Evasion Equation

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HypoVereinsbank Settles Dividend-Stripping Tax Case

Two chairs, dividend stripped of lawyers. Source: DPA
Two chairs, dividend stripped of lawyers.
  • Why it matters

    Why it matters

    Prosecutors are investigating whether HypoVereinsbank promoted illegal tax-evasion investment products. The bank has set aside €200 million to cover possible fines.

  • Facts

    Facts

    • A legal loophole allowing dividend-stripping trades was not closed in Germany until 2012.
    • The arcane investment practice has cost Germany billions of euros in tax revenue.
    • A U.S.-based private equity investor, Clemens Vedder, helped broker a deal for HypoVereinsbank.
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    Audio

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In a surprise legal twist, HypoVereinsbank has agreed to drop its claim for more than €120 million ($160 million) against a former client, Rafael Roth, in a case involving the investment practice of dividend stripping, known as “cum-ex trades.”

The bank and its client, who has since died, used a loophole in German law allowing them, through clever short-selling, to buy shares of a company just before it paid out a cash dividend to secure capital gains tax credits.

For three years, from 2006 until 2008, everything went well. Then the German tax authorities demanded €120 million back from Mr. Roth and the bank. The one-time business partners then became adversaries.

At a hearing in July, things didn’t look bad for HypoVereinsbank, which is based in Munich. At a hearing in Frankfurt district court, the presiding judge found that Mr. Roth was responsible for the trades.

Mr. Roth’s lawyers argued that HVB had conducted the questionable sales without his knowledge. They argued that Mr. Roth never guessed that his trades were being made at taxpayer expense. But according to the judge, Mr. Roth would have had to explicitly rule out short sales in order to avoid legal responsibility, something he did not do.

But something must have happened in the time between the hearing in July and the discussions just concluded between HVB and Mr. Roth’s son, Joram Roth, and his lawyers. Last month, the bank looked to be a likely winner in court. However, looking at the new agreement, it appears the opposite is true.

One person close to the negotiations told Handelsblatt that Joram Roth will not pay €120 million to HypoVereinsbank, but only a fraction of that sum. That’s particularly bitter for the bank, since it won’t even cover the bank’s costs.

According to company sources, fees for lawyers and advisors are close to €100 million.

Neither Mr. Roth nor the bank wanted to comment on the settlement. “I won’t say anything about the numbers,” Mr. Joram Roth told Handelsblatt. “If an agreement is reached here, then it is only to end the public defamation of my father.”

Rafael Roth died in September 2013 in Berlin, where seven years earlier the bank had proposed to him the ill-fated “cum-ex” transactions. His son believes that it was the stress surrounding the deal that cost the senior Mr. Roth his life.

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