A German court said it is excluding — at least temporarily — four of the five financial institutions on the hook for €396 million if two defendants on trial in a cum-ex dividend case are found guilty.
The two unidentified British stockbrokers, who were formerly employed by HypoVereinsbank, are on trial for their alleged roles in trading that prosecutors claim cost the German government €447.5 million. In August 2019 the Bonn Regional Court ordered M.M. Warburg and its Warburg Invest subsidiary, as well as units of BNY Mellon, Société Générale, and Hansainvest, an investment company, to appear as associated parties in the trial.
On February 5 Judge Roland Zickler said he saw no legal obstacles to requiring the banks to compensate the government for its losses from the trades, which typically involve the cross-border sale or swap of shares around the time that a dividend is to be paid out on a stock. The shares are then sold or lent to a buyer in a second country immediately before the dividend payout and, depending on the timing of the sale or loan and dividend, a party to the transaction could claim a credit for taxes paid on the dividend, even though no tax was ever withheld in that country on the dividend income.
Court spokesman Tobias Gülich said the March 16 decision to exclude the four financial institutions was necessary to speed up the trial because of the spread of the coronavirus. He also said the cases against the four banks can be pursued later. “They were excluded because they want to present other witnesses and documents, which would take more than two weeks to [do],” Gülich said. “With M.M. Warburg, there are only two things to clear up.”
Gülich said the court could be finished within a couple of days. “The court has only 10 days to decide the case,” he said. “It’s possible to bring the other banks back in through another cum-ex case or in some other proceeding to recover the money.”
Thomas Busching, a tax partner with Squire Patton Boggs in Frankfurt, said the criminal procedures against the stockbrokers form the basis of the possible confiscation actions against the banks as well. “I assume M.M. Warburg is still in the court procedure because it indicated early on that it is willing to pay up,” Busching said. “The other financial institutions still have challenges and evidence requests pending. That’s probably why the court said it would split the contingent part of the confiscations procedure and will address it later.”
Busching said he expects the court to pursue confiscation actions at a later date. “I wouldn’t assume they will be dropped,” he said. “This is all driven by the coronavirus. Somebody on the [court] panel got sick. The risk of the court not being able to continue is getting too high for them. They want to end this as soon as possible, but that doesn’t mean that the other four financial institutions are off the hook.”
Gülich said the one of the judges on the five-member panel who became ill recently had “a regular cold,” and not COVID-19, and is back at work.
Christian Pelz, an attorney with Noerr LLP specializing in criminal and tax law, said severing proceedings against individuals and corporations is common in Germany. “I am sure that the court will resume the proceedings against the [other] entities,” he said. “Whether this will be done in a short time or whether the court waits [to see] if the judgment against the individuals or Warburg is appealed is open [to question].”
BNY Mellon declined to comment on the latest development in the case. The other banks didn’t respond to requests for comment.