleged CumEx trades which amounted to circa 400 million euros’ tax evasion. The verdict was expedited by several weeks because of the coronavirus pandemic.

At the end of last year, David set out the implications for the various UK parties involved in Cum-Ex transactions, which took advantage of a now-abandoned method of taxing dividends, which made it possible to get multiple refunds through a combination of short sales and other transactions.

Both bankers received suspended sentences with a requirement to repay several million Euros of benefit from the CumEx transactions.  This should not be seen as the likely sentences for those who have not co-operated.

In this case, it appears that their first mover position and co-operation brought reward.  Ordinarily, under German sentencing law it is understood that there would be no possibility of a suspended sentence for causing tax evasion of several million Euros.  However, in this case the court sought to understand how the financial-services industry was able to obtain multiple tax refunds on dividend payments. Because the complex practice required the interplay of many characters, the case led to a closer examination of the wider industry. Both defendants provided significant assistance, which helped identify crucial details of the strategy.

The court also made a ruling against the main lender involved in providing liquidity to the CumEx trades, namely M.M. Warburg Group, which has been ordered to repay Euro 176 million, which was found to be the profit the lender made from deals.

Wednesday’s ruling could open the door to even more cases from prosecutors, who are investigating more than 600 people. 

The current view is that there is now expected to be a “cascade of indictments” in Cum-Ex investigations.

There have already been significant recent developments in the CumEx story in early 2020, which reinforce the need for UK firms to take note and act, including:

  • German prosecutors have stated that they will pursue around 400 more suspects arising out of 56 investigations;
  • Dozens of law firms and lawyers may also face penalties, having drafted highly priced opinions contending that CumEx trading was lawful;
  • This increased prosecuting intensity may well stem from the 10-year limitation period common to German tax fraud cases, and;
  • Barclays Plc and Bank of America Corp.’s Merrill Lynch face renewed exposure having been caught up in Germany’s expanding CumEx scandal, with prosecutors alleging that they were among several companies used by the now-defunct Maple Bank as short sellers or brokers to expand profits and “better veil” the controversial transactions.

There are at least two further trials which are set to commence, albeit in the current climate the dates will no doubt be significantly put back.  It appears that many more are likely to be contemplated.

It still remains to be seen whether the UK prosecuting authorities will take any steps to investigate these practices, but any UK institution and its senior personnel involved in CumEx trading will be well advised to take all necessary steps to protect their interests, both in respect of any potential proceedings in Germany, but also in respect of potential intervention in the UK.

David Stern is an experienced barrister practising in financial crime.  He is Joint Head of Business Crime at 5 St Andrew’s Hill, a specialist chambers in London.

He was at the forefront of the LIBOR benchmark manipulation scandal successfully representing senior bankers and inter-dealer brokers in SFO criminal proceedings.

He is also considered a leading legal expert in CumEx dividend arbitrage trading.

David is repeatedly ranked in Chambers & Partners as a leader in the field of Financial Crime (London) as well as the Legal 500 for Business and Regulatory Crime (including Global investigations) (London).