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

As I have noted (paragraph 123 above; and see Appendix 3), one key element of the Solo Model was to have tax exempt clients that might be entitled in principle to the benefit of a DTT between their respective tax domiciles and Denmark. In the Solo Model 2012/2013 trades, the clients in question were all USPFs.

The first 30 USPFs to participate (the ‘Original Argre Plans’) were pension plans set up by the principals behind Argre, or contacts of theirs introduced to GSS following Sanjay Shah’s approach to Mr Markowitz early in April 2012 (paragraph 144 above), together with a few other USPFs introduced by other contacts of Sanjay Shah (the ‘Zeta Plans’). All of the Original Argre Plans were newly established entities with, so far as material, no assets. In late 2013, 10 further USPFs were taken on by GSS as custody clients and became involved in Solo Model trading, introduced by Mr Fletcher through Mr Murphy, Mr Murphy having been introduced to Mr Fletcher by Mr Devonshire.

All Solo Model trading in 2012/2013 (and again in 2014/2015) was planned and coordinated by Solo’s GSS team. The Solo Model could not have been implemented otherwise. The GSS team decided the terms and prices for the individual transactions in the initial and unwind phases that participants should trade. There was no option to trade on any different basis – the terms and prices chosen by the GSS team were not open to negotiation, the only trading decision to be made by the participating parties was whether to trade as proposed by the GSS team or not.

From the outset, that coordinated effort built in obfuscatory elements to hide the fact that many individual trades and their resulting tax refund claims were being generated centrally, in reality, by a single entity (SCP through the GSS team, for the benefit, primarily, of Ganymede). For example, the share volumes, and sometimes also the traded prices, varied a little across any given set of trades referencing the same dividend, to avoid them being all equal, which might look like coordinated trading. There was no independent decision-making there by any of the participants. They were given volumes to trade and prices to fix. The communication of those details was done largely off email to avoid creating evidence trails. That evidences, in my judgment, an instinctive expectation that what Solo was doing might be challenged if it was appreciated that indeed this was a coordinated trading scheme being run by SCP rather than SCP acting simply as custodian for trading conducted independently by clients and brokers.

Hence, for an illustration from the very first Solo Model Danish trade: 10 Argre USPFs traded between them 63.5m TDC shares and the relevant TDC dividend was DKK2.30 per share; there was no reason, except to serve that obfuscatory purpose, for the trading not to be 10 x 6.35m, leading to 10 tax refund claims each for DKK3,943,350; instead, 10 different volumes were traded, ranging from 5.5m to 7.75m, that did not in any meaningful way reflect requests from or choices by the USPFs (e.g. by the California Catalog Company Pension Plan that it wanted ‘only’ 5.5m shares, or by Michelle Investments Pension Plan that it wanted to go big and buy 7.75m shares).

Efforts by some of the defendants (including Sanjay Shah and, notably again, Mr Horn) to pretend in their witness evidence that there was independent trading beyond decisions to say yes to whatever Solo put in front of participants were rather lame, and did not withstand cross-examination. Likewise refusals to acknowledge the obfuscatory purpose of the otherwise unnecessary details, like variation in volumes or prices, or for that matter like having as many USPFs as possible, to spread the overall volume of activity across lots of different putative tax refund claimants.

The ingredients assembled, in the form of the traded transaction terms, did not blend completely harmoniously to a nil end result in Solo Model trading. This is the complex wrinkle on the cash side to which I referred in paragraph 74 above. The traded terms of the equity price hedge (cash-settled exchange traded futures in Solo Model 2012/2013 trading), as put on at the outset and closed out on the unwind, and the stock lending cost (cash collateral interest less stock lending fee), did not create such a perfectly balanced hedge that the amounts credited to and debited from the cum-ex buyer over the full life of the structured trade aggregated to nil. Rather, there was an overall net trading profit or loss to the buyer, on paper, and an equal and opposite net trading loss or profit to the short seller, on paper, leaving any tax refund claim amount out of account.

This wrinkle was dealt with in Solo Model 2012/2013 trading by retrospectively amending the stock lending terms either on the same trade, or on previous and otherwise unrelated trades, so as to create offsetting losses or gains for the long buyer (and their opposites for the short seller), so that, as intended by Solo, the only profit element anywhere in the structure would indeed be the tax refund amount to be claimed from SKAT. Successful such reclaims would be the only source of funds out of which any of the parties to any of the Solo Model trading transactions could or would ever be paid anything.

The Solo Model was not only deployed in respect of Danish dividend tax. A number of other jurisdictions were also considered, and Solo Model trading was in fact undertaken with reference to Austrian and Belgian shares. The Belgian trading gave rise to an episode on which SKAT cross-examined Sanjay Shah. It was not pleaded by SKAT as any part of its case against Mr Shah, so I treat the cross-examination as no more than a matter going to Mr Shah’s credibility:

I mentioned above that by late August 2013, Mr Horn had left Solo. His was not the only significant departure in 2013. Rajen Shah and Mr Dhorajiwala also left, following which they developed and implemented the Maple Point Model along similar lines to the Solo Model (see below). Solo’s Head of Compliance, Gary Pitts, also left, and he does not feature in the case after 2013.

In Rajen Shah’s case, his departure was triggered by Sanjay Shah’s failure to agree promptly to the withdrawal of Austrian tax refund claims derived from Solo Model trading following an email on 19 March 2013 from LeitnerLaw (‘Leitner’), tax law advisors in Vienna. Leitner had given advice as to Austrian tax law in 2012 that had been treated within Solo as supportive. They now wrote to Rajen Shah, unsolicited, to report “negative developments” for cum-ex trades, namely that “in some cases, no withholding tax refund has been granted and some issues have been raised with regard to the fiscal criminal rules”. By email a few days later, 22 March 2013, Rajen Shah asked for a ‘self-declaration’ form and any other documentation required to withdraw a tax refund claim. Leitner responded on 26 March 2013 with a written memo, indicating (in substance) that while in principle it should be permissible to withdraw a tax refund claim, the impact of doing so on any criminal charge relating to having made it in the first place was complex. A telcon followed on 28 March 2013, in which I infer Leitner was asked to draft a letter for the withdrawal of a tax reclaim, because on 1 April 2013, Rajen Shah by email asked Leitner to “forward the draft letter to withdrawn [sic.] the reclaim as soon as you can”. Leitner replied on 2 April 2013, saying that they were working on the matter, both senior partners for tax criminal matters were out of the office (it was Easter week), and they would revert the following week. Rajen Shah was not satisfied that Sanjay Shah would ensure, or allow, that any pending Austrian tax reclaims be withdrawn. He resigned from Solo with immediate effect on Friday 5 April 2013.

In the event, Leitner did not provide a draft tax reclaim withdrawal letter, instead concluding that they were conflicted and could not continue to assist SCP. Their email to Solo dated 9 April 2013 reporting that conclusion stated that without a detailed consideration of the actual facts and circumstances of whatever trades had been done, they could not exclude adverse tax consequences (refusal of a pending reclaim, claim to recover reclaims previously paid) or criminal issues (monetary penalties, theoretically imprisonment). What mattered, Leitner said, was exactly how Leitner’s original advice had been followed in the trading, if it had been; and a simple, informal withdrawal of the tax refund claim, without giving reasons, “may not be sufficient to avoid tax criminal elements” (if there were any, that is). Leitner recommended someone at Deloitte (Austria) who specialised in criminal tax matters, if Solo wanted further assistance. Now in Rajen Shah’s absence, Mr Horn forwarded that email to Mr Dhorajiwala, but no action was taken arising from it.

Turning then to Mr Pitts, on 16 July 2013, by email to Sanjay Shah, copied to Mr Dhorajiwala, he recommended Solo take advice “on the appropriateness of US based GSS clients entering into transactions that involve clearing on BClear and Eurex”. He did so because, as Chief Compliance Officer for SCP, he was uncomfortable signing off on the then recently recruited new USPF clients, since Solo Model trading at the time involved single stock futures being cleared via JP Morgan through Eurex, which might be unlawful under US law because Eurex was not listed as an approved means for interstate commerce by the US Commodity Futures Trading Commission (‘CFTC’). There was effectively an exemption if the USPFs were Qualified Institutional Buyers (‘QIB’); but Mr Pitts thought there was a risk that they were not, which in turn meant there was a risk that Solo was assisting US persons to circumvent US law and putting JP Morgan in a position where they were helping US persons breach US regulations and the rules of Eurex. Since no external legal advice had been taken before taking on USPF clients, Mr Pitts advised that SCP management was exposed to a risk of regulatory censure.

Mr Pitts’ email also noted, fairly, that no one law firm had been asked to opine on the Solo Model in its entirety. Some advice had been taken, but it was on particular points put to different lawyers from time to time. He recommended a full review of the model by one firm before any more extensive activity was undertaken. No such full review was ever commissioned. Cross-examination of Sanjay Shah as to that satisfied me that he had at the time, and can offer today, no good reason why not.

Focusing on the US law / QIB question, Sanjay Shah’s immediate response was to resist “burning money on legal fees at the drop of a hat”, suggesting that Solo had enough in house expertise for most issues and should recruit rather than outsource if that was not true. Mr Pitts responded inter alia that US securities law “is an ugly sprawling mess that is hard to navigate and has lots of pitfalls for the unwary”. He said he was likewise not fond of spending money on external lawyers, but advised that “if you or the firm are challenged about a course of action that has been taken, the only robust defence if we have got it wrong is that we took appropriate external counsel (as external counsel is not deemed to be under the delivery pressure that might be placed on a GC or CCO).”

Mr Pitts followed his own recommendation and took advice on behalf of SCP from Jacob Preiserowicz of Schulte Roth & Zabel LLP (‘SRZ’) in Washington, DC. That advice confirmed Mr Pitts’ understanding that US clients who did not meet the QIB definition would be acting in breach of US securities laws, facilitated by SCP; and it explained that a QIB had to own in aggregate at least US$100 million in securities. Mr Pitts recommended that onboarding of new clients should cease until the point was resolved and that any open trades should be unwound. Sanjay Shah did not accept that recommendation. He spoke to Mr Preiserowicz and declared himself unimpressed by him. He told Mr Pitts he regarded the QIB case as still open.

On 5 August 2013, Mr Pitts therefore sent Sanjay Shah draft instructions by which further advice might be sought from US counsel. They noted that when a USPF was taken on, it “might not” have US$100m in assets (in fact, more accurately, in the Solo Model it was certain not to have any substantial assets when approved for trading), and described SCP’s idea (this having been Sanjay Shah’s QIB theory) thus: “However, through the leverage facility of our custody platform, the [USPFs] will take on positions in excess of this size and thus become eligible to be considered QIBs, at which point we would like to categorise them as QIBs and retain this categorisation for them as their holdings would fluctuate above and below this level.” As Mr Pitts explained to Sanjay Shah when he queried it, the use of leverage obviously needed to be mentioned. Mr Shah’s theory depended on (a) the prima facie implausible, circular thought that a regulatory requirement to qualify for trading defined by a client’s assets might be satisfied by the value of the assets they would trade if they qualified, and then (b) an entitlement for that purpose to value assets gross of any leverage involved in ‘acquiring’ them.

The draft instructions also noted that the USPFs’ trades would clear at SCP “by netting off equal and opposite transactions in its omnibus custody account”. Sanjay Shah also baulked at the idea of mentioning that, asking why external counsel would need to know about it. Mr Pitts explained that “the advisor might assume that we put the assets in custody in the traditional model – this might have an impact on the advice given – if someone talked to me of custody and clearing I would certainly not have our model in mind. In the UK, the difference between our model and a traditional custody model would definitely have an impact on any advice I gave.”

In the event, Mr Pitts’ draft instructions were not used, and Solo Model trading continued on Sanjay Shah’s say so, contrary to Mr Pitts’ recommendation to pause activity until the US law / QIB issue was bottomed out. Sanjay Shah took some advice from Dechert LLP in New York in August 2013. Mr Shah first put the following to Dechert, as to part (a) of his theory (paragraph 166 above): “After some digging, we believe we can clear [European single stock futures] for QIBs. We found that a QIB can be an employee benefit plan defined by Erisa, as long as it manages $100mm of assets or more. The clients we deal with are 401k pension plans, and they would have over $100mm under management. I would like to know if these plans would be considered to be QIBs.” I think no lawyer reading that as a question for advice would guess that Mr Shah had in mind USPFs that would be signed up with SCP for trading when they had no or minimal assets, with the ‘qualifying’ US$100m in asset value then being the nominal value of assets traded through SCP, an integral part of that trading being the single stock futures that gave rise to the QIB issue. In response to the question put thus, Dechert advised that the USPF described would be a QIB.

At Mr Dhorajiwala’s prompting, Sanjay Shah replied, so as to test part (b) of the theory (paragraph 166 above), with “A quick question: is the $100mm test on gross or net assets? If the client owns $100mm of equities that were purchased through use of leverage, then do we deduct the leverage, or just look at the gross asset amount? In the event that the legislation isn’t specific on this point and open to our interpretation, can I assume we can use gross assets if we wish?”. Again, I think, any lawyer reading that would have assumed the assets in question existed independently of the trading SCP was considering that gave rise to the need to clear single stock futures and therefore the QIB issue, and not (synthetic) assets created only by that very trading. Dechert responded that the language of the relevant rules was not conclusive, but it was reasonable to conclude that a gross asset value test applied.

Given the way Sanjay Shah had framed his questions to them, Dechert’s positive advice could not reasonably have been understood to cover what SCP was doing through the Solo Model.

The QIB issue generated by clearing single stock futures on an exchange would not arise after 2013, as they were not used as the price hedge instrument in the Solo Model for 2014 or 2015. It is speculative to say whether Sanjay Shah’s mishandling of the issue was a resigning matter for Mr Pitts, who departed Solo thereafter. The concerns he highlighted in the work plan and handover notes he left as he went were bigger picture issues of corporate governance and compliance. For example, he thought there was uncertainty over transaction reporting, a potential for market abuse behaviours or fraud within the GSS business because Adam LaRosa traded for so many USPF clients under powers of attorney, and still no unified legal opinion “on the GSS platform as a whole”, that might be treated by the FCA as “fundamentally poor governance (perception of poor product development, no collegiate approach involving all stakeholders, apparent drive for income at all costs).” Or again, Mr Pitts was concerned that there was no documented business strategy at Solo and the Management Committee’s role was in reality limited to approving decisions made by Sanjay Shah.