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Traders at Ermotti’s UniCredit Unit Recount Cum-Ex Free-for-All

Donal Griffin and Karin Matussek

(Bloomberg) -- From a wood-paneled dock in a Bonn courtroom, a onetime star trader at UniCredit SpA recounted how controversial tax deals that created a windfall for his desk went to the highest levels of the bank.

The trader, recalling so-called Cum-Ex deals between 2005 and 2008 that exploited loopholes in German tax law, described lucrative transactions that were commonplace at the bank, regularly approved by superiors and done out in the open. The trader, Martin Shields, said one of UniCredit’s top executives “was part of the decision-making committee in at least one of these years.”

The unit at the heart of Shields’s testimony was part of UniCredit’s markets and investment banking division, at the time led by a man who has since become one of Europe’s most prominent financiers: UBS Group AG Chief Executive Officer Sergio Ermotti.

The investigation into a practice that German authorities now say is a tax heist has riveted financial circles, ensnared dozens of banks and exposed a sprawling network of financiers, short-sellers and middlemen. Now it raises questions about what Ermotti and his team knew about the practice when he oversaw the unit that UniCredit lauded in its 2007 annual report for its “exceptional” performance. Ermotti served as UniCredit’s head of markets and investment banking and ultimately as deputy CEO before he joined UBS in 2011.

Ermotti, who declined to comment, hasn’t been accused of any wrongdoing. Shields, who didn’t name the executive he was referring to in court, is cooperating with prosecutors in an attempt to avoid jail time. A spokesman for Shields declined to comment on why he didn’t name the executive during his testimony. Shields is preparing for more questioning on Thursday as Germany’s first criminal trial over Cum-Ex resumes.

Big Names

Some of the biggest names in finance are being investigated in the sprawling probe, including ex-Deutsche Bank AG co-CEO Anshu Jain, the firm’s former investment-bank chief Garth Ritchie, Macquarie Group Ltd. CEO Shemara Wikramanayake and her predecessor Nicholas Moore, and banks ranging from Barclays Plc to Banco Santander SA. Ritchie has previously denied being “personally involved” in Cum-Ex transactions. Spokesmen for Jain, Moore and Wikramanayake declined to comment.

“There were a lot of banking businesses pre-2008 that were making a great deal of money and management were busy slapping themselves on the back and congratulating themselves on how well they were doing,” said Christopher Wheeler, a veteran banking analyst who has worked at firms including Barclays Plc and Mediobanca SpA.

Shields and another team member are facing trial for what prosecutors say amounted to a 400-million euro ($444 million) tax fraud. By exploiting how Germany taxed dividend payments, multiple people were able to claim ownership of tax refunds, a maneuver named after the Latin term Cum-Ex, meaning “With-Without.” Germany in 2012 revised its tax laws in an effort to end it, but whether the tactic is illegal is still being contested.

Tax Trades

Shields, 41, and Nicholas Diable, 38, are charged with orchestrating Cum-Ex transactions and are cooperating with prosecutors.

Over several days of testimony, Shields has told the court how the Cum-Ex deals required collaboration from multiple players across the industry, and how the dividend-tax trades were widely known at the Milan-based firm and had the blessing of his superiors. Shields said he knew the unnamed executive from their joint time at Merrill Lynch & Co., where the manager in question had been part of the equity markets division’s leadership.

In his testimony, Shields describes how a batch of the trades required approval from a parent entity in Milan, where the top banker was part of a committee that signed off on deals. Shields said his boss, Paul Mora, had also crossed paths with the executive before at Merrill Lynch, where they had worked together on trades that involved dividends.

Ermotti, 59, had spent the earlier part of his career at Merrill Lynch, where he joined in 1987. He climbed the ranks of the firm’s equities business, becoming co-head of global equity markets in 2001 and left the firm in 2003. Part of his stint at Merrill Lynch overlapped with an executive, Edoardo Spezzotti, who later served on the executive management committee of the UniCredit unit overseen by Ermotti. Spezzotti didn’t return requests for comment sent via his LinkedIn account.

UniCredit is among firms under scrutiny from German prosecutors as they probe Cum-Ex trades. Ermotti, now one of the world’s most influential bankers, was hired by UniCredit at the end of 2005, shortly after the bank had taken over German rival HVB Group and Shields’s team started to become rainmakers.

Climbing the Ranks

The former traders described how, in 2004, they joined HVB’s equity-finance desk, a business that typically profits from providing financing and stocks to hedge funds and other asset managers. They frequently engaged in Cum-Ex trades and their group was among the most profitable at the equities division as a result, Shields said in court.

“There was no black box,” Shields said. “There was only an extremely profitable desk.”

UniCredit purchased HVB in 2005 for more than 19 billion euros. In 2006, the newly hired Ermotti announced the creation of one division that would house the group’s trading and banking operations, a move that would “propel” the Italian lender into “the top league of European investment banks,” he said at the time.

At UniCredit, Ermotti sat atop a division generating more than 2.8 billion euros of annual operating revenue, the 2007 annual report shows. His boss was CEO Alessandro Profumo, who had built the lender with a series of acquisitions. Key deputies included markets head Willi Hemetsberger, Chief Operating Officer Stefan Ermisch and investment-banking co-heads Ronald Seilheimer and Spezzotti, and together they formed the unit’s executive management committee. Profumo said he has no direct recollection of events that date back to 2007. The other executives either declined to comment or didn’t return calls.

New Business

Ermotti and his team were tasked with pulling together a newly formed, disparate empire of 3,300 employees across 39 different offices, a 2007 presentation shows. Accounts of how closely they managed this endeavor differ: some former employees, speaking on condition of anonymity, tell of how UniCredit executives tightly controlled operations from Milan, while others describe a looser arrangement, where a subsidiary such as HVB could operate with some autonomy.

Shields said that in 2007, Cum-Ex trading contributed about 40% of revenue on the equity-finance desk -– some 40 million euros -– and that Mora was “lauded” for the team’s profitability.

The equity-finance team pushed UniCredit’s overall equities income up 10 percent in 2007 to 383 million euros, according to the lender’s annual report. The performance buoyed Ermotti’s business unit as the financial crisis began to rage and losses started to soar.

Shields and Mora left UniCredit in 2008 to strike it out alone, and Diable followed a year later. Even after their departure from UniCredit, Cum-Ex trading continued at the bank, Shields said.

To contact the reporters on this story: Donal Griffin in London at dgriffin10@bloomberg.net;Karin Matussek in Berlin at kmatussek@bloomberg.net

To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, Benedikt Kammel

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