Family offices exposed to Cum-Ex trading scandal

Family offices are likely to have been caught up in the so-called “Cum-Ex” trading scandal that has been unfolding in the last few years in Europe and is now leading to more criminal prosecutions and investigations.

The scandal involves complicated illegal trades and arbitrage deals leading to tax evasion on shares bought and sold. The practice is sometimes referred to as dividend stripping. An analogy used by a publication involved in uncovering the scandal described the scandal in the following useful and clear way: “It’s a bit like parents claiming a child benefit for two – or more – children when there is only one child in the family.”

Bank J. Safra Sarasin was forced a few years ago to compensate billionaire Erwin Mueller, the German founder of the Mueller drugstore chain after he brought a lawsuit against the bank for losses incurred through Cum-Ex investments

One German court has said the scandal is: “the biggest tax swindle in the history of Europe”.

“Given the number of arrests in recent years, and the quantum of the claims being brought by the German, and most recently Danish, tax authorities, it is safe to say that there will be litigation for many years to come in this arena,” says Joshua Swift, an associate in law firm Withers London’s litigation team.

“Whether against the promoters of the schemes, the ultimate recipients of the funds, the investors, those who actually did the trading, or against advisers.  There are already extremely large lawsuits going through the courts of England and the US (New York) at the moment, to name just a few jurisdictions involved.  The defendants include household-name banks.”

The Cum-Ex scandal has been raging in Germany since it was exposed in 2017 and the courts there have recently prosecuted two London-based former investment bankers. 

A few days ago, Henry Gabay, CEO of London-based investment business Duet Group, was arrested in France in relation to a German investigation into the Cum-Ex tax scandal. A number of German banks, including one of the country’s oldest and most revered, Hamburg-based MM Warburg, have also been caught up in the scandal. 

Some lawyers advising clients of the legality of the scheme have also been investigated.  

In Switzerland, wealth management group Bank J. Safra Sarasin was forced a few years ago to compensate billionaire Erwin Mueller, the German founder of the Mueller drugstore chain, after he brought a lawsuit against the bank for losses incurred through Cum-Ex investments.  

London-based financial consultancy FMRC has said family offices are likely to have been investors in Cum-Ex schemes. It has produced a useful table of all the groups involved and the depth of their involvement in the scandal. 

“There is certainly a strong possibility that family offices are exposed to investments that are now embroiled in the Danish and/or German cum-ex affairs, given how prevalent these types of trading strategies were,” says Swift. “It would definitely be worthwhile reviewing investments to identify any involvement at an early stage.”

He adds: “The difficulty for clients is that there were a number of different types of ‘cum-ex’ investment: some totally legitimate and some in the grey areas.  It is often hard for a lay client to know whether their investment relies on exploiting a tax ‘loophole’ that might later be challenged, or something else.”