An unemployed trader who became a $700M exile | Hacker News Reader

An unemployed trader who became a $700M exile

bloomberg.com

127 pointssimonebrunozzi96 comments

But in a series of recent interviews from his $4.5 million home in Dubai, Shah was unrepentant.

“Bankers don’t have morals,” the 50-year-old said on a video call. “Hedge-fund managers, and so on, they don’t have morals. I made the money legally.” [...] “Prove that any law was broken,” Shah said. “Prove that there was fraud. The legal system allowed it.”

At least he's honest in his contempt for normal ethical mores - there's none of the vacillating bull we associate with PR from say, big corporate tax dodgers.

Naive, idealistic me has often wondered how possible an abstract law of last resort for prosecuting people who exploit loopholes in what a jury of their peers would consider to be an unethical way; but I guess it would be to open to abuse by dodgy governments and other entities and presumably not compatible with a democratic legal system.

We have laws like this for computer hackers. No-one ever defends themselves by saying "everything I did was enabled by the poorly designed system, therefore I am not a criminal". Why not for the financial system?

> No-one ever defends themselves by saying "everything I did was enabled by the poorly designed system, therefore I am not a criminal".

People charged with hacking defend themselves this way all the time. And other people defend them in the same terms.

Recently a guy was charged for accessing public URLs. Sure, they were specifically made available to the public, but the public wasn't supposed to look at them.

The weev case was a travesty from start to finish. The failure on ATT's part is legendary. The "secret" information was only ever exposed to a professional journalist, who didn't pass it on to anyone. Nothing happened in New Jersey. And of course, as the appellate court found:

...no evidence was advanced at trial that the account slurper ever breached any password gate or other code-based barrier. The account slurper simply accessed the publicly facing portion of the login screen and scraped information that AT&T unintentionally published. [0]

[0] http://cdn.arstechnica.net/wp-content/uploads/2014/04/weevru...

I think it is pretty clear from the context that a) Tronno is referring to people exploiting vulnerabilities for nefarious purposes, and b) successfully defending themselves with that argument.

The CFAA is a terrible law that has been used to prosecute people over very questionable cases. Let's not bring (any more of) that level of subjectivity to finance.

For computer hackers, we have clear laws citing unlawful access to computer systems. Plus, computer hackers don't tend to consult with lawyers before doing their thing.

For traders, we don't have all-encompassing laws covering tax avoidance. Plus, traders have money for hiring professional for finding loopholes.

That's the difference.

>We have laws like this for computer hackers. No-one ever defends themselves by saying "everything I did was enabled by the poorly designed system, therefore I am not a criminal". Why not for the financial system?

Because the CFAA is pretty universally hated and makes for bad outcomes.

> No-one ever defends themselves by saying "everything I did was enabled by the poorly designed system, therefore I am not a criminal".

This is a pretty common argument, actually, when it comes to questions of "allowed" API access.

No such law is needed, at least in this case. This guy is up to his neck in lawsuits and the only reason he isn't cooling his heels in a Copenhagen jail is that he's on the run in Dubai

but should our legal system prosecute those hackers that didn't break any law on the books? I'd argue they shouldn't - sure some of the bad guys get put away, but so to do good* guys because of the legal precedent being followed

*good as being defined as likely a net positive value on society similarly bad as being defined as a net negative for society

Exploiting loopholes is virtuous for many of the people in the industry. It demonstrates your attentiveness to the rules.

Or we could fix these financial zero-days when they are found instead of letting them run for years.

“Financial Zero-days” - Excellent analogy :)

This should be a thing.

And further, reward people who responsibly report them early instead of exploiting them.

But think about what that will do to the zero-day market! It will surely crash from such an action!

> "Naive, idealistic me has often wondered how possible an abstract law of last resort for prosecuting people who exploit loopholes in what a jury of their peers would consider to be an unethical way"

Heaven help those who are unpopular or of a class that is widely discriminated against under such a system.

Perhaps GP meant to account for it by 'of their peers', as in equals.

For example, in the UK peers (of the realm) used to have the right to trial by jury of fellow peers (of the realm).

They are now the victims of inequality - while commoners have the right to a trial by their commoner peers, peers (of the realm) have only the right to a trial by commoners!

Ancient Chinese law worked that way; people whose acts were considered blatantly unethical would routinely be charged for violating an imperial decree. Not an actual imperial decree, but everyone acknowledged that the Emperor would have made such a decree if he'd been aware of the circumstances.

selective application of the law (aka, a lynchmob) has a very chilling effect on the populous. They will not take risks, nor try new innovations for fear of such reprisals.

You end up with a "can't go wrong buying IBM" mentality, but for society.

It wasn't a case of lynch mobs - the court administration were properly appointed officials, and there were checks and balances in place (by the standards of the time). But the mentality that the rules had to be written down ahead of time and any loopholes were fair game just wasn't there.

At some point the disease is worse than the cure.

You also use this word "democratic" in a way that does not mean "rule by the majority".

> You also use this word "democratic" in a way that does not mean "rule by the majority".

I’ll take the bait. “Democratic legal system” is, according to you, an oxymoron because of the “rule by the majority” part? A common sentiment although easily debunked, since there are always rulers in any system with legal codes. In any case this seems pretty off-topic.

Another in any case (since I can’t help myself): when political scientists talk about “modern democracies” they mean liberal democracies with rule of law etc. Even though very few modern countries are truely democracies.

I totally agree and questioned if I should just leave that part out.

However words are important and are used to disguise what is occurring. Had the parent wrote "presumably not compatible with a non-democratic legal system." they would have been more accurate.

Rule of law is not accurate either. Purely democratic states can fall well within rule of law. The issue here is that there is some law that democracies cannot pass because it violates a higher law.

Piketty writes about this issue in regard to slavery. To free slaves (in the USA) without compensation was regarded as not following within the higher law which is ~ the law of property.

The same issue would be faced with trying to free the "ill gotten gains" of "bankers" from their holdings. The childish subtext of our propertarian legal system is "new rules dont count".

I just meant legal systems as exist in developed democracies but that's more long-winded and potentially open to red-herring discussions on which countries are democratic etc.

Perhaps, "rule of law" is what you were looking for?

I think that probably also has room for interpretation. Anyway, hopefully most will have known what I meant.

I used to work in trading. Honestly a very large portion of the markets trading type business for investment banks is really just taking advantage one way or another of these kind of regulatory loopholes, not as blatantly as this maybe but some still very questionable. That and ripping off clueless corporate clients with bid-ask spreads. Some traders are still able to convince themselves it's cause theyre some sort of market wizard though cause tbh most of these people aren't that bright. Any other finance guys can correct me if I'm wrong, it could be just because my experience had been working with teams that I was never too impressed with

You're wrong. Few reasons: 1. "A very large portion" - no, there are some motivated by different regulatory treatment for different transactions, but it's not "a very large portion." There's also nothing wrong with the regulatory-motivated trades generally done by banks. It's not the same as what this guy did which is clearly immoral/wrong - he was not doing something in an optimal way to reduce tax burden. He was doing things that caused governments to literally pay out new money - negative tax payments - possibly under fraudulent pretenses. As an analogy for what is appropriate - if you open a Corp in the US but decide to open an S Corp rather than a C Corp for better tax treatment - is that a reg loophole? No you're following the law to get better tax treatment. 2. Wide bid-offer isn't a rip off. Markets are generally competitive, corp clients can easily ask 3-4 banks for a price for the same product. What confuses novices is that in financial markets its typically easy to see the "mid" in addition to a bid-offer and then feel bad about profits. Would you feel equally guilty if you went to the store and saw the "mid" on a $1000 iPhone is $500 - and the bid/offer is 50%? Before you say "it's different!" - consider the complexity involved in arranging a profitable bank that has a competent sales team, trading desk, operations, compliance, capital, legal, etc. etc. - and also does profitable transactions. It's a moat - hard to replicate - and that's what leads to profits.

For the first point I agree. In this person's case it is more extreme. I don't know what capacity your involved in sell side trading but I'll share some cases I've seen in case anyone else reading is curious as well.

For rmb, krw, and a lot of Asian currencies in general there is an onshore and offshore market. A lot of the times both onshore and offshore books are managed by the same team. This creates two tradable currencies which should theoretically move in lockstep and some corporates have capacity to arbitrage/move currency across border. A common strategy is to simply bet that their spread converges when some technical factor like a large trade going through moves one market more than the other. Hardly nefarious but exists because of regulatory reasons and hardly rocket science. The problem happens when currency trends strongly in one direction in which case one book has massive losses and the bank ceo of that branch is not happy. Or when the onshore/offshore team starts trying to claim a stake of the profits because their resources/credit lines are being utilized. A lot of bickering and politics then ensues.

Another case, in China, regulation requires long usdcny fx forwards to be accompanied with an extra 300bp charge to stop cny depreciation. Option structure only require half the charge. A lot of the desk pnl is essentially made from selling synthetic forwards structured from calls.

Similarly a large part of the hybrid structured business in general is because some insurance/pension funds are only allowed to trade bonds but want fx/equity exposure.

For 2, from my experience it really is ripping off most of the time. The exception is when a client comes in with an order much larger than what the market can digest quickly. This usually requires a mixture of luck, skill, and balls to avoid it blowing up in your face and is one of the rare times I think traders really are doing their job. However these trades don't come too often

I like the way you put it... "Better Tax Treatment"...

You make market making sound very easy, but let me tell you, it really isn't. Quoting correct big/ask spreads that are competitive, leave you with some profit, and aren't unduly risky is a very difficult job.

I agree with you, but think OP has something different in mind than you. Market making in an open, competitive space (e.g. prop shops competing on a public exchange) is extremely difficult.

But I get the sense that OP was talking about captive flow. You do see this a lot on sell-side desks. Some client approaches the bank to do a trade that's ancillary to their business. E.g. a large multinational needing to hedge its FX exposure. They're mostly selecting the bank based on the overall reputation and relationship with the franchise. If the desk squeezes them for a few basis points on a cross-currency swap, the client pretty much doesn't care, let alone seeking out competitive pricing on individual trades.

Yes this is what I meant. Basically if your in sell-side trading, corporate flows are your bread and butter. The way it works is some corporate customer has some hedging need and the sales desk slaps on a big fat margin that contributes to the majority of money being made. The trader sees this and he's a greedy sob too so what he does is he quotes the sales desk an internal price that is further away from the true market bid-ask. This usually involves some degree of bickering depending on how well the two desks get along, and whatever the trader is able to get away with contributes to his "trading" pnl. And yes it is as pathetic as it sounds and involves a fair bit of weaseling around. Less the case if your client is a financial institution though, in which case it more depends on how many flows and trades you get and hope it matches off

Not a finance guy here: i think it depneds on which branch or company you are working with and their incentives/business model. But yeah very few companies can call themselves "market wizards" for 5+ years

It’s interesting that the biggest _diss_ here seems to be that they are “not that bright”, not the implication that they are doing something blameworthy.

This is one of the reasons I like Europe, a monetary union with wildly disparate "sovereign clearing agents", as in the nation state clears your money from any taxation claims but they all do it differently with no coordination. There is currently no union-wide government you have to pay.

There's nothing like it in the world.

They formed this union but their own people barely go to the other countries to take advantage of the discrepancies, its just foreigners that see the whole playground in its current state and have no historical opinion that deters them from playing with it all.

Maybe it's because US folks are used to jusrisdiction mostly using a "letter of the law" approach which invites loophole seeking and exploitation, while EU jusrisdictions use a "spirit of the law" approach. Sounds like this guy's defense is based on missing that cultural difference, at least.

I don't know if it will take 30 years or 50, but my gut feeling is that "spirit of the law" is much much more tenuous than "letter of the law". Who knows if the US is metastable. Things have been going nuts with the legal system here but it is also 250 years old. Most european democracies are a much younger experiment (and france is on what, attempt #5? Maybe #6 if you count subsumption into the EU as an unrecognized, but fundamental change in political dynamics).

Maybe an expert in the history of "civil law" will chime in, but my guess is that the "spirit of the law" principle has been in the legal systems of continental Europe since ancient Rome.

Yes, particularly legal systems that derive from Roman law (France, Spain, Italy) rely more heavily on this concept than those that derive from English Common law.

There's a saying I've heard somewhere, in England everything is allowed unless it is prohibited, in Germany everything is prohibited unless it is allowed and in France everything is allowed even if it is prohibited.

I guess I should have been clear that I meant stability + a democratic/republican system that preserves civil liberties, not stability with respect to the continuity of governments in the absolute sense.

To add with common law systems, we also can completely ignore the law. The state can as well just because there are so many laws. So stupid laws like "you can't chain a donkey to a tree with a wheelbarrow" are often ignore because the culture has just changed significantly.

I don't really like this "letter of the law" v "spirit of the law" distinction. "Spirit of the law" means open to interpretation. It is important in any environment for people to be clear how to operate within it, and if any of that is depends on intuition and interpretation, that amounts to a bigger loophole than any carefully examined technicality. The distinction then becomes not what loopholes to exploit but who gets to exploit them. With a "letter of the law" approach it takes a way the ability for arbiters to selectively interpret rules and puts the onus on the engineers of the system to be more careful and thoughtful in creating the environment.

If I can create a Ricardian compiler that can deterministically interpret human language and apply it to machine behavior, maybe the solution is to raise the standards we expect of those that craft our laws. "Spirit of the law" seems to be a cop out excusing sloppy lawmaking and leaving the door open for selective enforcement.

As a US folk myself, does it matter?

If I was in the same position I would have made it harder to find and seize my assets while the actual court cases proceeded.

Nah, some European systems can be very much “letter of the law” too. It’s more of a political thing, typically (how many people are exploiting this, and are they rich/famous/powerful enough to be troublesome?). This guy is an outsider to the system he exploited, so the system will throw the book at him.

I think this is the most accurate answer. If he was white guy from the right family, he would be a hero for exposing flaws in the financial legal systems. But he is son of brown immigrants, doesn't sound like he had any high level connections, so he is the villain.

I don't think it particularly has anything to do with his color. He isn't a member of the banking class in Europe and he humiliated them by bringing press to the loopholes they've created (deliberately or otherwise) so they're going to make an example out of him.

My understanding is that citizens pays their government, and the governments in turn use (some of) that money to pay for the functioning of Europe (generally approx 1% of it's GNP). The European budget is mostly an "investment budget", and represents 2% of public spending in Europe.

For 2019, Europe operated with a budget of 165 G$

https://en.wikipedia.org/wiki/Budget_of_the_European_Union

He essentially penetration tested tax law in a multinational economic organization. He did not follow prior disclosure guidelines that you'd expect in a penetration testing scenario.

In all honesty, disclosing these loopholes would've been unfruitful. Unless exploited, lawmakers would not have put much effort into closing these loopholes, and many would've been very likely to take advantage of them themselves. And big complex entities like the EU would be very slow to fix anything anyway, and it is likely that any fix would've left other openings to exploit.

From an engineering perspective, a system like the finance and tax legislation of the EU and it's member states is a massive, monolithic, legacy fraught and overhead encumbered system where the engineers of it cannot foresee exploits in their system, have no tools to test the system before launch, and are often incentivised to deliberately leave openings to be exploited.

> A small group of agents in the U.K. wrote to Skat between 2012 and 2015, claiming to represent hundreds of overseas entities -- including small U.S. pension funds along with firms in Malaysia and Luxembourg -- that had received dividends from Danish stocks and were entitled to tax refunds. Satisfied with the proof they received, the Danes say they handed over some $2 billion.

Yeah, sounds very legal.

If you think you can determine whether a tax refund is legal based on a two-sentence summary, you probably shouldn't be a tax attorney.

Sure but it's enough to sniff out that there's maybe a problem with transactions have no underlying economic value and obscured beneficial ownership, which is a category of transactions that tend to cause trouble in taxation discussions.

It sounds very shady regardless of legality. Laws are made to serve people’s best interests, it is not just a code, and a judge will certainly take that into account.

I am familiar with this scandal (but not a finance expert or anything).

The problem with loopholes is that it's up to interpretation. Is it intentional? Is it legal? These are hard problems to determine.

America famously offered a tax benefit for 'manufacturing'. But what constitutes manufacturing? If I have a restaurant, am I manufacturing food? It's hard to say.

I don't think what Shah did was criminal. But I do think the governments should be able to demand that he return the money if a court rules that their interpretation of the law was wrong,

I think it's very unfair to give someone money and then demand it back. It puts people in awful situations financially. I know people that have been ruined via this when it happened with their taxes (and they weren't doing anything illegial) or unemployment.

This isn't a small, poor individual; or even a small local business - so I'm not convinced the analogy holds, or at least I'm much less sympathetic.

Going from half a mil to 700 mil has to raise a few red flags. Even if they were forced to give back 80%, they would hardly be left desolate.

But it's also unfair to fraudulently receive money from someone. If you accidentally gain because someone gives you money (say they sent it to the wrong bank account) it isn't fair to keep it.

It's a loophole in the same way as an unwatched cash register is a loophole.

That is not fair to the subject of the article.

Not only is what the subject of the article did probably not illegal, but also lawmakers will probably choose to eliminate the loophole (i.e., to change the tax code) rather than to make exploiting the loophole illegal in the future.

> Not only is what the subject of the article did probably not illegal

Why do you say that?

The method they used consists of simply filing forms to get withheld taxes paid out that were never withheld. The amounts paid out corresponds to owning all stocks in the actual companies many times over.

Sanjay himself went drinking with the employee of the Danish tax authority in Copenhagen who was in charge of approving the applications while the (I'll go ahead and use the word) fraud was going on, presumably to ensure things would continue to go on[0]. The employee has since been jailed for approving fraudulent applications in another case[1]

American pension funds who similarly exploited this have settled with the danish authorities and returned all the money they received[2]

Sanjay says he suggested a settlement, offering to return 1.9B DKK (~311m USD) in 2018[3]

Yes, the danish authorities were sleeping at the wheel, but that does not make it legal.

[0] https://www.dr.dk/nyheder/webfeature/milliardkuppet

[1] https://www.dr.dk/nyheder/penge/seks-aars-faengsel-til-sven-...

[2] https://www.skm.dk/aktuelt/presse-nyheder/pressemeddelelser/...

[3] https://www.dr.dk/nyheder/penge/sanjay-shah-jeg-tilboed-danm...

Let's hope that they catch all those who did this.

In germany, they are also going to vote a law before christmas that the crime can still be followed up after 10 years in order to bring all of them to court who did this in germany.

This is completely fair to the subject: He got a tax refund for taxes paid for dividends, that he never paid in the first place. This is not a loophole, open to interpretation or in any way anything except plain old fraud.

Now you can fault the authorities for not having better checks in place (I personally blame, in the Danish case, a previous government for firing ~2000 “IRS” employees due to them being unneeded when a new IT system was put in place. Funny thing is the IT system had just been funded, when they were fired), but it is still outright fraud.

In the end I hope this will be a PR win for EU, as we can hopefully agree to heavy sanctions if he is not extradited.

Cum-ex is getting a refund for taxes you never paid on transactions you made purely to get the tax refund. There was no risk at all. Of course it is fraud and illicit, and judges have long confirmed this.

The government can ask you to return the money. How is it a loophole if you end up in debt if you exploit it?

Even here on HackerNews the Cum-Ex trades were documented back in 2018: https://news.ycombinator.com/item?id=18246379

I get so many lucrative ideas from Bloomberg articles, pretty much every day. Well worth paying the subscription.

Haven’t fully read the article. What other ideas other than scams have you gotten from it?

I assume the GP comment was sarcastic.

It's not sarcastic. I had never heard of the "Cum Ex" market before this article, and here there are people being interviewed about their experience investing in that market across two decades.

People that literally saw a pitch for a market I never heard of, and did it, and made bank. This is not my world, and I want it to be.

I know to look across EU and peripheral EU nations for arbitrage and obscure policies, despite having no interest in raiding government coffers due to discrepancies in settlement times, I would have never thought to look at it this way.

That is interesting. I see one-off articles every couple months about traders discovering "loopholes" of one kind or another and exploiting. The question I've struggled with is: How can someone systematically approach trying to find loopholes like this vs. just randomly stumbling upon them?

Step 1 is getting a job at an investment bank where you have direct access to the markets and enough political clout to keep it all "legal".

Also realize that any genius loophole you find will have already been discovered and exploited by other banks. If you want to get a feel for what this is like watch The Big Short.

Surely though, by the time Bloomberg writes an article, the proverbial jig is well and truly up?

By the time it's in Bloomberg, isn't it already played out?

I think that attitude is why it isn't.

By the time Tesla was in the news, it wasn't worth investing in any more, right?

Tesla's a bit unusual though - it was in the news a lot, but a lot of that news provided a short thesis.

Bloomberg described it back in 2019 BTW.

The gravy train was 10-15 years ago, I want to know about the stuff then. What is happening right now being pitched at family office events in Dubai that I wont hear about until 2035?

I want to know about it now

The point of all. arbitrage plays and other such phenomena is that they don't last forever; as soon as they are noticed they are equilibrated or regulated away.

So someone who finds one only shops it around to HNWs, trying to push as much money into the imbalance as quickly as possible, keeping part of it for themselves. They certainly aren't going to talk about it publicly as that would simply allow others to call attention to the forces that would cause the opportunity to vanish.

Unless you are an HNW yourself you aren't going to hear about it.

> Unless you are an HNW yourself you aren't going to hear about it.

Like I've been alluding to, I'm at the place where I want to either know about it because I'm in the place to know about it, or push as much money into the imbalance as quickly as possible because I know about it and can convince the people that matter they should care

I think it is fascinating when others do and I like seeing how they think.

I'm not asking for how. Just having a conversation about what I like.

Pretty sure I’ve seen this in the Guardian too, months ago.

How do you use them, though?

What's a past example?

"Bankers don't have morals"

Which is exactly why they need to be regulated more. Amoral bankers keep plunging the world into crisis after crisis.

Capitalism has no morals.

Unbridled capitalism - one with little oversight and regulation - is destroying the US IMHO. Yet this is exactly what the Republicans endgame is.

> But Shah says he’s being made a “scapegoat” for figuring out how to legally profit from obscure tax-code loopholes that allowed Cum-Ex trades, named for the Latin term for “With-Without.”

How does this claim keep getting made? "Cum-Ex" is English for "with-without". It would be Latin for "with-from". The Latin word for "without" is sine.

Without in English means both "bereft of" and "outside of", and even if the latter sense has become archaic it still persists as a learned usage and is a reasonable translation here of Latin ex.

No, the sense of "ex" here is very definitely "bereft of", and it is specific to financial English. (Why do you think it's being contrasted with cum?) Buying ex-dividend means you don't get the dividend.

It develops, through the phrase "ex-dividend date", from a special sense of ex in Latin when applied to times, meaning "after". (You can see exactly the same thing happening in English phrases like "from now on".) Originally, ex-dividend date referred to a date after the dividend date. This was reanalyzed as referring to a date upon which the instrument becomes "ex-dividend" [nonsensical in Latin], which required a reanalysis of ex as pertaining to the dividend rather than the date.

It is an error to talk about translating "Latin ex" here; this isn't a Latin ex.

I should also point out that "outside of" is not a meaning of Latin ex; you'd want extra.

“Bankers don’t have morals.” it's a fair point

https://archive.is/x6Nxo

Hang the Bankers!!!

Multiple governments are trying to seize his assets.

Unresolved legal issues like like this are why its worth it so always obfuscate the provenance of money.

It's only "money laundering" when the origin is illegal, when the source is illicit. Otherwise obfuscation is just you playing around with your own money. Protip: the state can't tell the difference. You can avoid any inconveniences of..... consensus failures.

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