How a £10 billion tax trade was untangled for a commodities house

When UK regulators fin ED&F Holdings over billions of dollars in illicit dividend-tax deals they focused on “Senior manager A”, who was a controlling mind behind the scheme.

Mark Whitehead was a former trader for Merrill Lynch & Co., MF Global Holdings Ltd., who joined ED&F Man, in 2012, and managed the commodities firm’s entrance into Cum-Ex trading. This is according to people familiar with the issue who requested anonymity as some details were private. His small team generated £129 million ($158.8 million) in revenue in only three years, and drove profits for the newly created Capital Markets division.

Whitehead’s appointment as head of equity financing was part of ED&F Man’s effort to expand beyond its core business of hauling coffee, cocoa and sugar around the globe. Its brokerage subsidiary proved to be a more complex venture. According to the UK’s Financial Conduct Authority, his desk was operating without “any meaningful supervision” while it executed trades worth £10 billion.

ED&F Man was ultimately caught up in one of the largest financial scandals of modern European history. Whitehead’s complex stock transactions, which exploited gaps in the dividend-tax laws of many European countries, cost their treasuries tens and even hundreds of millions of euros. They have also spawned numerous investigations and court cases. The FCA fined the firm £17-million on June 5 for its involvement in Cum-Ex. It criticized the lack controls at the Capital Markets Unit and the behavior of equity-finance. The executives at ED&F intend to close the division, after sold a large part of its operations last year to Marex Group.

Emma Kane is an external spokesperson of ED&F Man. She said the FCA action was related to a “legacy business area” that had been shut down in 2015, a full year before Whitehead quit the company. She refused to comment on “Senior manager A.”

Whitehead’s attorney Julian Pike stated in an email that the trader disputes the FCA findings.

Pike stated that “While Mr Whitehead may have seen the FCA decision, it is important to know that the FCA ended its investigation of him nearly two and a half years ago, without taking further action.” He does not accept as true the key facts and events outlined in the FCA decision. As a result, he is disappointed by the inaccurate picture painted by the FCA decision.

A spokesperson from the FCA declined comment.

Now, countries across Europe are evaluating the losses caused by these trades. The banks and traders argued they believed these trades were legal, but courts and authorities now state otherwise. Multiple convictions have been made by German authorities against those accused of taking part in the deal, including one former Merrill Lynch employee who was hired by Whitehead. German and Danish investigators have raided London’s Capital Markets Unit and visited the homes and offices of those at the firm under investigation.

Peter Hahn is an emeritus Professor at the London Institute of Banking & Finance. He was a banker for Citigroup Inc. and now teaches at the London Institute of Banking & Finance. He said that finance firms often move into industries that they do not understand because of the promise of profit and the comfort that others have done it as well.

The executives should have asked, “Do we really know this?” Experience? Controls? Hahn asked. Was it ‘wow! Looks like easy money and it won’t be costly if they don’t deliver so let’s do it’?”

In its fine dated June 5, the FCA claimed that the equity finance desk “enabled”, significant volumes of trades involving dividend taxes, which allowed millions of euro in refunds from Danish authorities to be illegally claimed. Therese chambers, the regulator’s Executive Director for Enforcement and Market Oversight said it was “completely inacceptable” that authorized firms could make money through this type of trading.

According to an interview conducted by lawyers from the Danish tax authority Skat in 2021 with a Capital Markets employee as part of a separate US proceeding, “Senior manager A” was described as “an individual responsible for the equity-finance table.”

The UK watchdog mentioned “Senior manager B” as the person who was in charge of Whitehead. According to FCA documents, the same employee who identified Whitehead as the Skat deposition’s supervisor named Stephen Hawksworth. Hawksworth was the CEO of the Capital Markets Unit from 2013 until 2019. Hawksworth did not respond to several letters requesting comment.

James Man, a sugar broker at a time when Britain was producing more than ever on the backs of enslaved workers in the Caribbean, also obtained a contract to supply rum to the British Navy during s period when each crew member had rations. Man was a sugar broker during a time in which Britain produced more than ever before on the backs of slaves in the Caribbean. He also secured a contract for rum supply to the British Navy at a point when every crew member had a right to a daily allowance, according to Ulbe Bosse, the author of ” the World of Sugar,” an industry history.

ED&F Man’s executives created a financial services arm two centuries after the company was founded. In 2000, the company was split into two: the agricultural commodities division retained the ED&F Man name and the financial services side became Man Group plc.

In 2007, MF Global was created by the initial publicly offered.

Whitehead, who had previously led equity-finance business at Merrill Lynch, Bank of America Corp. and Goldman Sachs Group Inc. (now MF Global), took a similar position at MF Global. It was then run by Jon Corzine, a former New Jersey governor and Goldman Sachs Group Inc. ex-partner. According to sources familiar with the situation, who asked to remain anonymous because the details were not public, Whitehead presented Cum-Ex trading to the board of the firm. The people claimed that directors were convinced the strategy was legal, and they approved it.

In a July 2011 conference call with analysts, Corzine and others executives cited “structured capital finance” as the reason for posting their highest quarterly revenue in almost three years.

MF Global was unable to survive a few short months after it collapsed due to wrong bets made on European sovereign debt. Around the same period, ED&F Man executives began to take steps to establish their own London-based broker unit that would focus once again on financial markets. This became ED&F Man capital Markets. Whitehead joined in 2012. Whitehead had a wide network of contacts in the London dividend arbitrage scene by the time he was hired at Capital Markets. He was one of the largest investors in the Cinnamon Club – an upmarket Indian Restaurant popular with traders which opened in 2001 at the former Westminster Library.

According to German legal filings, Whitehead had contacts with two traders named Martin Shields & Paul Mora who worked for him in Merrill Lynch during the early 2000s. They later founded Ballance Group, an investment firm that specialized in Cum-Ex trading and attracted regulators’ attention around 2018. Shields, as a consequence of his involvement, has worked with German prosecutors. Mora was also charged and placed on Interpol’s Most Wanted List in 2021. He has denied all wrongdoing.

Whitehead, who had worked at MF Global as well, had hoped that he could continue to focus on the dividend-tax trades involving German stocks, just like he did before, according to FCA. After Germany’s tax laws changed in 2012, Whitehead and his team shifted their focus to Denmark. The FCA stated that they engaged in trades involving PS4 billion worth of Danish stocks. This caused the tax authority in Denmark to issue millions in illegal refunds. Whitehead’s desk remained the only profitable activity in the division, even though his superiors were unable to comprehend what he did.

The FCA stated that the senior management of the company was aware of their lack of basic understanding, but the trading continued regardless. According to the FCA, Whitehead’s Desk cultivated pension fund clients in the US and took advantage of their tax exempt status to facilitate Cum Ex trades. The FCA and legal filings have also cited a flurry of complaints against ED&F.

Bernard Tew was one of these clients. He oversaw several pension plans in Kentucky. According to a claim filed in the Eastern District of Kentucky on June 14, he thought that the ED&F Desk was conducting “legal dividend arbitrage trades” for his funds, but they were actually involved in fraud. Skat sued him for illicit profits worth tens and millions of dollars in 2018. This forced him to declare bankruptcy, settle with the IRS for $34million, and file for bankruptcy.

In an emailed message, Tew’s lawyer, Jeffrey Ritholtz at Rolnick Kramer Sadighi LLP, claimed that ED&F Man had illegally and egregiously acted, costing victims of both sides in its supposed trades hundreds, if not even billions, of dollars.

Emma Kane from ED&F Man described Tew’s claims as “opportunistic and without substance.” Kane cited a separate case in 2015 where the US Department of Labor determined that Tew misappropriated pension-plan funds. This led to Tew being banned from acting as a Fiduciary for employee benefit plans. Whitehead left ED&F Man at the end of 2016. The firm closed its equity-finance division three years later. Around this time, ED&F Man began to see its core sugar business suffer. Prices were being impacted by bumper crops in Asia, and executives wanted to get rid of troublesome assets. Chris Mahoney, a veteran agricultural commodities trader, became chairman in 2021. A year later, he led the sale of brokerage to Marex Group for $220 million.

George Stein, the managing director of New York’s Commodity Talent LLC, said that Mahoney had “dismantled a troublesome division which strayed away from ED&F’s historical origins.” He “concluded that it was time to let others handle complex financial products.”