Controversial Transactions

Left in the Lurch

Luxembourg, Luxembourg City, Neumunster Abbey and St Michaels Church.
  • Why it matters

    Why it matters

    • Dividend stripping might have cost German taxpayers an estimated €12 billion ($13.6 billion) in lost revenue in recent years.
  • Facts


    • Theodor Knepper worked at the bank as chief financial officer and then CEO before being fired.
    • German tax-fraud investigators say they are closing in on illegal dividend-stripping business by 129 banks.
    • The Federal Financial Supervisory Authority closed the German subsidiary of Canada’s Maple Bank to public business last week due to dividend stripping activities.
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Great things awaited Theodor Knepper when he began working for Valovis Bank in mid-2009, despite the turmoil that faced him. The bank, founded in 2001 as Karstadt Hypothekenbank, was suffering from the bankruptcy of Germany’s once-vaunted Karstadt department-store company.

In March 2010, less than 10 months after beginning work, chief financial officer Mr. Knepper announced his first coup: €6 million in profits from a bet of €50 million. Returns of 12 percent – and in only a few months.

As the months went by, Mr. Knepper impressed the bank’s non-executive supervisory board more and more. In 2011, just two years after he started, the bank took on a new structure and the suprvisory board announced that Mr. Knepper was to become chief executive.

His good fortunes didn’t last. Mr. Knepper was fired 14 months after becoming the boss. The supervisory board had released Mr. Knepper “with immediate effect and for good reason,” the bank said in a statement at the time.

It even claimed €48 million in damages from him for the same sort of transaction with which Mr. Knepper had engendered such enthusiasm among the supervisory board in 2010, namely a tax deal involving so-called dividend stripping. Mr. Knepper disputed the accusations.

Mr. Knepper’s whirlwind time at the top is a tale of the excesses of the financial industry – one of the many complicated tricks orchestrated by dozens of banks across Germany and Europe.

Dividend strippers, long celebrated as miracle workers, are now castigated as gamblers.

Dividend stripping is a common technique used by professional investors in Britain and the United States that is now largely outlawed in Germany. The technique involves the purchase of shares, often in large quantities, just before a company pays out a dividend. Once the dividend is paid, the share price drops and the shares are then sold. If the purchases are made with borrowed money, a completely fictional loss can be generated, which can then be used to reduce other capital gains liabilities.

For years, banks have been burdened with difficult business conditions. Interest rates and profit margins are low. Deals involving dividend stripping were well-received in this environment. Double-digit returns with no risk.

But dividend strippers, long celebrated as miracle workers, are now castigated as gamblers.

Such traders and their bosses are now being fired and reported to the authorities. Tax agents and state prosecutors are investigating not only these individuals but also their employers. Banks, investors, consultants, lawyers are all under scrutiny by the authorities. Renowned institutes such as Hypo-Vereinsbank and HSH Nordbank have already made amends. The deals have cost each of them more than €100 million.

Not every bank can afford such penalties: A few days ago, Germany’s top financial regulator closed the German subsidiary of Canada’s Maple Bank to public business. It too was involved in dividend stripping.

In total, almost 130 banks both in Germany and abroad may be involved. That’s according to a USB data-stick provided by an insider to tax-fraud agents in the industrial city of Wuppertal in western Germany, who are leading the investigations.

In March 2011, could Mr. Knepper have suspected things would come to this? He was familiar with the funds that engaged in so-called dividend stripping. Before and after the day when dividends are paid, stock packages worth billions were traded to benefit from the practice. It made something possible that common sense would seem to exclude: The participants allowed themselves to be reimbursed several times for a capital-gains tax they had paid only once. Such tricks were not banned until 2012.

Dividend stripping became the driving impetus in Mr. Knepper’s career. He put €50 million in the multi-asset fund of a German investment company. Three months later, he got the money back along with 12.3 percent profit. The fact that these returns came from the pockets of German taxpayers didn’t stop the chief financial officer. As soon as the next opportunity arose, Mr. Knepper intended to take it.

As chief executive of Valovis, Mr. Knepper then decided to invest €50 million once again in dividend stripping on March, 22, 2011. This time his partner was Sheridan, a small investment company registered in Luxembourg that was heavily involved in the controversial practice. Among its customers were millionaires Carsten Maschmeyer, Clemens Tönnies and Erwin Müller, but also institutional investors such as Swiss Life. The Swiss private bank J. Safra Sarasin also sent its wealthy clients to Sheridan.

Mr. Knepper didn’t need to do much convincing when he spoke of the new investment opportunity in spring 2011. The other members of the management board agreed, and the supervisory board was also enthusiastic about the idea.

And then everything fell apart.

In the second dividend-stripping trade, not only was there no profit. Four years later, only €5 million remains from the original €50 million. The other €45 million are in the hands of the tax authorities – who aren’t releasing the money.

From a dream deal to a catastrophe. After tax authorities for years issued tax refunds amounting to two, three or even eight times the amount of capital-gains taxes that were paid only once, the party has been over since 2011.

Tax officials refuse to grant the reimbursements, and because the deals are set up so that not only the returns but also the invested capital must pass through the tax-collection office, there is a total loss in addition to the zero returns. Only the various advisers and intermediaries have been able to skim off their fees and emoluments beforehand.

But the game could turn out badly for them as well. Public prosecutors in Cologne and Munich are investigating responsible parties at the investment firms and further participants. Sheridan would not comment when contacted by Handelsblatt.

The participants in dividend stripping have reason to fear not only public authorities, but also their former business partners. Countless lawsuits are making their way through the courts. Investors are suing their bank, banks are suing their advisers. And Valovis Bank has filed a claim against its former chief executive.

Valovis Bank wants €45 million of the “not returned investment sum” from Mr. Knepper after throwing him out in October 2012. Plus €2.3 million for “lost profits.” The parties are at loggerheads about not only the dividend-stripping, but also Mr. Knepper’s handling of Greek bonds.

But up to now, Valovis is making little progress. The bank accuses its former head of “grievous dereliction of duty” and of having “negligently assumed a disproportionately high risk” with the Sheridan investment. It argues that Mr. Knepper should not have given credence to the expertise prepared by the lawyer Hanno Berger and the tax professor Joachim Englisch, because they also worked for the investment managers of the fund and thus had a conflict of interest.

A district court in Essen saw things differently. Its decision of July 8, 2015, stated: “The investment in the Sheridan fund was– just barely – covered by broad entrepreneurial discretionary authority. A mistake by Theodor Knepper in evaluating the risk of default cannot be ascertained.”

On February 22, the adversaries will meet for the next round at the Higher Regional Court in Hamm. If Mr. Knepper wins again, he intends to counter with his own claim. Regardless of the total loss to Valovis, Mr. Knepper wants payment for his contract – up to its originally planned termination on December, 31, 2016. That would be €36,666.66 in fixed salary per month. And Mr. Knepper is after his bonus as well.


Sönke Iwersen and Volker Votsmeier are part of Handelsblatt’s investigative team. To contact the authors: and  

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