Thursday, January 30, 2020

Follow Up on the Biggest Tax Heist Ever (1/30/20)

I wrote previously about an alleged scheme to steal revenue from various European countries based on claims for refund from so-called “cum-ex” trading.  NYT Article on Perhaps Biggest Tax Heist Ever (1/24/20), here.

I still don’t know the details of the precise scheme but have read in cases I cite at the end of this blog that it operated by having entities (retirement and pension plans) purportedly owning Danish stock on which Danish tax was withheld make claims for refund of the withheld tax under certain double tax treaties.  The cases I cite below involve the U.S. double tax treaty with Denmark.  In very high level summary, the basis for the claim for refund required, at a minimum, that the claimant own the stock that paid the dividend from which tax was withheld and paid over to the Danish tax authority (acronymed in the U.S. to SKAT).  SKAT came to believe that the claimants did not own the stock on which thy claimed the refund.  SKAT took steps under its tax procedures to recover the refunds; under those procedures pending in Denmark, SKAT claims that it is entitled to recover the erroneous refunds.  In addition, SKAT filed U.S. suits against the various U.S. entities causing the claims to be made.  In the U.S. suits, Denmark is not invoking its tax claims qua tax claims but is instead invoking “six common law claims against the defendants. Counts One and Two allege fraud and aiding and abetting fraud. Count Six alleges negligent misrepresentation. And Counts Three through Five allege payment by mistake, unjust enrichment, and money had and received.”  That U.S. litigation has been consolidated into a multi-district litigation (“MDL”) case being managed by Judge Lewis Kaplan of S.D.N.Y.  (Judge Kaplan, here, is one of the best trial judges I have appeared before in my career.)  The cases below were rendered in that MDL.

Here is a key allegation from In Re SKAT Tax Refund Scheme Litigation, 356 F. Supp. 3d 300, 309 (S.D. N.Y. 2019) (footnotes omitted):
SKAT alleges that these refund claims were fraudulent because the defendant plans did not own shares in the Danish companies that they purported to own.[12] It argues that it was not possible for the plans to have owned the shares they purported to own because many, including The Bradley London Pension Plan ("Bradley Plan"), were single-participant 401(k) plans limited to approximately $116,500 in contributions per year, yet they claimed to own millions of dollars of stock in Danish companies within the first year of their existence.[13] The numbers, the plaintiff argues, simply do not add up. The defendants therefore were not entitled to the dividends they claimed to have earned and were not entitled to the tax refunds they claimed under the U.S.-Denmark Treaty.[14] SKAT allegedly paid out approximately $2.1 billion as a result of this fraudulent tax refund scheme.[15]
I infer that the claim to have owned millions of dollars of stock when they had limited contributions must have require some "phony" loans of the type often see in bullshit tax shelters.

Addressing the defendants' claims of bona fides, the Court said (pp. 313-314):
[Defendants]  have merely argued that: (1) their ownership of the shares is confirmed by "bona fide documentation issued by the Broker Custodian," but they have not provided either that documentation or any evidence of ownership, either in an affidavit or otherwise; (2) there are "many means to obtain liquidity to purchase shares (such as through financing transactions)," but they have not provided any evidence that the defendants used any such means or entered into a single such financing transaction; and (3) the "lack of registration with [the central securities depository in Denmark] is of no significance in determining either legal or fiscal ownership of the shares (for example, because such shares may have been held in omnibus or custodian accounts)," but they have provided no evidence that the defendants owned the shares legally, fiscally, or through an omnibus or custodian account.[51] That is to say, the defendants — in an effort to avoid the complaints' allegations that the defendants did not own the shares — have (1) put forward only hypothetical ways in which a market participant could "own" shares without paying for them with its own cash, and (2) asserted that a document (that is alleged to be part of the fraud) exists that states that the defendants owned the shares. But the Court assumes the truth of the complaints' allegations of lack of ownership, at least in the absence of competent evidence to the contrary. Accordingly, there is no need on this motion to engage Danish tax or other law to decide any issue of ownership, beneficial or otherwise.
The scheme was apparently masterminded by a person named Sanjay Shah, whose Wikipedia entry is here.

Judge Kaplan rejected any permutation of the revenue rule in which U.S. courts generally do not enforce foreign tax law (In Re SKAT Tax Refund Scheme Litigation, 356 F. Supp. 3d 300, 318 (S.D. N.Y. 2019)):

The claims, as pleaded, are not ones for tax revenue but for money stolen from the plaintiff by fraud. Any argument that an action is one for "enforcement" if it involves the determination that defendants were not eligible for or entitled to tax refunds under Danish law is foreclosed by the case law discussed above. Mere recognition or even application of foreign tax law is not the same as enforcement.

Judge Kaplan also had some choice comments

One example (In Re SKAT Tax Refund Scheme Litigation, 356 F. Supp. 3d 300, 320 (S.D. N.Y. 2019) (footnotes omitted):
Finally, the Court will not countenance defendants' attempts to use the status of the victim they allegedly chose to target in this fraud to block the victim from obtaining relief. The Court does not expect SKAT to sit idly by, and it sees no inconsistency in SKAT's decision to withdraw its prior decision to refund dividend taxes, leading to administrative appeals in Denmark, and to file the complaints alleging fraud and seeking relief in this Court. Defendants are completely correct to note that "it is the method by which the alleged fraud occurred" that matters — not the chosen victim.
Another example, in response to a claim that SKAT should be equitably estopped because SKAT had an administrative practice in paying refunds on fraudulent ownership claims thus inducing the defendants to make their own fraudulent claims (In re SKAT Tax Refund Scheme Litig., 2020 U.S. Dist. LEXIS 12129 (S.D. N.Y.1/23/20)):
SKAT's alleged practice of complying with the U.S.-Denmark treaty's refund requirement is not a "clear and unambiguous promise." Goldstein has pointed to no authority, and I am aware of none, holding that a government agency's pattern of engaging in legally required behavior on the basis of taxpayer submissions that later turn out to be fraudulent constitutes a "promise" for the purposes of a promissory estoppel claim.

The cases:
  • In Re SKAT Tax Refund Scheme Litigation, 356 F. Supp. 3d 300 (S.D. N.Y. 2019), here
  • In re SKAT Tax Refund Scheme Litig., 2020 U.S. Dist. LEXIS 12129 (S.D. N.Y.1/23/20), here.
Other articles:
  • David Segal, Where in the World Is Denmark’s $2 Billion? (NYT 10/5/18), here.
  • Philip Oltermann, 'The men who plundered Europe': bankers on trial for defrauding €447m (9/20/19), here.

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