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

Sham Trading?

It was not always clear in the litigation what SKAT was alleging, in saying as it did that the trading activity in the case was ‘sham’, or why it was saying it. SKAT ultimately accepted that though it would still contend, if required, that what it said about that activity, if accurate, would make it proper to say that the trading transactions were shams, whether that was correct or not, a matter of the legal characterisation of the transactions, was not itself relevant to the claims it pursued in the litigation. What mattered was whether what SKAT said about the trading activity was true, and if so (where relevant) what state of knowledge or understanding any given individual had of that at the time, as part (and only part) of determining whether, if SKAT was misled, relevant individuals knew, believed or intended that to be the case. I shall therefore deal with this more shortly than I might have done if the question of characterisation (sham or not sham) was itself critical.

Taking what is for my purposes the most pertinent aspect, to illustrate the point about relevance, consider the equity purchase trade in each instance. Then:

In closing, SKAT referred to Chitty on Contracts, 35^th Edition, for a submission that English law would use the language of sham in two situations: firstly, where parties “create a document that purports to show a contract between them when in fact there was none” (ibid at 4-213, giving as examples the sham charterparty in The Good Helmsman, Harmony Shipping Co SA v Saudi-Europe Line Ltd [1981] 1 Lloyd’s Rep 377, and the sham ownership transfer in The Ocean Enterprise, Glatzer v Bradston Ltd [1997] 1 Lloyd’s Rep 449); secondly, where a document “is a sham in the sense of being designed by parties to give “[to] third parties or [to] the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations … which the parties intend to create” [where] the parties do not intend the sham document to bind them, but they do intend to be bound by the “actual” agreement.” (ibid at 4-214, quoting Snook v West Riding Investments Ltd [1967] 2 QB 786, per Diplock LJ at 802D). Chitty acknowledges that on the facts of a given case, a correct characterisation might be that of collateral contract, at all events where there is no joint intention to give false appearances to third parties (ibid, at n.964, citing Coleman v Mundell [2020] EWHC 2852 (QB)).

SKAT submitted that distinct concepts are not involved, but rather in both of those situations the same general principle is applied, namely that there is a sham where there is a “common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating”: Snook, supra, per Diplock LJ at 802E; and see Antoniades v Villiers et al. [1990] 1 AC 417 (HL), in which one of the agreements purported to be a licence, with a view to evading the Rent Acts given that in truth a lease was agreed between the parties, and purported to reserve to the freeholder a right to place others into the property when no such agreement had been reached.

As Diplock LJ made clear in the same passage in Snook, supra, all parties to the relevant allegedly sham transaction must have the common intention to create a false appearance: “No unexpressed intentions of a “shammer” affect the rights of a party whom he deceived.” (ibid, at 802F). There was an express finding in Snook that the defendants knew nothing of the matters said to render sham the transactions they had concluded for the hire-purchase refinancing of a car, so the contention that they were a sham failed.

SKAT then submitted, in writing, that it alleged sham trading “in support of its case that various Defendants knew that they were participating in a scheme to defraud SKAT and/or in response to the Defendants’ allegations that they were acting honestly at all times”. However, on analysis – hence, ultimately, SKAT’s concession referred to in paragraph 414 above – SKAT was not relying on its allegation of sham trading for that purpose, rather it was relying on matters that might (also) support such an allegation (for example their case that parties other than custodians appreciated that no Danish shares were being or had ever been transferred) that either had significance for the claims being pursued or not, as the case may be, irrespective of whether they (also) led to a conclusion that one or more of the transactions was or were sham.

It may be unnecessary in the circumstances to say anything more about SKAT’s allegation that this was sham trading. However, I consider I should make clear that I do not accept it in its most extreme form. That is to say, I reject the claim, to the extent made, that any of the parties involved was engaged in a total charade, pretending to enter into contracts but not intending what they were doing to have legal effect, doing so simply as pretext for generating CANs that could be presented to SKAT to support tax refund claims.

I am satisfied that that is not what the architects of any of the trading models involved were doing. They were, all of them (Sanjay Shah, Mr Horn, Rajen Shah, Mr Klar), engaged in what was for them an evolutionary process in which they developed trading models previously used to the point reached where, they thought, real share purchases (i.e. contracts) could be settled in the absence of real shares. Whether they took on board the full implications of the synthetic trading systems they created (The Emperor’s New Clothes point perhaps) may be relevant to whether they believed that they generated or might generate valid tax refund claims or to their understanding of whether false statements were or would be made to SKAT when tax refund claims were submitted. However, I was left in no doubt but that they all considered and intended the transactions involved in the respective trading models to be real trades (binding contracts) between the parties to them.

All the more so, I am clear, those not in command of the closed trading ecosystems that the Solo Model and Maple Point Model trading created – the non-Solo custodians, the equity buyers, the short sellers, the stock loan and forward counterparties – intended to enter into, and will have thought they were entering into, legally binding trading transactions. That is so even if (which for the most part I do not accept anyway) those outside participants appreciated that their trades were being settled by the self-fulfilling, share-less loop method that was in fact being used. The Klar Model involved far fewer outside participants (just Blue Ocean, Cole and (possibly) Heber), in respect of whom there was very little evidence before me beyond Mr Klar’s own evidence. I do not accept it was shown by SKAT that any of them, to the extent they were involved at all, were merely pretending to trade in the sense I am considering now (paragraph 420 above).

The fact that the architects of the scheme, and others involved if they knew of that method, either realised or should have realised that no shares were being transferred, so that it might be at least questionable whether valid tax refund claims were generated, does not mean their trades were not real trades at all.