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

Sanjay Shah originally joined KPMG’s corporate tax department in 1994 as a graduate trainee, but left before obtaining accountancy qualifications to pursue a career in investment banking, joining Merrill Lynch in 1996. He worked there in a financial reporting team, then in a middle office role for a precious metals trading desk where he acquired knowledge of derivatives and financial products. In 1998, he moved to Morgan Stanley for a job with similar functional responsibilities in equity derivatives, which introduced him to div-arb trading. He left Morgan Stanley in 1999 (the year in which he and Mrs Shah married), moving to Donaldson, Lufkin and Jenrette (‘DLJ’) as an assistant trader for equity derivatives.

In late 2000, DLJ was bought by Credit Suisse First Boston which led Sanjay Shah to join a prime brokerage team. Over a period of three years or so, his role developed to that of dedicated div-arb trader, and in 2003 he moved to ING to become a senior trader there in an equity finance team. His work at ING covered equity derivatives, stock lending and hedge fund finance lending, and included dealings with Rabobank, to which he moved in 2007, joining as European Head of Equity Finance with a mandate to grow a European equities div-arb business. That was where he first encountered cum-ex trading, and his job at Rabobank was his last employment before setting up his own business under the Solo Capital name.

Rabobank withdrew from the equity finance business after the global financial crisis hit in late 2008, making Sanjay Shah redundant. To set up in business for himself, he incorporated SCL in 2009. His first recruits at SCL were Mr Smyth (a stock loan broker) and Messrs Rajen Shah and Klar (to act as structurers).

In 2010, SCL explored German cum-ex trading. It acted as investment manager for an Irish fund, Broadgate, which used cum-ex trades to generate a German WHT reclaim based on the Germany-Ireland DTT under which Irish entities were entitled not to be taxed above 10% on German dividends. Some of those involved in the Broadgate transaction were significant to the development and implementation of the Solo Model for Danish shares:

The Argre principals were wealthy, sophisticated, knowledgeable and experienced professional investors. Prior to establishing Argre:

The Broadgate transaction was very profitable for SCL. It received c.50% of the WHT refund net proceeds, from which it paid the other counterparties to the trade, including short sellers and stock lenders.

Argre and SCL collaborated on another German transaction in 2011, with a view to facilitating a WHT refund claim by or on behalf of the US tax-domiciled not-for-profit foundation behind the Ezra Academy in the Borough of Queens, New York. Funding of US$40m was created through a total return swap with Deutsche Bank as custodian. The transaction was loss-making because the WHT refund claim was withdrawn following questions from the German authorities, notwithstanding a tax certificate stating that the Ezra Academy had suffered WHT on dividends received. Deutsche Bank resigned as custodian on reputational grounds. The circumstances were explored in greater detail with some of the witnesses at trial, but they are peripheral.

I mention for completeness two other matters, also peripheral for my purposes, that arose from the German cum-ex trading.

Firstly, Solo had been given supportive legal advice on the German tax law treatment of that trading, by Martin Krause of Norton Rose LLP in Frankfurt. On 21 January 2011, he emailed Mr Klar, then still at Solo, to mention a legal article just published in which the author took the view that cum-ex trades created a substantial risk of prosecution as tax evasion. He said that the focus of the article was on a particular German court decision where a short seller sold and repurchased, never acquiring any shares because the delivery claims were netted on the settlement date, but that the author’s explanations were not limited to that scenario and would extend more generally to cum-ex trades. Mr Krause said that to the best of Norton Rose’s knowledge, “the article is the first publication of a Frankfurt-based lawyer taking a particularly negative view to the effect that cum-ex trades could result in criminal prosecution. In terms of reputation, this is an entirely new quality and cannot be disregarded. Rather, one has to state, that a new view among peer lawyers has been formed that condemns cum-ex trades.”

Mr Klar forwarded Mr Krause’s email to Sanjay Shah and Rajen Shah, adding as comment, “For fuck’s sake”, to which Rajen Shah replied, “No director is going to sign up if he refers to criminal prosecution in the tax opinion.” Mr Graham KC submitted in oral closing argument for SKAT that Rajen Shah was thus angling to get Norton Rose not to disclose the risk of criminal sanctions in any opinion. I do not accept that. As I read him, Rajen Shah was recognising by his response that Mr Krause would be bound to refer to that risk in any opinion and that, even if Mr Krause’s own view remained that German cum-ex trading was lawful, or at least could be depending on the detail, that would probably mean that no further German trading would be possible in practice.

That was an important development. I conclude, below, that when putting the Solo Model together, Sanjay Shah, Mr Horn and Rajen Shah did not govern themselves by whether it would generate tax refund claims that would be valid and not questionable under Danish tax law. However, in my judgment, as evidenced by Rajen Shah’s response to Mr Krause’s update, they had no interest in or appetite for anything that might be considered criminal.

Secondly, three of the Zeta Plans (see paragraph 151 below) engaged in German cum-ex trading in 2011, through Macquarie as custodian. In connection with that trading, each of them entered into an agreement with Acupay and SCL dated 1 June 2011 appointing Acupay as agent to secure tax relief from the German tax authority through the use of SCL’s “DTV” claim filer number, although SCL was not the Zeta Plans’ custodian on the trades. On 10 October 2014, Blackfriars Crown Court issued an order under s.32 of the Crime (International Co-Operation) Act 2003 requiring SCL to produce certain documents, as specified in the order, relating to the Zeta Plans. SCL responded by letter dated 12 December 2014 signed by Sanjay Shah as director. Mr Shah was cross-examined about the response, and suggestions were made that it was variously untruthful, or misleading, or unhelpful. However, no case was put that SCL had acted in breach of the order, indeed Mr Rabinowitz KC disavowed any such case and the cross-examination was conducted without even a copy of the order. In the absence of any case that SCL acted in breach of the order, I consider this episode not to be relevant even as to credibility.

In 2011/2012, Solo tried without success to find another bank willing to provide it with leverage for cum-ex trades. For example, mainly for reputational reasons, none of Brown Brothers Harriman, Bank of Ireland, State Street or BNP Paribas was willing to provide leverage or act as custodian for cum-ex trades that might be arranged by Solo. There was some London market sentiment that, due in some way to the Broadgate transaction, Solo was to blame for a widespread withdrawal of appetite on the part of major financial institutions to fund cum-ex trading.

On 9 April 2012, Sanjay Shah emailed Mr Markowitz of Argre to ask if he had any USPFs that could be used for trading equities and derivatives, and in a subsequent call, it was explained that SCP itself would be the custodian. The idea, appreciated within Solo by at least Sanjay Shah, the DWF Ds and Mr Klar (who was then on the point of departing Solo to go into business for himself), was to structure out any need for funding of any kind external to the structured trades themselves, by the use of internalised settlement at SCP, acting as clearer to settle the trades.

That was the magic ingredient identified within Solo that, as those working on this perceived it, could allow trades to be settled without access to external funding, or shares, i.e. with synthetic leverage, as Mr Dhorajiwala called it, and (equally, I would say) synthetic shares (see paragraph 71 above). There was no consistent body of evidence as to how widely it was made known within Solo even, let alone within the wider community of participants in the Solo Model, or later the Maple Point Model, that this was how trades would be and were being settled. In my judgment, the more powerful evidence was to the effect that it was considered the trade secret of those who designed and ran the trading that will not have been shared with anyone it was not thought needed to know.

I did not consider trustworthy, for example, claims made by Mr Horn that of course the Argre Principals knew all about it. In that evidence, which notably fell short of Mr Horn claiming that he had himself explained Solo’s settlement method to the Argre Principals, in my view Mr Horn was putting forward a line he liked for his defence that he saw no difficulty with the share-less settlement method, and believed that the resulting tax refund claims were or might be valid claims. If the very impressive likes of the Argre Principals knew what was going on, and did not object to taking part, so that line of argument would have it, Mr Horn could be reassured that it was an honest way of doing things. In my judgment, in line with evidence given by a number of the trial defendants, Solo had and deployed a plausible pitch that proved successful for recruiting participants, namely that they had a method of using stock lending at settlement to finance a trading structure so that the equity trade would settle and the tax-advantaged purchaser could be in a position to make a tax refund claim, the details of which were for Solo to take care of. That was not crazy or suspicious in concept; and if it was shown to work in practice, it was reason in principle for the willingness of participants to see the lion’s share of the profit generated through the tax reclaim going to those who were organising and implementing that trade. Moreover, as regards the Argre Principals in particular, in my view they would have been the last participants to whom Sanjay Shah would want the Solo method to be disclosed, as they had the experience, sophistication and contacts to replicate the method for themselves, depriving Sanjay Shah of his lion’s share of the profits (realised through Ganymede).

None of the Argre Principals was a witness in these proceedings, and though SKAT relied on some isolated passages in the deposition testimony of Mr Markowitz in its US proceedings, they did not include evidence that it was ever explained to him, or that he realised on some other basis, that a share-less model for settlement was being operated. Certain legal advice taken by or shared with the Argre Principals was in evidence, but it did not demonstrate awareness on their part that there would never be any shares or share transfers. On the evidence I had at trial, in my judgment SKAT’s submission that the Argre Principals should be found to have known of that was, in truth, an invitation to speculate that they sought to work out, and guessed correctly, how exactly Solo was settling Solo Model trades (and, therefore, how the Maple Point custodians, under direction from the DWF Ds, later settled Maple Point Model trades). I prefer and accept the Shah Ds’ submission that, as Sanjay Shah said in his evidence, the explanation of the trading given to the Argre Principals was limited in scope, such that:

The idea of doing things as they were done arose at Solo from discussions after Sanjay Shah had been told by someone at CACEIS Bank about its use of internalised settlement to settle transactions without the need for access to the asset, in the context of which Mr Klar mentioned a trade when he was at ABN Amro in which the Philippines branch bought government bonds from the London branch, selling short, and the purchase settled by the Philippines branch lending identical bonds to London on the settlement date, with the transactions settling against each other but being treated as having both been performed (equal and opposite gross ‘deliveries’), not cancelled. In evidence at trial that I accept, Mr Klar said that he cannot now recall the exact mechanism used, but (a) as I have just said, it meant the two trades were treated by ABN Amro as having been performed, not washed out, but (b) “nobody had to go out into the market to borrow Philippine government bonds”.

It takes only a moment to see that the trade Mr Klar described is functionally equivalent to a forward sale of government bonds by the London branch to the Philippines branch, for delivery at the end of what was in fact structured as a securities lending period (London borrowing bonds from the Philippines). The reason why it was structured as a mutually fulfilling sale and borrow-back (be it accounting, tax, regulatory, or as the case may have been) is a level of detail that Mr Klar does not recall (if he knew it at the time) about which, therefore, I am not in a position to make any finding.