How a storied private bank became embroiled in a tax scandal

M.M. Warburg & Co’s headquarters exudes the aura of a fortress that has withstood the tumultuous twists of German history for centuries. The ornate sandstone structure survived the bombs that rained down on Hamburg starting in 1941. One shell hit the roof but bounced off a metal beam, limiting the damage. Even the firestorm that wiped out much of the neighbourhood in a 1943 raid couldn’t harm the building. The Jewish family that owned and ran the bank was expelled by the Nazis and went into exile, only to return after the war and rebuild the institution into one of the country’s largest and best-regarded private lenders. Now another crisis is enveloping the storied institution and has forced its longtime chairman, Christian Olearius, as well as co-owner Max Warburg - a direct descendant of the founding family - from the supervisory board. Authorities have raided Warburg three times as well as the private homes of Mr Olearius. Among the seized documents were the chairman’s personal diaries containing meticulous records of his business life. Warburg allegedly participated in controversial dividend trades known as Cum-Ex that took advantage of double tax reimbursements. The scandal, which lawmaker say has cost the state at least €10 billion ($10.8bn) in lost revenue, has roiled the financial industry, ensnaring lenders from Deutsche Bank to Barclays. The case has led to a months-long trial unfolding in Bonn with two defendants, former bankers who have laid out the industry’s complicity in the practice. Mr Olearius, his son Joachim - now the lender’s chief executive - Max Warburg and several top managers are being probed over their roles in Cum-Ex. The next charges filed by Cologne prosecutors will target Warburg employees, people familiar with the case said. Warburg said it never intended to participate in illegal share transactions, misinform tax authorities or claim unjustified refunds. Cum-Ex trades, named for the Latin term for “With-Without,” took advantage of German tax laws and allowed multiple investors to claim refunds on a dividend levy that was paid only once, prosecutors say. How a discreet institution like Warburg, which has carefully crafted the image of respectability, got caught up in what’s been labeled the biggest tax heist in Germany has perplexed investigators and the public alike. Warburg is a fixture among Hamburg’s moneyed elite, and the fall of Mr Olearius has sent shock waves through the upper echelons of society and political circles. “Warburg survived countless challenges in the last 200 years; numerous wars, a hyperinflation and the Nazis - you have to wonder why a bank with such tradition was prepared to participate in these kinds of acts,” said Christopher Kopper, a professor at Bielefeld University specialising in corporate history. In the world of Cum-Ex, Warburg stands out. Its deep involvement in the scandal belies its modest size compared to global giants like Bank of America’s Merrill Lynch unit or Barclays. Warburg long focused on private banking for the rich, as well as asset management and investment banking, and the company prides itself in its long-term approach. A corporate brochure suggests Warburg is guided by a higher ethical standard, claiming it doesn’t do business for its own sake. “Cum-Ex has laid bare the fundamental problem of the finance industry, which likes to embrace all possibilities that are not strictly illegal,” said Bernhard Emunds, an ethics professor at the Sankt Georgen college in Frankfurt. Warburg is one of the last family-owned private banks in the country. Sal. Oppenheim, previously Europe’s largest private bank with a rich history to match Warburg’s, was forced to embrace Deutsche Bank as a saviour in 2009 after investments went sour. The Hamburg bank traces its roots to brothers Moses Marcus Warburg and Gerson Warburg, who set up shop in 1798. Over the next century, it expanded to become a well-connected lender with close government ties around the globe. Paul Warburg, a family offspring who became an investment banker in New York, was an early advocate for the US Federal Reserve System, while Eric M. Warburg founded E.M. Warburg in New York in 1939, which evolved into private equity firm Warburg Pincus. The Nazis finally forced the family in Hamburg to give up its shares and the bank later had to change its name to Brinckmann, Wirtz & Co. After the war, the Warburgs regained ownership and reinstated the family name. Warburg’s first brush with Cum-Ex occurred more than a decade ago, when one of Germany’s top tax lawyers stopped by for a meeting. On January 30, 2006, Hanno Berger pitched Mr Olearius a new trade that promised safe yet highly lucrative transactions built around taxation of dividends, according to the indictment filed by prosecutors in the Bonn case. One of Mr Berger’s associates, a tax lawyer who has since turned on his former boss using the pseudonym Benjamin Frey, recounted the meetings, and how he was awed by the splendor, with oil paintings depicting the dynasty adorning the walls, coffee served by butlers and china with the Warburg emblem. (The bank denies employing butlers). Mr Frey said Mr Berger explained the deals, though Mr Olearius “didn’t understand the details,” instead relying on another manager who had analysed the structure. In the end, Mr Olearius signaled his interest, and that he might also invest his personal money, according to Mr Frey’s account in court last year. Warburg set out as a Cum-Ex shortseller later in 2006. The following year, the bank switched roles and acted as the buyer in the deals, continuing until 2011, prosecutors say. The Cum-Ex practice ended in 2012 after Germany changed how dividend tax is collected. Mr Berger, who moved to Switzerland that same year after his Frankfurt law office was raided, has denied any wrongdoing. The bank has long maintained that it simply participated in legitimate dividend arbitrage transactions and couldn’t know that these involved Cum-Ex-type deals. It’s an argument refuted by witnesses in the Bonn trial, who said everyone knew and could detect Cum-Ex even if the term wasn’t used because the profits priced into the underlying transaction were unusually high. The bank’s investment unit also set up funds that collected money from German millionaires and other investors. One of these arrangements was dubbed “Maltese structure” because it used offshore companies based in Malta. That entity alone caused damages of €108 million, according to the indictment. In the majority of the 34 cases under review in the Bonn case, Warburg or people associated with the bank were involved. A verdict in that case is expected toward the end of March or early in April. Martin Shields, one of the accused in the Bonn trial, told the court that he came in contact with Warburg when he was still a trader at UniCredit SpA’s HVB unit. The Hamburg lender was “one of our desk’s most active relationships,” said Mr Shields, who worked primarily on Cum-Ex deals. When Mr Shields left the bank to set up his own boutique advising on Cum-Ex deals, Warburg was his first client. “The agreement with M.M. Warburg provided us with a certain amount of credibility and basic business,” Mr Shields, who is cooperating with authorities in a bid to avoid jail time, told the court. The judges in the Bonn case have said they consider the deals to be criminal and that Warburg will most likely have to pay about €280m in lost tax revenue. “Warburg needs to understand that the state is clamping down,” said Konrad Duffy, an expert on financial crime at Finanzwende, a political pressure group. “This is why the bank is struggling, because it previously wasn’t accustomed to such behaviour.” Confronted with the allegations, the bank initially went on the offensive. After the third raid of its headquarters in 2018, Warburg issued a terse release denying any wrongdoing. The probe, Warburg said, was a “useless” exercise that failed to produce even a single case backing the allegations. The staunch resistance enraged prosecutors, according to people familiar with the probe. Public perception of Warburg and Mr Olearius had already begun to shift, depicting the bank and its chairman as greedy and willing to sacrifice their principles on the altar of profit. By the end of November, pressure had become unsustainable. Mr Olearius and Max Warburg both quit their posts to “devote more time to their social commitment,” according to a statement. The release maintained the veneer of an orderly generational handover that had been long in the making. But Bafin, the regulator, had essentially forced out that duo that had guided the bank for decades. After Mr Olearius and Max Warburg stepped down, the bank began revealing a more cooperative side. Less than three weeks after their departure was announced, lawyers told the Bonn court that the lender was ready to pay back any profits generated from the incriminated transactions. Warburg says it made €68m in the deals. Earlier this month, the bank said Mr Olearius and Max Warburg were prepared to contribute the necessary funds to cope with any Cum-Ex impact. “Mr Olearius spent years cultivating the image of the honorable merchant,” Duffy said. “Taking a closer look, that now rings hollow.”