CL-2018-000297, CL-2018-000404, CL-2018-000590, - [2025] EWHC 2364 (Comm)

Klar Model trading, between March 2012 and May 2015, appears to have been Mr Klar’s principal occupation in 2012, while in 2013 to 2015 it sat alongside lucrative activity as a trading counterparty in both Solo Model and Maple Point Model trading. The Klar Model used Salgado as custodian. Salgado was a Comoros Islands company Mr Klar incorporated for the purpose. He used a simplified cum-ex trading model to generate successful tax refund claims dated between December 2012 and May 2015 for an aggregate amount paid out by SKAT of DKK321m.

Mr Klar qualified as a chartered accountant in 1997 and worked at Shell, as a tax structurer, then at Enron, as director of a tax department, between 1997 and 2001. After the collapse of Enron in 2001, he joined ABN Amro as director of Structured Debt & Equity working on tax-related projects, but not cum-ex. He was introduced to Sanjay Shah by Rajen Shah, probably in 2008, and became one of the first recruits to the Solo business.

In September 2010, Mr Klar described his role at SCL as “Principal of Solo Capital’s start-up fund management business” in charge of “structuring … vehicles to trade market neutral equities strategies over listed Western European shares”. He was a Co-Chief Investment Officer, together with Rajen Shah, and he was SCL’s Compliance Officer, as a result of which he was among other things the designated person with responsibility for the FCA-regulated controlled functions at SCL of money laundering reporting (from 20 September 2010 to 17 January 2011), significant management (from 20 September 2010 to 3 January 2012) and customer-dealing (from 7 January 2010 to 3 January 2012).

The basis on which Mr Klar was engaged was changed from employment by SCL to self-employed consultancy. This was documented only from late 2011 but the changed basis was backdated to December 2010, so that his employment by SCL was treated as having ended on 20 December 2010 and his engagement (by Sanjay Shah) as a consultant was treated as having started on 21 December 2010. The change in the basis of his engagement, whether before or after it was documented, did not make any difference to the work he was doing and did for Solo.

At Solo, the idea to use internalised settlement with settlement loops settling to zero, to avoid any need for funding or the acquisition of shares, as a foundation for dividend tax refund claims, came from Mr Klar and Sanjay Shah, as I have described above. Mr Klar was no longer at Solo, in any capacity, by the time Solo Model trading commenced, as he had left, with effect from 3 January 2012, to pursue his own interests. They came to include participation as a stock lender and (later) a forward counterparty, at Sanjay Shah’s invitation, in whatever trading strategy he (Sanjay Shah) had finally settled upon.

Mr Klar insisted, in evidence that I accept, that he was not told in any detail what that strategy was. However, as he accepted, he did not need to be told. When he did the trading himself (in 2013, before he had Mr Sethuraman trading for him), he was a stock lender borrowing and lending on back-to-back terms from and to SCP clients, where always the lender to him was a USPF and the borrower from him was not, trading on a dividend record date for next day settlement with cash collateral calculated at a cum-div price from before the ex-date, with no margin or haircut, and his reward for doing the trade was 0.5% of the dividend amount, payable not by his lender or his borrower but by Ganymede. To Mr Klar, it was obvious, and he in fact assumed, that he was participating in a coordinated cum-ex trading strategy designed at Solo around the idea of settling internally so that neither cash nor shares would be required, in order to facilitate the making of a tax refund claim to SKAT by the end buyer within the structure.

Mr Klar’s Solo Model activity was carried out through his company, Amalthea. Amalthea was incorporated on 14 February 2013 and over the rest of that year acted as stock lender on dozens of Solo Model 2012/2013 trades. In 2014, Amalthea was a forward counterparty on hundreds of Solo Model 2014/2015 trades, and another company of his, Cork Oak, after incorporation on 7 March 2014, also participated, as a forward counterparty, in 250 settlement loops in Solo Model 2014/2015 trades between March and December 2014. Mr Klar insisted, and I accept, that all of the individual decisions to conclude those 2014 and 2015 trades will have been made by Mr Sethuraman, as Mr Klar left him to get on with the trading once he was in post in time for the first 2014 trades.

Through Sherwood and Potala (incorporated, respectively, on 6 and 11 February 2014), Mr Klar also participated in Maple Point Model trading. Sherwood was onboarded by NCB, Potala by Indigo and (later) Lindisfarne. This participation came in response to an initial invitation from Rajen Shah, the later invitation to trade via Lindisfarne then coming from Mr Horn. Sherwood acted as both stock lender and forward counterparty via NCB; Potala acted as stock lender via Indigo, and as both stock lender and forward counterparty via Lindisfarne. Mr Klar appreciated that the transactions of Sherwood and Potala were, like those of Amalthea and Cork Oak, elements of coordinated structures designed to create circular settlement loops settling to zero that would generate CANs from the custodians.

Returning to the Klar Model, Mr Klar devised, orchestrated and participated in the entirety of the trading, involving himself in all aspects of it and preparing all the trading documents including the CANs issued by Salgado. The other key participants were his companies, Salgado, Europa and Khajuraho, plus Blue Ocean and Cole, which were corporate vehicles (limited liability companies incorporated in Illinois) of Kevin Kenning and Todd Bergeron.

Europa was Mr Klar’s English pension scheme, founded by him on 3 December 2010, and Khajuraho was a company he incorporated in Luxembourg on 23 May 2012. Under Denmark’s DTTs with, respectively, the UK and Luxembourg, each of Europa and Khajuraho was entitled not to pay more than 15% in Danish dividend tax. The tax refund claims made on their behalf, and paid by SKAT, are the only instances with which I am dealing where the reclaim was for a partial refund (12%, given the WHT rate of 27%) rather than a full refund. Blue Ocean and Cole, for their part, each established a USPF that became a client of Salgado, and in due course full refund claims were presented to SKAT on behalf of those USPFs, and paid by SKAT.

Salgado was incorporated on 28 February 2012 in Anjouan, a Comoros Island, with a share capital of US$1. None of its customers ever deposited any funds with it, its only receipts being proceeds received from successful dividend tax refund claims made to SKAT and its counterparts in other jurisdictions, in particular Belgium and Austria.

Mr Klar had control of Salgado, and was its directing mind and will, at all times. He was its only authorised trader, made all of its trading decisions and prepared all trading documents, was in charge of all brokerage and custody services, and prepared all broker and stock loan confirmations, and all Salgado CANs. In practical terms, Salgado was Mr Klar, documenting trades and their settlement using standard office software products, without any connection of any kind to any equity trading or financial market.

Nominal ownership of Salgado was not with Mr Klar, however. His evidence was that he wanted someone else to own Salgado because he intended to trade cum-ex and “did not want to give any tax authority an excuse, no matter how invalid it might be, to be difficult about approving WHT reclaims”. I consider it more likely that Mr Klar simply wanted Salgado to appear to be independent of Europa and Khajuraho, to disguise the fact that in Klar Model trades involving them, Mr Klar was effectively on both sides of the trade.

The result was that Mr Klar arranged for a corporate service business in Anjouan to hold the shares in Salgado, via Hillingdon Turner Nominees Ltd from 28 February 2012 to 11 June 2012 and by the Salgado Charitable Trust, a Mauritian trust, thereafter. Mr Klar was in my judgment at all times the shadow director and true, but hidden, ultimate owner of Salgado.

As I noted above, Europa was an English pension scheme established by Mr Klar. It was his personal pension fund. He was its sole trustee and beneficiary and had absolute control and effective indirect ownership of all the trust assets. Europa was eventually wound up only in April 2021, although Mr Klar decided to wind it up in August 2016. Khajuraho was incorporated in Luxembourg, with Mr Klar as sole shareholder and ultimate beneficial owner. It had a gérante and office manager (Janice Allgrove), but she had a purely administrative role and played no part in Khajuraho’s trading which was directed entirely by Mr Klar. In November 2020, Khajuraho was placed in compulsory liquidation following a claim by the Luxembourg tax authorities, and it was dissolved by a judgment of the Luxembourg District Court on 15 May 2023.

Between December 2012 and May 2015, Goal made tax refund claims to SKAT on behalf of Europa and Khajuraho, supported by Salgado CANs, on which SKAT paid out a total of DKK114,049,140. Tax Agents made tax refund claims on behalf of the Blue Ocean USPF dated between 13 March 2013 and 7 May 2015, and on behalf of the Cole USPF dated between 17 April 2013 and 7 May 2015, all supported by Salgado CANs, on which SKAT paid out totals of DKK105,633,585 and DKK101,076,120 respectively.

The involvement of Blue Ocean and Cole arose out of a meeting in Dublin between Mr Klar, Messrs Kenning and Bergeron, and Barry O’Sullivan in the second half of 2012. Mr O’Sullivan was the principal of QED Equity (‘QED’), an Irish investment firm, who had discussions with Solo (Mr Klar, Sanjay Shah and Rajen Shah) in early 2011 about QED’s involvement in one of the German transactions at Solo. Mr Klar explained the trading strategy, in broad terms at least. That included, and Messrs Kenning, Bergeron and O’Sullivan therefore cannot have failed to appreciate, that the submission of tax refund claims based on the trading carried out was fundamental to the strategy, as the only source of realisable profit for any of the participants. Mr Klar explained to them (and used a whiteboard to illustrate in some way) that the strategy involved the short sale to the equity buyer being settled by netting it against a stock loan by the buyer, through Salgado, to the short seller.

Mr Klar’s case was that from 2013, the short seller in Klar Model trading was Heber Securities Trading Ltd (‘Heber’), a Maltese company of Mr O’Sullivan’s, rather than Salgado, which therefore acted as a matched-principal broker and custodian only. His case was that the Dublin discussion resulted in agreement for Messrs Kenning and Bergeron to participate in the Klar Model strategy through USPFs they were in a position to establish, and for Mr O’Sullivan to participate as the short seller for all Klar Model trades.

Mr Klar disclosed no documents evidencing any involvement of Heber in Klar Model trading. His disclosed documents evidence only trading by Salgado with Europa, Khajuraho, and the Blue Ocean and Cole USPFs, with Salgado acting as custodian, broker, short seller and stock borrower / stock re-purchaser, and no external brokers, intermediaries or additional counterparties. However, the buyer-facing transaction records generated at Salgado would be the same whether it was backing the trades with Heber, as matched-principal broker, or trading for its own account. Mr Klar explained the absence of documents showing Heber’s back-to-back involvement thus:

In Mr Klar’s criminal trial in Denmark, he and Kevin Robinson, a solicitor, gave evidence that indeed Heber acted as short seller, while Messrs O’Sullivan and Kenning gave evidence that Mr O’Sullivan merely acted as introducer, to Salgado, of Blue Ocean and Cole (meaning, in practical terms, Messrs Kenning and Bergeron). Neither version of events is without difficulty. Heber was only incorporated in May 2014, so it could not have been trading as a short seller from 2013. On the other hand, there was no reason for Mr O’Sullivan to be given (through Heber or otherwise) a 30% profit share (or, it may have been, a 33.3% share) of tax refund claim proceeds achieved by the Blue Ocean and Cole USPFs, let alone such a share also of those proceeds achieved by Europa and Khajuraho, as an introducer’s fee. Mr Klar knew Mr Kenning already, they having worked together at ABN Amro, along with Mr O’Sullivan.

Mr Klar was in my judgment wrong to suggest there was no such profit share, and likewise he was wrong to suggest that no profit sharing was agreed with Messrs Kenning and Bergeron to split the balance of tax refund proceeds net of fees and Mr O’Sullivan’s share. His evidence in that regard was part of his misguided attempt, effectively abandoned during cross-examination, to claim that the purpose of the Klar Model trading was not to generate successful tax refund claims as the only source of (realisable) profit for any participant. The absence of documentary records, and the lack of complete consistency of the testimony variously given by those involved, in these proceedings and elsewhere, means I cannot make a clear finding as to the agreed profit share percentages. I consider it possible that there was, as SKAT asked me to find, a simple, even, three-way split, between Salgado, Blue Ocean/Cole, and Heber; but Heber’s share may have been only 30%, not 33.3%, leaving 70% rather than 66.7% split between Salgado and Blue Ocean/Cole.

On balance, and although it involves rejecting Mr Klar’s evidence on the profit sharing arrangements, I believed and am prepared to accept Mr Klar’s evidence that Mr O’Sullivan joined in the Klar Model activity so as to act, and did act, as the short seller on the opposite side of Klar Model trades from 2013, and that he did so acting through a corporate identity of ‘Heber’. The unavailability to Mr Klar now of a full documentary record makes it a mystery on which I am not in a position to make any finding that Heber, the Maltese entity, came into existence only in May 2014. Logical possibilities include the existence prior to that date of a different ‘Heber’ entity (and after Mr Klar’s cross-examination, SKAT did locate evidence that a BVI company called Heber Trading Ltd had existed since 1 September 2009), or the use of the ‘Heber’ name by Mr O’Sullivan for Klar Model trading prior to having incorporated (the Maltese) Heber as a separate legal entity (and in response to the additional evidence located by SKAT, Mr Klar has insisted that Heber, i.e. a company by the name of Heber Securities Trading Ltd, was onboarded by him at Salgado before 2013 trading in reliance on what appeared to be corporate constitution documents for it as an extant entity).

As appears from Appendix 3, Mr Klar’s transaction model, in both of its iterations, had an elegant simplicity that might be said to have taken the ideas behind all of the Solo Model trading variants, or for that matter the Maple Point Model trading, to a logical conclusion. If they worked, in the sense of generating tax refund entitlements, why not also Mr Klar’s simple ‘buy and lend’ or ‘buy and re-sell’ ideas for trading between parties that had neither assets nor funding?

For its part, SKAT adopted that logic for an argument that made its way back up the chain of reasoning. Mr Klar’s trading, SKAT said, involved the idea that two entities without assets or funding could conjure out of thin air an entitlement to payments by SKAT, by trading with each other on Mr Klar’s laptop, entering into mutually offsetting contracts with each other and having them settle against each other by book entries at a custodian that held neither shares nor cash for either of them. SKAT argued that any claim to an honest belief that that worked could not be credible, let alone a claim of honest belief on the part of an experienced financial professional. But then, SKAT contended, likewise any claim to an honest belief that Solo Model trading or Maple Point Model trading worked, because by design those Models achieved nothing of substance different to or more than Mr Klar’s simplified version.

If that reasoning were sound, it would not entitle SKAT to judgment on any claim that was before this court, because that required SKAT to prove, for any given claim, not some generalised allegation of dishonesty, but the necessary ingredients of the claim, as pleaded. On that aspect, SKAT did not suggest that the facilitation or arrangement of invalid Danish tax refund claims gave it any cause of action, even if those involved did what they did knowing or believing that they were causing SKAT to pay invalid claims.

In any event, one must not rush to accept that sort of reasoning, powerful though it can be. Staying in Denmark, Hans Christian Andersen was familiar, as is any judge, with the capacity of the mind for delusion. Some of the courtiers and townsfolk in The Emperor’s New Clothes, perhaps many or even most of them, persuaded themselves, so as to have an honest belief, that they were seeing the finest of new imperial robes, until the young child, free from the persuasive influences in play, pointed out the objectively evident truth.

At the centre of Hans Christian Andersen’s tale lay con men posing as fine clothmakers who busied themselves pretending to conjure robes out of thin air. Whether any analogy with The Emperor’s New Clothes extends that far depends on whether SKAT established on the evidence not just dishonest behaviour of one or more kinds in and about the Solo Model, Maple Point Model and/or Klar Model cum-ex trading businesses, but the particular deceit it alleged by its pleadings in these proceedings.

Trial Witnesses