Ex-Merrill Lynch star flips sides to help dividend tax scheme prosecutors

A former Merrill Lynch banker, who says he was “dazzled” by potential gains from the Cum-Ex tax scheme that’s implicated some of Wall Street’s biggest banks, has switched sides to cooperate with German prosecutors.

Osman Semerci’s decision was made public on Tuesday when he testified at a Bonn trial over the Cum-Ex scheme. The 55-year old ex-partner at London-based asset manager Duet Group said the move was prompted after he hired a new German defense lawyer.

“Recently, I have handed over extensive documents to prosecutors,” Semerci said. “After changing my legal counsel, I shared everything I have.”

Cum-Ex, a strategy that took advantage of how Germany collected dividend tax, involved multiple parties claiming refunds on a tax that was paid only once. Germany changed the way it collected dividend taxes in 2012 to block the practice that may have cost the country’s tax authorities at least €10 billion ($11 billion) in total. About 1,800 suspects are now being probed by several prosecutors’ offices.

The Cologne probe, by far the largest, is relying heavily on traders who are now sharing their inside knowledge in exchange for leniency from judges. One of them, Aneil Anand, who ran the Cum-Ex trades at Duet, testified at the trial in April, implicating the Duet leadership.

The former Duet employee on trial is Vijaya Sankar, who in March confessed and said he was sorry for what he did. Semerci was charged alongside Sankar as well as Duet co-founders Henry Gabay and Alain Schibl last year. The trial of the partners will start only after a verdict in the Sankar case.

The three Duet partners discussed the tax, legal and reputational issues of Cum-Ex deals and were aware of the fact that authorities could change their view on them. But the partners were willing to accept that “business risk,” Semerci told the judges. 

“The term ‘illegal’ wasn’t used,” he said. “It was discussed that the deals could be considered ‘not appropriate,’ that they could become illegal.” 

At the time, they didn’t call the trades Cum-Ex but talked about “dividend arbitrage strategies” that exploited cross-border taxation. 

Cum-Ex was first introduced to Duet in 2008 by Salim Mohamed, one of many former Merrill Lynch bankers looking for new jobs amid the financial crisis. He contacted Semerci and his business idea resonated with the partners.

Semerci said that while he doesn’t remember discussing double refunds, it was obvious that the transactions’ profits came from the tax side. The deals were leveraged multiple times and so were highly profitable.

‘Red flag’

The technical details weren’t explained and “we didn’t ask,” the former banker said. When in 2009 the profits were much higher than what was described in the business plan, they should have asked questions, he said.

“It was a red flag, and I failed on that,” he said. “Maybe I was dazzled too much by the profits. I turned a blind eye.”

A former star at Merrill Lynch and one of the best-known figures on Wall Street during the industry’s mortgage-bond craze, Semerci was fired in October 2007 in the wake of the financial crisis and a year later joined Duet. At the time he was global head of fixed income, currencies and commodities and his dismissal came as a “total shock” after 17 years at the bank, he said. 

He then talked to Gabay, whom he first met in Geneva in 1992 during their common time at the Merrill Lynch. Gabay suggested it might be better for him to work at a smaller structure. While Semerci had many offers from major banks at the time, he opted to work with Duet. 

“I was emotionally very fragile back then, so I decided it was better for me to work with Henry and Alain,” he told the court.