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

There was expert evidence at trial on Danish public law, concerning SKAT’s identity and capacity to bring the proceedings, from a forensic accountant, analysing payments made by SKAT and the flow of funds resulting from them, and on matters of market practice. There was scheduled to be expert evidence on Danish private law, but the need for that evidence fell away (see paragraph 42 above).

On Danish public law, the only evidence was that of Prof. Waage by his expert report, which was unchallenged and so was adduced without the need for SKAT to call him at trial (see paragraphs 14 to 16 above). Similarly, only SKAT put in expert evidence from a forensic accountant, Mr Jens Ringbӕk of Deloitte Denmark, whose evidence was also unchallenged. Pending my having read his report, time was reserved in the trial timetable for him to be called, in case I needed to ask him questions to ensure I understood what the report was saying. In the event, I did not identify any such questions, and so for Mr Ringbӕk also, his report was adduced at trial and SKAT did not call him.

On market practice, SKAT, the DWF Ds and the Shah Ds instructed experts who prepared reports, a joint memorandum, and supplementary reports. All were called at trial and cross-examined. SKAT and the DWF Ds called Mr Graham Wade and Mr Paul Sharma, respectively, as they did at the Validity Trial. The Shah Ds called Mr Simon Bird, who was not an expert witness at the Validity Trial, but was not new to the wider litigation, having an involvement as an expert witness instructed by various defendants in related proceedings in other jurisdictions.

In brief summary, no doubt not doing justice to their CVs, their primary careers, entitling them to be considered expert witnesses as to relevant market practice, were as follows:

The case management directions for the Main Trial permitted expert evidence as to market practice on the following issues:

“18A. To the extent (if at all) that it involves expertise to identify, what trading structures and/or series of transactions were (purportedly) constituted or provided for by the Sample Trades?

18B. To what extent were the Sample Trades consistent with any standard market practice?

19.

With respect to each of the Sample Trades, did the Custodians hold any Danish shares in their custody accounts, in the custody accounts of any sub-custodians, or with VP Securities (for themselves or on behalf of any of the participants in the transactions purportedly carried out under the relevant models)?

20.

With respect to each of the Sample Trades, did the Custodians receive any payments in the amount of dividends declared by Danish companies?”

With hindsight, expert issues 19 and 20 perhaps should have been qualified in the same way as issue 18A, i.e. “To the extent (if at all) that it involves expertise to identify …”. Having said that, such a qualification is implicit in any question upon which expert evidence is permitted; and in the present case I am confident that failing to spell it out in expert issues 19 and 20 did not make any difference to how the experts went about their reports. They included in their reports full, lengthy and detailed discussions of expert issues 18A, 19 and 20, although (as I now see it) none of them required consideration of matters of market practice on which expert evidence might have been of assistance.

As regards expert issue 18A, the work the experts did was useful nonetheless. Their reports served as a convenient vehicle for setting out detailed descriptions of the transactions involved in the Sample Trades and how they were operated. By the edited versions of the expert reports that were ultimately adopted as evidence in chief, that material was not adduced as expert evidence at trial. However, much of it was effectively adopted as trial material, as a convenient way of presenting the primary facts to the court. For example, it informed, and was cross-referenced in, the Sample Trades Summary agreed between SKAT, the Shah Ds and the DWF Ds that was helpful for Appendix 3 to this judgment.

As regards expert issues 19 and 20, the straightforward answer in each case is ‘No’. By design, the Sample Trades involved no Danish shares being held by any custodian or participant at any time. It follows inevitably, and was the case as a matter of fact, that no custodian ever received a payment in any dividend amount. If there is a qualification to that, it is only that a debit entry in a short seller’s account at a custodian, for simultaneous crediting to a buyer’s account at that custodian as a dividend compensation payment to the buyer, might be said to involve the custodian receiving and making matching ‘payments in the amount of dividends declared’. But that adds nothing for present purposes, that is to say for concluding that market practice expertise is not involved in or required to answer expert issue 20.

The focus of the edited versions of the expert reports adopted as evidence in chief was therefore expert issue 18B.

At the Validity Trial, on the matters dealt with and the evidence I heard then, I concluded that Mr Wade and Mr Sharma (and Dr Collier, the expert called by the Shah Ds at that trial) gave, in general, “carefully considered, honest opinions as to matters they had been asked to address, to the extent they could do so within their … expertise”, and that their evidence had been “helpful, interesting, and obviously expert” (SKAT (Validity Issues), supra, at [43]). I found that, on the issues addressed by them for the Validity Trial, there was “very little in the way of relevant but different opinion between them” (ibid at [51]), and that “their differences of background and perspective mean … that Mr Sharma was better placed to deal with matters of market structure and operation, and regulation, whereas Mr Wade was better placed to deal with matters of market practices and understanding” (ibid at [52]).

On the matters covered by the experts for the Main Trial, and the greater depth with which some of those matters were explored, I would revise that last assessment slightly to say that Mr Sharma was at least as well placed as Mr Wade to deal with matters of market practice and understanding, although their backgrounds still mean their perspective on points may be different without that necessarily meaning, on its own, that the view of either deserves to be accorded greater weight than that of the other. On that aspect – the ability in general to give well-informed and obviously expert opinions to assist the court – I consider that Mr Bird was also well placed.

All three experts, in differing ways, did not provide properly balanced written reports, uninfluenced by the fact that they were instructed, respectively, by SKAT (Mr Wade), the DWF Ds (Mr Sharma), and the Shah Ds (Mr Bird). This was most evident in the case of Mr Wade, much of whose written work was argument rather than expert evidence. Regrettably, in my view he carried into his oral evidence the same tendency and approach, to think first of how he should be putting the case for SKAT. I concluded, with regret, that he has become compromised by the nature and extent of his involvement for SKAT in its global litigation effort, such that he finds it difficult not to think and express himself as an advocate for SKAT’s position. He has, I think, lost detachment from the partisan interests of SKAT as his instructing client, and that left me unhappy to accept views of his that, on analysis, were genuinely matters of expert opinion where his views were not shared by at least one of Mr Sharma or Mr Bird.

In Mr Sharma’s case, my concern was less pronounced. There was in his case an unwelcome tendency, in writing, to fail to express qualifications or set out a complete expression of his view, such that the absence, or narrowness, of any real difference of expert opinion between him and Mr Wade was obscured, and the impression might have been gained from reading his reports that there was nothing at all unusual or contrary to typical market practice about the Maple Point Model trading (which was Mr Sharma’s focus). That exposed Mr Sharma to a cross-examination that should have been largely unnecessary to confirm the extent to which, in substance, he agrees with a range of matters on which SKAT relied. However, he dealt with the resulting questions impressively, fairly (with balance), and with an obvious depth of thought and expertise. I was not left with any general concern about according weight to Mr Sharma’s expert views.

My difficulty with Mr Bird’s written work was the extent to which it consisted of or included his views on contentious matters of primary fact; but that was largely, if not entirely, overcome by the edited versions of his reports that were adduced as his evidence in chief at trial. Like Mr Sharma, in my view Mr Bird dealt thoughtfully and fairly with questions put to him in cross-examination and questions from the court to clarify his evidence. In general, and so long as I took care to filter out remaining instances where Mr Bird continued to express views on matters of primary fact that were not for him, I was not troubled about placing reliance on Mr Bird’s expert views.

However, on the question of terminology to which I refer immediately below, Mr Bird put forward a view on the normal market use of the terms ‘market claim’ and ‘manufactured dividend’ that I concluded had not been his view at any material time. It was inconsistent with the views he had expressed in writing, including in his primary expert report in these proceedings, to which he had to proffer alterations when called to give his oral evidence to advance the different view. In my judgment, the evidence as given at trial by Mr Bird on this aspect did him no credit and was advanced by him for no good reason, but rather only because he had appreciated that his actual views coincided with Mr Wade’s on the point and so would be said by SKAT to assist its case. As it happens, the point is not central, and my finding on it is not an unqualified acceptance of SKAT’s position anyway. That does not make it acceptable for Mr Bird to have approached his oral evidence on it as he did.

That point concerns what I said in SKAT (Validity Issues) at [53], namely (now with some added numbering) that:

“On the most important points considered by the market experts [for the Validity Trial], they were in any event agreed. For example, they agreed that [(i)] market participants would understand a dividend (or ‘real dividend’) to be a distribution from a share issuer to its shareholders, and [(ii)] to be different from a ‘manufactured dividend’, [(iii)] viz. a contractual payment representing a dividend but arising under a contract for the sale or other transfer of securities as compensation for a dividend forgone; they agreed that [(iv)] depending on the context the word ‘dividend’ on its own might be used in the market so as to encompass manufactured dividends as well as real dividends; and they agreed that [(v)] in any event what ‘dividend’ might mean for Danish tax law, and what were the requirements for there to be dividend tax liability or dividend tax refund entitlement under Danish law, [(v)(a)] would be understood to be a matter of Danish tax law on which [(v)(b)] a market participant, if interested, would take specialist advice.”

A point arose at the Main Trial on the definition of a ‘manufactured dividend’ that I gave at [53(iii)], viz. a “contractual payment representing a dividend but arising under a contract for the sale or other transfer of securities as compensation for a dividend forgone”. I touched on this at paragraphs 87 to 91 above.

On the factual and expert evidence at the Main Trial, it was tolerably clear, and I find, that there was no fixed or uniform market usage concerning the meaning of ‘manufactured dividend’. I should be clear that the market in question here is a global equity trading and equity finance market relating to European equities, most pertinently Danish equities. Within that global market, there might be specific practices peculiar to a particular jurisdiction, be that the jurisdiction of the equities in question or the jurisdiction of the participant in question (for example, that of a custodian or that of the equity buyer). They might include practices to meet specific local legal or regulatory rules. Something of that sort could affect the use of terminology in particular contexts, but there was no suggestion by any party, or evidence, that any specific market practice existed at the material time concerning the nature or content of documentation generated in the context of Danish dividend tax and any possible tax refund claim made to SKAT.

Leaving aside any usage derived from or tailored to some jurisdiction-specific circumstance, in the market generally, as in part I noted at paragraph 87 above, some might not refer to what I am calling a dividend compensation payment as a ‘manufactured dividend’, because some would give the latter term a narrower scope than I gave it in SKAT (Validity Issues). In particular, they might refer to a dividend compensation payment as a (type of) ‘market claim’, even if more commonly that term would be used in a meaning that would match the CAJWG definition, or be intended to refer to it. On all of that, I prefer and accept Mr Sharma’s expert evidence to the extent that it differed from Mr Wade’s or Mr Bird’s (if it truly did, once their evidence had been explored at trial).

That variability of terminology was illustrated by a handout put together by Freshfields in March 2012 summarising and explaining legal issues concerning div-arb opportunities across Europe. Freshfields, it seems, put on seminars from time to time for commercial parties interested in the field. Rajen Shah and Mr Horn went to one, probably in early 2011 (since it led to some advice being taken from Freshfields in May 2011, in connection with Belgium), and Mr Shah remembers taking away from it what may have been a similar handout or at any rate a document containing similar commentary.

The 2012 Freshfields handout discussed inter alia the tax treatment of dividends and related payments in a range of different jurisdictions; it seems evident that the section of the document for any given jurisdiction will have been prepared by or under the supervision of the named Freshfields partner practising there, as identified at the end of the document as the point of contact for that jurisdiction. In relation to some jurisdictions, the document covered cum-ex trades. Where that was so, it was not consistent in its use of terminology for what I am calling dividend compensation payments under such trades. For example, in the French and Belgian sections, they were referred to as market claims, but in the section for the UK it was said to be a “difficult question … whether [the] compensation payment is just an accounting for the real dividend that is treated as belonging to the buyer, or … is a manufactured dividend, or … should be viewed for UK tax purposes as simply an adjustment to the contracted sale price”. The DWF Ds also drew attention, in closing, to an email from Freshfields in November 2011, seen at the time by Sanjay Shah, Rajen Shah, Mr Horn and Mr Klar, referring to a cum-ex buyer’s dividend compensation entitlement as a market claim. (SKAT relied on indications in the Freshfields handout that they may not have been contemplating cum-ex trades where the seller was and always remained short. That does not affect the current point, which concerns the use of the term ‘market claim’. It would be relevant to whether the Freshfields handout could be taken to express a view that a dividend compensation payment in the case of a short cum-ex sale of Belgian shares that was settled without any share transfer would give the buyer a valid Belgian tax refund claim.)

Those who would give manufactured dividend the fuller meaning I gave it in SKAT (Validity Issues) would be likely, as Mr Wade does and Mr Bird did prior to his unsatisfactory oral evidence on this point, to use the term ‘market claim’, as reflected and influenced by the CAJWG definition, to refer to the process by which a real dividend payment received through a custody chain is redistributed to a party contractually entitled to that payment.

Except for the specific point mentioned next, none of that would cause me to revisit anything I said in SKAT (Validity Issues), so long as it is borne in mind when reading it that my use of the term ‘manufactured dividend’, as I defined it in that judgment, is not a usage that was fixed in the market at the time. For completeness only, therefore, I would now re-state SKAT (Validity Issues) at [53] as follows:

“[(i)] market participants would understand a dividend (or ‘real dividend’) to be a distribution from a share issuer to its shareholders, and [(ii)] to be different from a contractual payment representing a dividend but arising under a contract for the sale or other transfer of securities as compensation for a dividend forgone, [(iii)] to which in this judgment I refer as a ‘manufactured dividend’, although that was not a fixed market usage; … [(iv)] depending on the context the word ‘dividend’ on its own might be used in the market so as to encompass manufactured dividends as well as real dividends; and … [(v)] in any event what ‘dividend’ might mean for Danish tax law, and what were the requirements for there to be dividend tax liability or dividend tax refund entitlement under Danish law, [(v)(a)] would be understood to be a matter of Danish tax law on which [(v)(b)] a market participant, if interested, would take specialist advice.”

That brings me to the further, specific point noted in passing at paragraph 91 above, which is more important to the case than the point on terminology that I have just revisited above. In SKAT (Validity Issues) at [269], I said that the experts at the Validity Trial had agreed in the joint memorandum, as they had, that it was the general practice of custodians to draw a distinction, in any CANs or tax vouchers they generated, between real and manufactured dividends. The context for that paragraph was a hypothetical example where a custodian holding 100 shares for Client A lent 40 to Client B so it could settle a short sale to a third party. I made the point that, other things being equal, in those circumstances any ‘dividend’ payment received by Client A during the stock loan term would be payment of a ‘real dividend’ on 60 shares and of a ‘manufactured dividend’ on 40 shares. I noted that in cross-examination Mr Sharma had said the practice of distinguishing between real and manufactured dividends in documents issued was limited to UK custodians in tax vouchers for possible submission to HMRC in relation to UK tax, but I rejected that evidence in the light of the unqualified joint memorandum opinion to which Mr Sharma had subscribed that, in the example given, “The market practice was that if [Client] A was provided with a confirmation of the amount withheld or a tax voucher, it would distinguish that A had received 60 dividends (net of withholding tax where relevant) and 40 manufactured dividends.”

At one stage it appeared that SKAT might contend that an issue estoppel arose from that, to the effect that the general practice of custodians was to draw a distinction in CANs between real and manufactured dividends (for that purpose, including dividend compensation payments, since that is how I was then using that term). It was not obvious how that might be correct, since nothing decided at the Validity Trial depended on that finding. I could set out additional analysis, but it suffices to say that the material decision, as reflected in the formal answers given to Validity Issues 10(a) to 10(d) in the Appendix to SKAT (Validity Issues), was that matters of market practice or understanding did not affect the relevant content of Danish tax law. In the event, an opportunity arose during the cross-examination of Mr Wade to check the position, and Mr Goldsmith KC for SKAT confirmed that no argument of issue estoppel was pursued.

That means I am free to consider the point afresh. Doing so, on the factual and expert evidence adduced at the Main Trial, I can see that Mr Sharma was in fact right to qualify what he had agreed for the Validity Trial. The way his attempt to do so came out at the Validity Trial was influential at the time; but that is now history. Naturally, his evidence on this point was tested at the Main Trial by reference inter alia to that history. I was persuaded by the cross-examination only to the view that Mr Sharma had done himself a disservice by aligning himself in the Validity Trial joint memorandum to an unqualified view that did not represent his full opinion. I am satisfied that in fact Mr Sharma was only ever aware of CANs or tax vouchers explicitly drawing the distinction, by describing income items as manufactured dividends, in the context of specific HMRC requirements to do so for UK tax purposes, that he was not aware of any practice of doing so outside that context, and that in fact his view always was that there was no general practice of doing so. The tenor of Mr Bird’s evidence was that there was no general market practice on the point, and now that Mr Wade had to defend his restated contrary opinion under cross-examination, I was not satisfied that he had any real basis for it. Tellingly, the CANs issued by Merrill Lynch under the Broadgate transaction, used by Solo as the template for CANs issued by SCP when Solo Model trading commenced, did not explicitly draw the distinction Mr Wade had in mind, yet they also concerned dividend compensation payments under a short selling cum-ex trading structure focused on facilitating a tax refund claim in Germany.

On the whole of the evidence I have now received, the true position, I find, is that there was no market standard for or general practice as to the form, format or content of a CAN. In particular, there was no established or general practice for CANs of expressing any distinction between real dividends and dividend compensation payments. The only rule of practice, in truth, was the obvious one that in issuing a CAN, if it did, a custodian should report accurately to its client the dividend-related credit it had booked to the client’s account. The fact that a CAN used the word ‘dividend’, and not the words ‘manufactured dividend’, would not convey that what was being reported was a real dividend payment rather then, for example, a dividend compensation payment.

Whether the CANs in this case merely reported accurately to their addressee clients dividend-related credits booked to their accounts, and if not why not, is an aspect of whether SKAT was misled, as it alleges, into making the payments it made in response to the tax refund claims that are the subject of these proceedings, to which I turn from paragraph 424 below. If a CAN, properly read, made a statement that was falsified by the fact that the payment credit reported was only a dividend compensation payment, then it will have been a misleading document in a way that could have been avoided by drawing the distinction explicitly. In terms of market practice, though, that will mean simply that the CAN failed to conform to the golden rule of factual accuracy, not that it failed to conform to a specific market practice about what words should be used to achieve it.