One year ago, a man calling himself Benjamin Frey appeared on German television wearing a fake chin, a gray wig, and thick glasses. His voice artificially distorted, the man told how he helped bankers, investors and traders extract billions from the country’s taxpayers — and how about 50 million euros ($56 million) of that money landed in his own pockets.
Last week, the same 48-year-old showed up as a witness in the first German trial over Cum-Ex, the controversial trading strategy described on TV. The mask was gone and he had to use his real name before the five judges in Bonn. The man, a lawyer whose identity still can’t be published, was the first person to cooperate with prosecutors in the Cum-Ex probes in an effort to avoid prison. His account laid out how Cum-Ex became a money-spinning machine on an unprecedented scale.
The practice has become a national financial scandal in Germany, ensnaring dozens of banks and financiers in a web of criminal probes across the country. Named for a Latin term meaning “With-Without,” Cum-Ex helped investors exploit a loophole on dividend payments, allowing multiple people to claim the same tax refund, according to authorities. Lawmakers say the deals eventually cost the government 10 billion euros in lost revenue.
At the Bonn trial, former London bankers Martin Shields and Nicholas Diable are accused of helping organize deals that led to more than 400 million euros in lost taxes. Neither man is challenging the facts prosecutors have assembled, and the court will ultimately rule on whether what they did was criminal. As part of the process, the man was called to testify last week about his role in Cum-Ex.
To make his story easier to read, Bloomberg will use his invented name, Benjamin Frey. Frey is scheduled to reappear for additional questioning on Tuesday in Bonn.
In three days on the witness stand, Frey laid out how he and another lawyer managed to transform Cum-Ex, which in 2005 was used for trades between banks, into a profit machine for a host of wealthy investors and their advisers. He described how his partner was allegedly able to influence lawmakers on new rules and how they helped their clients “twist” trades to avoid getting caught by authorities trying to curb the double dipping on dividends.
“We often fabricated our own version of the truth,” Frey said.
Frey told the court he came from a “very modest” background in Northern Germany. But his father was a businessman, giving him a thirst for money. After graduating among the top in his class in law at Osnabrueck University, one of his professors opened the door to a Wall Street Law firm: Shearman & Sterling LLP. He joined in 2001.
A year later, he came under the tutelage of a man who would become his mentor on a journey into the world of Cum-Ex: Hanno Berger. At the time, Berger was a top tax lawyer, with banks and billionaires lining up to get his help – and tips on how to lower tax bills or avoid them altogether. Berger took Frey along when he moved to Dewey Ballantine LLP, where Frey made partner.
The duo eventually struck it out alone to become the poster children of Cum-Ex in Germany, a strategy they discovered almost by chance, Frey said. Berger was asked to give a second opinion on a memo another law firm had written for the Australian bank Macquarie on whether Cum-Ex deals were viable under German law.
“Berger’s first reaction was remarkable — he said: ‘That can’t be possible,’” Frey recounted in court. “But then he scrutinized the legal details very diligently and saw it was possible.”
Berger and Frey quickly copied the business model and did the first Cum-Ex deals with the late German billionaire, Rafael Roth, who invested 50 million euros in transactions related to Cum-Ex. The transactions were done with the help of Unicredit’s HVB unit in London where Shields and Diable, the two defendants in the Bonn trial, worked at a trading desk under Paul Mora, another suspect in the Cum-Ex probes. Mora’s lawyer said his client isn’t a defendant in the Bonn trial, making the presumption of innocence even more important.
But in an interview, Berger refuted Frey’s testimony, calling his former colleague “an egomaniac, opportunist,” and “a bad lawyer.”
Berger emphasized in the phone conversation from Switzerland that Cum-Ex trades were legal a decade ago and the government wants to criminalize the conduct after the fact, “a grave violation of the rule of law.”
Still, the technique Berger and Frey pioneered, where shares were bought and sold ahead of a dividend date allowed people to make a lot of money, fast. Investors could make 15% on a 50 million-euro stake during the six-month German dividend season, according to Frey. Repeated, that meant 30% a year.
Frey said that with the right accounting perspective, it was even more.
“You could also say it was 60% per year, since the money was only needed for three months,” he said.
Berger and Frey later formed their own law firm — and also a group of companies called OAK — to channel profits from their clients, according to Frey. The duo introduced Cum-Ex to Hamburg-based private bank M.M. Warburg, which traded on its own book and gave half of it profits to the two lawyers. Berger and Frey also worked closely with Ballance Group, founded by Mora and Shields in 2008, and also took a share of their profits. Warburg declined to comment.
From 2006 through 2011, Cum-Ex was widely profitable for investors and the two lawyers. Frey said that both he and Berger each made 50 million euros, much of it likely coming from profit sharing with their clients. Berger, who now lives in Switzerland, said he “personally” didn’t make any money as the proceeds from went to the law firms he worked with or to OAK. He didn’t have any shares or say in the OAK group of companies, he said.
Cum-Ex reached its peak in 2010. By the end of that year, new rules made it impossible for funds to do the trades, Frey said. He sent an email to clients with the message “Game Over.”
Still, he spent much of 2011 working on a way to bring in U.S. pension funds, the only alternative left to salvage the transactions, he said.
But by that time, Berger and Frey started to feel the pressure from tax authorities. The turning point for Frey came in 2014 when he became a suspect in the Cologne probe. One morning at 6 a.m., police knocked on the door of his house in Zurich.
“There was my wife holding our 1 1/2-year-old child in her arms,” watching their home being raided, Frey said. “Then it became clear to me that something was very wrong.”
Since then Cum-Ex probes have mushroomed throughout Germany with prosecutors in five cities investigating some 500 suspects. In Cologne alone, more than 50 separate probes are pending.
But even before the German crackdown, some people knew Cum-Ex might not be proper. Frey recounted a meeting at the law firm in Frankfurt, where Berger told young attorneys:
“Whoever has a problem with the fact that because of our work there are fewer kindergartens being built, here’s the door,” Frey recalled in court. Berger didn’t dispute the account, but he said it was a way of saying that lawyers have a duty to show clients all their options under the law, and to help them make use of them.
Last year in his TV interview, Frey said he had returned the 50 million euros to German authorities. Then in court last week, he admitted that this wasn’t accurate. He explained that the interview was taped in March 2018 and he knew it would be aired only in October.
“I thought I would have paid back the money by then,” he said.