Bank MM Warburg has sued Deutsche Bank – it is becoming increasingly unlikely that Hamburg will be right.
(Photo: Reuters)
Dusseldorf This is not a good sign for MM Warburg: the Frankfurt Higher Regional Court wants to announce the verdict as early as March 2, said Senate Chairman Peter Scherer at the hearing. The court, it seems, has largely made up its mind.
There is little to suggest that the Hamburg private bank can still avert the impending defeat by Deutsche Bank. Warburg hopes that she will not have to answer for the three-digit million euro amount that the tax authorities have charged her for illegal cum-ex transactions.
Initially, the Hamburgers had gone all out with their lawsuit and had demanded the full tax amount of almost 170 million euros from Deutsche Bank. But after sobering signals from the court in the first hearing, Warburg changed strategy.
In the new lawsuit, MM Warburg is only demanding back around 63 million euros. That is the share that was collected by Deutsche Bank and other parties involved in the cum-ex transactions. Lawyers speak of a joint and several debtor settlement.
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The Latin term stands for the trading of large blocks of shares with (cum) and without (ex) dividends, with which the participants aimed to have unpaid capital gains taxes reimbursed. These deals were illegal. Banks are now arguing about which of them should bear the damage.
Court gives MM Warburg little hope
The Higher Regional Court reacted cautiously to the new complaint. Apparently the Senate is of the opinion that Warburg cannot claim Deutsche Bank for part of the damage either. A spokesman for Deutsche Bank was confident of victory: “In our opinion, the Higher Regional Court also seems to follow our legal opinion. Warburg cannot pass on his own cum-ex tax liability to a third party. We are optimistic that the court will dismiss Warburg’s appeal.”
A dismissal of the lawsuit would not come as a surprise: during the oral hearing in early November 2021, the Higher Regional Court had already signaled that MM Warburg’s lawsuit had little chance of success. Judge Scherer made it clear that the Senate considers the judgment of the Frankfurt Regional Court to be correct in principle.
In the first instance, MM Warburg suffered a clear defeat. In the judgment announced on September 23, 2019, the Frankfurt Regional Court left no doubt that MM Warburg had to foot the bill.
The Hamburg private bank cannot hold Deutsche Bank, as the custodian bank, jointly liable for capital gains taxes that have not been paid. “Privatbank Warburg is the original tax debtor and therefore has to bear the taxes primarily in relation to Deutsche Bank,” the court ruled.
Deutsche Bank was in principle obliged to pay capital gains tax on the sale of shares to the tax authorities. This follows from its role as custodian of the seller of the shares. In the disputed cases, the papers came from the London broker Icap.
According to the court, the fact that Deutsche Bank as the custodian bank was obliged to pay the tax alongside the private bank Warburg as the buyer of the shares only served to secure the tax claim in favor of the state. However, this does not justify an obligation on the part of Deutsche Bank to compensate Warburg Bank as the primary tax debtor.
Criminal proceedings burden MM Warburg
The chamber of the regional court also expressed doubts about the representation of the private bank Warburg, according to which there had been no agreed cum-ex transactions. This thesis is hardly tenable, especially since the business has already been the subject of two criminal proceedings before the Bonn Regional Court. In these proceedings, it became clear that Warburg Bank was well aware that the profits came from the refund of unpaid capital gains taxes.
In the first judgment, the court convicted two British stockbrokers involved in the MM Warburg deals. They got away with comparatively moderate suspended sentences because of their educational contributions.
The Federal Court of Justice has now confirmed the verdict and classified Cum-Ex as punishable. In another criminal case, the court sentenced the bank’s former chief representative to five and a half years in prison. This judgment is not yet final.
A former manager of the bank subsidiary Warburg Invest is currently sitting in the dock. He recently made a partial confession. However, the bank emphasized that this case has nothing to do with the lawsuit against Deutsche Bank.
Investigations in the environment of Deutsche Bank
Deutsche Bank is by no means unencumbered in the cum-ex complex. Although the institute emphasizes that it was not involved in the transactions itself, it was all the more active as a service provider. This is confirmed by an internal investigation commissioned by the bank itself. The so-called “Xenon” reports show that Deutsche Bank played many roles in the deals.
It acted as a custodian bank, provided borrowed capital, supplied the short seller with shares or hedged prices with derivatives for the short seller, sometimes closely coordinated. At these points, the institute participated in the cum-ex profits. Today the bank has to reckon with the “skimming off of profits and fines”, as it writes in annual reports.
In fact, the public prosecutor’s office is not only very critical of MM Warburg’s activities, but also of Deutsche Bank. The scope of the investigation is very extensive. Around 100 suspects come from the environment of the largest German private bank, even if many have left the house in the meantime. The investigators also consider some top managers to be suspicious. Among them are former co-CEO Anshu Jain and Garth Ritchie, who served on the board until mid-2019. Both come from investment banking.
A victory before the Frankfurt Higher Regional Court would not eliminate the cum-ex legacy at Deutsche Bank. MM Warburg won’t rest anytime soon either. This is underscored by a second lawsuit against Deutsche Bank before the Hamburg Regional Court.
More: Everyone against everyone: The cum-ex debacle caused a wave of claims for damages