Denmark Charges Hedge Fund Pioneer With Stealing $2BN In “Cum-Ex” Tax Fraud

Lawmakers in Germany have called it the “greatest Tax heist” in history: a hedge fund manager exploited what he has described as a loophole in the tax law of Germany, Denmark and the UK to pocket hundreds of millions of dollars via a trading strategy known as “Cum-Ex” – or “With-Without”.

In the past, we have written about how Deutsche Bank and its staff helped these traders to stiff the German government. One year later, Danish authorities have brought charges against Sanjay Shah, the founder of Solo Capital, and one other individual accusing them of stealing close to $2BN from the Danish government.

“This is a case of extremely serious and extraordinarily extensive crime committed against the Danish state,” prosecutors said. “We believe that the two defendants committed cynical and meticulously planned fraud.”

Denmark is trying to recover some $2BN in tax revenue that prosecutors allege was stolen by the perpetrators.

Denmark, which is trying to recoup some 12.7 billion krone ($2 billion), or close to 1% of its gross domestic product, says the entire enterprise was a charade. Its lawyers are seeking to gain access to bank records that they maintain will prove that point. Authorities have now frozen much of Shah’s fortune and he’s fighting lawsuits and criminal probes in several countries. His lawyers have told him he’ll be arrested if he leaves the Gulf city for Europe, though he’s yet to be charged.

The charges are the latest legal escalation for Shah, who lives in Dubai, related to the “Cum-Ex” trades, which were designed to allow his firm to claim multiple refunds on stock dividends. Shah, who has been described as the “mastermind” of Cum-Ex fraud by the Danish tax authority, also faces civil lawsuits filed in both the UK, and Dubai.

Sanjay Shah

Authorities in the UK and Germany are still investigating Shah (others have stood trial in Germany for their role in allegedly helping to structure the trades), but prosecutors in Denmark have apparently seen enough. The latest batch of charges targets “some of the central actors” in the Cum-Ex scandal, they said.

But even before the charges were filed, a civil case filed by the Danes had already succeeded in freezing most of Shah’s assets, including a $20MM London mansion which he owns.

The second person charged in the case was described by prosecutors as the “presumed helper” of the principal figure in the case.

The development is a milestone in a scandal that has outraged Danes since they learned that international financiers stole about $2 billion from state coffers by falsely claiming refunds on dividend taxes. The wider Cum-Ex scandal is still being investigated in Germany and the U.K., as well as in Denmark.

The Danes have frozen as much as 3.5 billion Danish kroner of Shah’s assets, including a $20 million London mansion, as part of its civil case. German lawmakers have called the Cum-Ex scandal the greatest tax heist in history.

A spokesman for Shah said the Solo Capital founder was consulting with lawyers, but reiterated past statements that Shah has never done anything wrong. In an interview last year, Shah said that he took advantage of loopholes in Danish law, but never did anything illegal.

For those who aren’t familir with “Cum-Ex”, here’s a quick rundown showing how it works, courtesy of the Conversation:

Party One, typically an asset manager who owns valuable company shares, “lends” its stock to Party Two, a bank. Under the agreement, the title and ownership of the stock is temporarily transferred to the borrower in return for a fee. Such practices are not only legal but a common part of “short selling”, the practice featured in the 2015 film The Big Short. Essentially, it is where an investor borrows a stock (for a fee), sells it, then buys it back later at a lower price to return it to the original – on the expectation the stock’s value will fall and a profit made.

Party Two then sells the shares with-dividend to Party Three fractionally before the Record Date. However, the shares are delivered without-dividend just after.

Timing, speed and complexity are key. Like a magic trick, the shares “disappear” fractionally before the Record Date and “reappear” with a new owner just after. The aim is to obscure exactly who – Party One, Two or Three – owns the stock on the Record Date. As a result, two parties can simultaneously claim ownership of the one stock.

Up until 2011, a loophole in the German tax code allowed both Party One (the owner of the original stock who had received the dividend and paid tax on it) and Party Three (the holder of the stock just after the Record Date) to claim a tax reimbursement. All colluding parties would then split the gains.

Pretty soon, a judge will need to decide if perpetrators of this scheme, which was allegedly conducted “on an industrial scale,” according to one suspect who cooperated with German investigators, were simply taking advantage of a tax loophole, or aggressively defrauded governments of billions of euros in revenue.