Three Americans Owe $160 Million to Denmark in Dividend Tax Scheme, Says Judge

A federal judge Monday decided three Americans had participated in tax fraud against Denmark. (Jefferson Siegel / AFP / Getty Images)

A tax scheme known as the cum-ex strategy has wrung more than $160 billion in false refunds from European governments over the last two decades. Monday, a federal judge in Manhattan said three Americans must repay Denmark more than $160 million for false tax refunds in a civil judgement.

The three “participated in one of the largest frauds perpetrated against the country of Denmark,” wrote U.S. District Judge Naomi Reice Buchwald, in ruling they must honor a repayment deal they made with Denmark in 2019.

New York lawyer Matthew Stein, with the Florida businessmen Jerome Lhote and Luke McGee, ran their cum-ex scheme from 2010 to 2015, joining a cottage industry of lawyers, bankers and accountants that tax authorities estimate have defrauded governments of at least $164 billion in the last few decades. Germany is pursuing hundreds of cases in tax frauds that may exceed $40 billion.

Denying that they engaged in fraud, Stein and his co-defendants called their strategy “dividend arbitrage.” Our requests for comment yielded no responses.

The cum-ex scheme was relatively simple, said Judge Buchwald. Danish companies withhold tax when they pay dividends. Tax treaties entitle U.S. pension funds to a refund of those taxes when they hold Danish stocks. The three Americans set up over 100 pension plans for some 50 friends and families. Then they falsely told Danish tax authorities that the funds owned dividend-bearing Danish shares, said the judge. When Denmark paid a refund, the defendants kept as much as 95% of the proceeds, leaving the small remainder for the pension fund, according to the defendants’ records.

Denmark paid out $580 million in cum-ex refunds to claimants like the three Americans, before growing suspicious of the tax stratagem around 2015. As Denmark’s tax authority filed hundreds of civil suits across the U.S., Stein and his colleagues hired lawyers and settled in 2019 by agreeing in to return more than $90 million, plus interest. Others refused to settle with Denmark and a federal civil court jury in New York this year found a group of them liable for fraud, resulting in a $78 million judgment.

Stein and his two associates had been making repayments when Danish prosecutors criminally indicted them in 2021 for their parts in the cum-ex schemes. After that, the three stopped paying their tax settlement. In a two-day trial this year, Judge Buchwald heard them argue that the settlement shouldn’t be enforced.

Monday, the judge ruled that the three Americans had breached their deal to repay Denmark. Using spreadsheets the defendants had created to run their scheme, Judge Buchwald said they now owe Denmark just shy of $164 million in damages and interest.

Their criminal trial in Denmark hasn’t yet begun.

Write to Bill Alpert at william.alpert@barrons.com