Mar 20, 2023
Former Merrill Lynch Trader Swept Up In Tax Fraud Investigation
(Bloomberg) -- Osman Semerci, a once-rising star at Merrill Lynch & Co. until the unit he oversaw helped usher in the firm’s demise, is in the spotlight again.
Authorities charged Semerci and three other people linked to the London-based asset manager Duet Group last year for their involvement in Cum-Ex, a stock-trading strategy that exploited gaps in how Germany collected dividend taxes. They are accused of participating in a scheme that generated more than €92 million in allegedly illicit tax refunds in 2010.
In addition to Semerci, who was a partner and chief executive officer at Duet for several years following his departure from Merrill Lynch in 2007, prosecutors have charged co-founders Henry Gabay and Alain Schibl and a former back-office employee, Vijaya Sankar. Sankar, who helped implement Cum-Ex-related deals, appeared n a Bonn court on Monday, the first of the group to be tried.
After prosecutors read the indictment against him in court on Monday, his lawyer said Sankar will make a statement on March 23.
Semerci’s German lawyer didn’t reply to emails seeking comments. When reached for comment, Gabay’s lawyer wrote, “the accusations made by the Public Prosecutor’s Office are rejected in their entirety.” Schibl’s attorney said his client will only discuss the case in court.
The former Duet employees are only the latest finance professionals to come under scrutiny from German prosecutors, who are pursuing traders and bankers around the world for what lawmakers have described as a tax scam that cost the country at least 10 billion euros ($10.7 billion) in lost revenue. Named for the Latin term for “with-without,” Cum-Ex deals took advantage of laws that seemed to allow multiple investors to claim refunds of the same dividend tax.
Cum-Ex trades became popular with banks and hedge funds in the early 2000s and continued in the wake of the financial crisis and waves of government bailouts. Germany changed the way it collected dividend taxes in 2012, thus blocking the practice, and launched a sprawling investigation into participating banks and hedge funds.
Many of those allegedly involved in the transactions, including Gabay and Schibl, have said that they believed it was lawful at the time, and that they received legal advice saying as much.
The probes that began more than a decade ago have recently become more intense as prosecutors have gained greater insight into how banks, brokers, lawyers and others participated in the deals. Authorities have conducted a series of raids on global banks including Bank of America Corp., Morgan Stanley and Barclays Plc., and are now investigating more than 1,600 people. Officials raided the homes of HSBC Holdings Plc employees on Feb. 28, just weeks after targeting BNP Paribas SA’s office in Frankfurt.
A separate trial against two bankers at M.M.Warburg also started in Bonn on Monday. The pair had been charged alongside two other bankers who were already convicted to 5.5 years and 3.5 years respectively.
The Duet Group, a two-decade-old multi-strategy firm that invested in everything from real estate to commodities, has been on Germany’s radar since at least 2016. Investigators were initially suspicious of an entity called the Caerus II Equity Fund, created by the Hamburg-based Varengold Bank AG, which they claim that Duet orchestrated Cum-Ex trades for in 2010.
Semerci was appointed CEO at Duet in 2008. The firm began engaging in Cum-Ex transactions around that time, Bloomberg has previously reported.
This isn’t the first time the Turkish native has been associated with what turned out to be risky trading activity.
Read More: Semerci, Former Merrill Executive, to Run Duet Group
A former rising star at Merrill Lynch and one of the best-known figures on Wall Street during the industry’s mortgage-bond craze, Semerci was promoted in 2006 to lead the bank’s global fixed-income trading division. He quickly ramped up sales of collateralized debt obligations, or CDOs — esoteric products often tied to subprime mortgages – even as competitors were backing away.
According to an internal bank review, Semerci inherited about $5 billion in CDOs when he took on the job. In barely a year, he created $70 billion in new CDOs and sold roughly $40 billion, leaving the firm saddled with $35 billion exposure at the onset of the mortgage crisis.
In October 2007, Merrill Lynch shocked the markets by announcing that it was writing approximately $8.4 billion off the value of assets, including CDOs. Semerci was fired that same month.
Bank of America agreed to buy Merrill Lynch less than a year later, bringing an end the storied brokerage’s 94 years of independence. By that point, Semerci was at the helm of Duet, where he stayed for four years until stepping down to found EMEA Capital LLP.
Schibl then left Duet around 2013, according to Financial Conduct Authority records, leaving Gabay in charge. The sprawling asset-management business invested in African stocks, a Moldovan electricity firm, and a luxury hotel on the Caribbean island of Saint-Barthelemy. In 2019, Gabay and Semerci teamed up to invest in Moneybaba Ltd., a London-based financial-technology company.
But the Cum-Ex probe brought this heady era to a halt. Some Duet entities — including Duet Asset Management Ltd. and Duet Private Equity Ltd. — went into liquidation last year in the UK and the group’s current status is unclear, filings show.
The former partners have also bitterly fallen out. In a dispute over unpaid debts that emerged in a London court case in 2021, Gabay and Schibl traded allegations of impropriety. After learning what Schibl told German prosecutors about him, Gabay sent a furious note in December 2020.
“You are both dead in my eyes,” Gabay wrote in an email cited in a court document. “Now you are both an enemy, you chose war, you chose lies just to make you feel good... let’s see how the war will end.”
The Cologne indictment covers Cum-Ex trades Duet allegedly was involved in 2010 and 2011. The 2010 deals allegedly produced about €92 million in illicit tax refunds, of which Duet received €13.6 million and Gabay, Semerci and Schibl another €14 million combined as their share of profits. Sankar was given a bonus of €93,000.
The 2011 trades sought tax refunds of €123 million, of which authorities — already suspicious of Cum-Ex transactions — refunded only €1.4 million. Sankar was not charged over the 2011 deals.
The Duet probe was first disclosed in the summer of 2020, when Gabay was arrested in the south of France and extradited to Germany. He posted €3 million bail and was released. In September 2020, Semerci and Schibl showed up voluntarily in Cologne and posted €2 million each to avoid being taken into custody.
All three have agreed to be questioned by prosecutors and said that the team handling Cum-Ex trades at Duet was working autonomously. The men have also said that they never personally set up the trades or knew about the details. Semerci has also said that in early 2011 he tried to convince his partners to end Duet’s practice of investing in Cum-Ex trades given the legal risks, but that he didn’t prevail. He left Duet at the end of 2011.
When reached for response, a spokesperson for Varengold referred to a report stating that Cologne prosecutors are investigating current and former staff and board members for their alleged role in deals executed between 2010 and 2016. The spokesperson declined to comment beyond that.
Sankar will be the first of the four men charged to appear at trial. While the court officially cites space concerns for that decision, there’s likely also a tactical reason behind it: he has testified in the probe and is expected to cooperate further during the trial in a bid for leniency.
He could eventually testify against his former bosses as a key witness.
(Updates with schedule for Sankar statement in fourth, separate Warburg trial in 10th paragraph)
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