TheChek News Flow

Cum-ex lawsuit brought by Danish tax authority against defendants including Sanjay Shah kicks off in London

Denmark’s tax authority accused trader Sanjay Shah’s hedge fund of masterminding a “meticulously pre-planned” fraud on Monday, at the opening of a trial described by an English judge as one of the most complex to hit London’s courts.

Lawyers acting for the Danish Customs and Tax Administration (Skat) told the High Court that dozens of defendants led by Shah’s hedge fund Solo Capital Partners conducted a fraud over three years that netted them a total of about £1.44bn in dividend tax refunds.

The case is part of the sprawling “cum-ex” scandal in Europe, in which authorities in several countries claim to have been duped into refunding withholding taxes on dividends that had never been paid in the first place.

The civil case is being heard at the same time as a criminal trial against Shah in Denmark that began last month, after he was extradited from Dubai to face charges. Danish prosecutors have alleged that Shah, who is also a defendant in the High Court case, was the mastermind of a scheme that received more than DKr9bn ($1.3bn) in such refunds. He has denied wrongdoing.

Investors based outside Denmark who hold shares in Danish companies are subject to 27 per cent withholding tax on dividend payouts, and can apply for a tax rebate in some circumstances.

Skat argues the defendants did not hold shares in the Danish companies and so their applications for refunds over the period, between 2012 and 2015, were unlawful. The defendants include other traders and businesses, most of which have a low profile.

Laurence Rabinowitz KC, representing Skat, told the High Court on Monday that the defendants “received no dividends from those companies, had no liability to tax in Denmark and suffered no withholding of tax”.

He said the largest such scheme was “masterminded” by Shah’s fund, and the refunds were “facilitated by meticulously pre-planned and co-ordinated trading, which was specifically designed to involve no delivery of any shares or cash at any time”.

Shah’s lawyers, led by Nigel Jones KC, said in written arguments that the “complexity of the trade does not prove dishonesty”. Shah “held a positive, honest belief that the trades were valid”, they added.

The civil proceedings in London follow a lengthy legal battle over jurisdiction. The UK Supreme Court rejected Solo’s attempt to block the case being heard in England last year, setting the stage for the High Court trial.

The case was described by a judge at an earlier stage of proceedings as “one of the largest and most complex pieces of litigation to be heard in the Commercial Court”. Skat has presented documents to the court running to about 250,000 pages, according to Shah’s legal team.

Shah is facing up to 12 years in prison in Denmark if found guilty in that criminal case. He told the Danish court last month that his hedge fund merely exploited a legal loophole and did nothing wrong.

“It was like a ballet,” he said of the co-ordinated trading his firm and others undertook to obtain the tax refunds.

Two former British employees of Shah’s fund, Anthony Patterson and Guenther Klar, were given prison sentences of eight and six years, respectively, by Danish courts earlier this year for their roles in the scheme.

It's the worst-kept secret in artificial intelligence.

Many of the AI chatbots developed by startups were likely made using data from OpenAI and other firms, even though these startups are trying to undercut OpenAI, according to developers and founders. This practice has resulted in a startling competitive dynamic: Developers are charging their customers a fraction of what GPT-4 costs, and yet these low-cost services can mimic GPT-4 on some tasks.

• Many startups are using OpenAI data to develop chatbots

• This practice breaches OpenAI rules

• Investors may not want to back startups doing so

Startups are not disclosing their use of OpenAI’s tech in their development. And such behavior puts the startups at risk because OpenAI, like other leading AI firms such as Anthropic and Google, technically forbids such behavior. Still, OpenAI CEO Sam Altman told a group of startup founders last summer that it was OK for smaller founders to use the company’s tech this way, according to a person who attended the meeting.

While Altman’s answer came as a relief to some of the founders in attendance, OpenAI could always change its mind if the practice hurts its growth. Flooding the market with AI that’s good enough for most customers could deprive OpenAI and other vendors of revenue. A proliferation of AI trained on similar sources could also make it harder for individual providers to stand out from the pack.

The practice works like this: Developers pay OpenAI for access to its most advanced model, GPT-4. They then ask the model a bunch of questions, such as “What’s the problem in this line of code?” They use the answers, along with the questions, to train their own competing models, such as ones that can debug computer code.

This tactic has been gathering steam for months. Daniel Han, a co-founder at Unsloth AI, which helps developers make conversational AI, estimated that around half of his customers generate some data from GPT-4 or from Anthropic’s Claude model and use it to improve their own models. Many firms also obtain such data from ShareGPT, a site where developers post the answers they’ve generated using OpenAI’s models. OpenAI declined to comment.

The smaller developers’ models are usually based on popular open-source ones that are freely available from Meta Platforms or Mistral AI, but they can be substantially improved by incorporating answers from OpenAI’s models. Some developers are using a service called OpenPipe to automate this process, Han said.

“This is what happens in a new ecosystem where there’s not a clear set of rules established,” said Matt Murphy, managing director at Menlo Ventures, which has invested in Anthropic, an OpenAI rival. “How are you going to be better than everyone else if you’re all using the same data?”

Risk-Reward Equation

For some companies, the risk of breaking explicit or unspoken rules might be worth it. In the hypercompetitive world of generative AI, gaining access to high-quality data for training or refining models is critical.

But it isn’t clear how long OpenAI, Google, Anthropic and other big developers will allow smaller rivals to effectively copy their AI in an effort to catch up. And some investors may not feel comfortable backing companies they view as cutting corners or developing technology indistinguishable from that of competitors—because they used similar training data.

“The quality and origins of training data for AI models is becoming one of the most important hot spots,” said Radical Ventures partner Rob Toews. “No one knows for sure how this will play out, but any AI startup that is not being thoughtful and strategic about [where their data is coming from] is falling behind.”

There are parallels, however, between what startups are doing with OpenAI data and what OpenAI and other leading AI developers have done in training their own models. For instance, OpenAI’s chief technology officer, Mira Murati, last month stumbled in answering questions about whether her colleagues used data from Google-owned YouTube and Meta Platforms–owned Facebook and Instagram to train Sora, which produces AI-generated video.

It wouldn’t be surprising if OpenAI did use such data. A recent report from The New York Times describes how the model developer created a speech recognition tool, Whisper, to transcribe YouTube videos to improve its GPT-4 model. The Information previously reported that the company secretly used YouTube data to train its prior AI models. Earlier this month, YouTube CEO Neal Mohan said he wouldn’t be OK with OpenAI using YouTube videos to develop models like Sora.

That has led to accusations from news publishers and some authors that AI developers are using copyrighted material for training purposes. The New York Times Co. sued OpenAI and its biggest backer, Microsoft, last December, alleging that they had unlawfully copied Times news articles as they trained models. The lawsuit alleged that OpenAI’s chatbots “can generate output that recites Times content verbatim.”

OpenAI argued in response that it has tried to strike partnerships with news publishers and its training practices are permitted under a U.S. copyright principle called “fair use.”

Still, OpenAI and Google have both struck multimillion-dollar licensing deals with publishers including Axel Springer and bigger deals with major sites like Reddit.

Not every AI developer operates this way. Databricks, which sells software tools for managing data and utilizing AI, did not rely on the work of competitors in developing a powerful open-source large language model, according to Jonathan Frankle, the company’s chief scientist. And Anthropic similarly doesn’t train its LLMs on outputs from other models, said a spokesperson.

The History of Training Data

Developers who quietly rely on other AI services to develop their models could end up in an embarrassing situation if that dependence is later revealed. For instance, Paris-based Mistral and Beijing-based 01.AI used Meta’s open-source AI, Llama 2, to create their own AI and didn’t disclose that fact until it inadvertently leaked. While Meta’s licensing terms allow such usage, the startups’ tardy disclosures about the practice didn’t play well with some app developers who felt the companies had been disingenuous. Both companies had raised hundreds of millions in funding and held themselves up as the OpenAI of their country.

Even large technology incumbents haven’t been able to resist the temptation of using others’ work. Examples include Google’s transcription of YouTube videos and Meta’s hiring of African contractors to summarize copyrighted books to train AI models on, according to the Times report. Adobe trained its software for image generation, Firefly, on AI-generated photos from startup Midjourney, according to a recent Bloomberg report. And last year, a senior AI engineer at Google quit in protest after he raised concerns about the company’s use of data from OpenAI’s ChatGPT to train Google’s own models, The Information reported. (Google stopped the practice, and the engineer later returned to Google after a stint at OpenAI.)

In many cases, the rapid pace of AI development and growing competitive pressure force developers to turn to controversial sources of training data, such as copyrighted content or LLMs, that they otherwise might not use, said Sharon Zhou, CEO at Lamini, a startup that helps developers train their own models.

Investors “need to see progress so fast in this space,” Zhou said. “What else are you going to do?”

As more companies develop models that derive partly from other models, it may become difficult to differentiate them. That could eat away at the competitive advantages of leaders such as OpenAI and force them to compete on price, especially as companies increasingly opt for cheaper, “good enough” LLMs rather than the most advanced and expensive models.

One alternative could come in the form of synthetic data, which companies generate with their own AI models rather than scraping human-made content from the internet or other sources. Google and Meta, for instance, have said they used synthetic data to build models that can solve geometry problems or produce computer code. Because AI produces this type of data, it avoids many of the legal questions that come with using human-generated content.

In the meantime, scores of AI startups are gaining access to private data from industries such as healthcare and law firms to develop models for specific uses. Models from companies like OpenAI can’t easily reproduce such models, said Ash Kulkarni, CEO of search analytics company Elastic.

IWC’s chief executive says it will keep leaning into its environmental message. But the watchmaker has scrapped a flagship sustainability report, and sustainability was less of a focus overall at this year’s Watches and Wonders Geneva.

GENEVA – What impact is sustainability having on luxury watch sales? According to industry studies, consumers are more concerned about the environmental impact of a watch than ever before. Deloitte’s Swiss Watch Industry Study, published in October, recorded that 43 per cent of industry executives surveyed said investing in sustainability was one of their “strongest priorities” for this year.

And yet, it felt like sustainability was less of a focus at this year’s Watches and Wonders Geneva, which ends Monday, compared to previous editions.

Even the brand that has championed sustainability in watchmaking over the past two decades appears to be going quiet on it: IWC, which had led the charge on the topic since being certified as carbon neutral in 2007, did not publish its annual sustainability report this year.

In a November report rating Swiss watch brands’ sustainability performance, the WWF underscored that the industry was still lagging on key topics like transparency, traceability and accountability for the social and environmental impact of mining. Still, it ranked IWC as the company with the most “ambitious” sustainability profile due to its more detailed annual reporting and advances in manufacturing. Not producing a report will be seen by the WWF as a backward step.

Asked why IWC, which is part of the Richemont Group, had backtracked on its commitment to transparent reporting, the company’s chief executive Chris Grainger-Herr said the company would now provide information on its environmental impact to the group. “We’re part of an ESG [environment, social and governance] framework within the group and we’ve started to report that at group level,” he said.

Less transparency — its impact will now be mixed with data on all the brands in the group — won’t mean less progress, Grainger-Herr said. “Our ambition is to continuously improve on all of the major [sustainability] factors.” Still, in the absence of reporting, such claims become more difficult to verify.

Grainger-Herr also said a partnership with the supermodel Gisele Bündchen, who acts as an advisor to IWC’s sustainability committee and has starred in nature-themed campaigns for the brand, would continue. “Yes, we work with her as closely as possible,” he said. He also confirmed sustainability would remain a key marketing pillar for the brand. The sustainability section of the company’s website did not appear to have been updated since 2022, however.

Research suggests sustainability matters to luxury watch buyers. In its study, Deloitte reported that 48 percent of watch buyers said sustainability was one of the most important factors behind a luxury watch purchase, and that similarly, 41 percent of pre-owned watch buyers were motivated by sustainability, second only to considerations of price.

Still, the report also found that sustainability ranks as the fourth most powerful driver behind a watch purchase — following brand image, design and price. And there’s often a gap between what customers say and what they actually buy.

One industry expert suggested IWC would be smart to move away from sustainability messaging, and to leave reporting to the group. “Choosing sustainability gives IWC an angle of communication, but not values or vision,” said Oliver Müller, founder of the Swiss consultancy LuxeConsult. “At the moment, the brand lacks purpose, even though the product and marketing mix is well executed.”

IWC’s sustainability efforts have earned clout within the industry on a key topic, as well as accolades from groups like WWF — but this doesn’t appear to have reinvigorated sales.

Richemont keeps a close guard on the financial results of its brands, and Grainger-Herr declined to comment on IWC’s performance. But according to a Morgan Stanley report estimating the size of Swiss watch brands (of which Müller is a co-author) IWC’s revenues dipped from 908 million Swiss francs ($996 million) in 2022 to 726 million Swiss francs last year.

“The brand suffers from a high price positioning compared with direct competitors, mainly Breitling and Omega,” said Müller. “The proportion of clients buying a watch at this price point, only or mainly because of a brand’s sustainability performance is, unfortunately, very low.”

Industry-Wide Focus

Schaffhausen-based IWC has been the flag-bearer for more sustainable practices in Swiss watchmaking since its carbon-neutral certification almost two decades ago. In 2018, it opened a state-of-the-art $43 million factory that draws energy from solar panels and water for cooling and heating from groundwater sources. It has also partnered with entrepreneurial start-ups such as Boom Supersonic, an aviation company looking to decarbonise supersonic air travel. On reviewing its activities, the WWF had concluded IWC is Switzerland’s most sustainable luxury watch company.

Swiss watch brands including Breitling and Oris have also emphasised sustainability commitments in recent years. The start-up watch company ID Genève has generated buzz for building its product and marketing strategy around circularity, the principle of re-using existing materials and eliminating waste throughout products’ life cycles. However, it’s unclear whether their efforts will really translate to customer demand at scale. Reports of IWC’s falling revenues last year came amidst a fast-growing market in which the broader Swiss watch industry reported record export values (up 7.6 percent to 26.7 billion Swiss francs).

“We have [demand for sustainability] on an anecdotal level, but it’s not something that I can measure empirically,” Grainger-Herr said. “We see that this is one important driver, understanding that a product is made as responsibly as it can be and that the brand is striving to improve what it does on that front continuously.”

Deloitte’s study indicated the appetite for sustainability in a luxury watch was more pronounced among young buyers. “They make very conscious decisions about products they purchase,” said Christian Knoop, IWC’s creative director. “They’re interested in lasting value and in authentic brands. We have to work on our credibility, and sustainability and improvement in sourcing materials, in production methods and in environmental measures for buildings are all part of that.”

At Watches and Wonders Geneva this week, IWC has introduced a collection of Portugieser models that invoked sustainability through timeless design rather than buzz-words like traceability. One high-end piece featured a new complication the brand is calling an “Eternal Calendar,” which it says could keep track of the date until the year 3999 and the phases of the moon for 45 million years assuming it’s kept wound and maintained. The origins of the design go back to the 1930s.

“It’s important in the design process to create a design that is meant to last and not to just play into the latest fashion,” Knoop said.

The law may yet dictate watch brands’ approach to sustainability. Last year, Switzerland passed the Swiss Climate and Innovation Act, the goal of which is for Switzerland to become climate neutral by 2050.

Asked by The Business of Fashion whether the Swiss watch industry would be caught out by the act, Cyrille Vigneron, chief executive of Cartier — another of the industry’s ESG front-runners — said that while manufacturing processes inside the country were “quite ok”, upstream issues in the supply chain or downstream impacts like the environmental cost of global distribution remained common.

And he issued a warning. “Where Swiss watchmaking is not really ready is for transparency,” he said.

US buyout firm has plans to build a vast data centre to tap growing demand for computing power

Blackstone is close to acquiring the former Britishvolt industrial site in the north of England, with plans to build one of Europe’s largest data centres as the artificial intelligence boom drives demand for computing power. 

Northumberland County Council is in talks with the US private equity firm about the 95-hectare coastal property near Blyth that could ultimately see Blackstone invest as much as £10bn in the area, according to council papers released on Monday.

Council leader Glen Sanderson said the project “offers a huge boost to the regeneration and renaissance of the local area”.

Britishvolt’s plan to build a “gigafactory” for electric vehicle batteries on the site of a former power station had been symbolic of the UK’s efforts to compete in high-tech automotive manufacturing, before the company collapsed last year. 

The land is in the hands of Britishvolt’s receivers, but the local government has the right to buy back the land under certain conditions. 

The council will next week meet to consider handing the US private equity firm long-term control of the site in exchange for up to £110mn in funding for local development. Blackstone would also pay £20mn to acquire the land.

If successful, it is hoped that the project could attract billions in investment to build one of Europe’s largest data centres and create about 4,000 jobs, the council said. 

The deal would mark an end to the effort to find another company to back an EV battery factory on the site, or an alternative plan to make it a major manufacturing centre.

Jaguar Land Rover owner Tata Motors previously expressed interest in the site, the FT reported last year, as well as other carmakers and wind turbine makers.

The bid for the site from Blackstone underscores the intense interest among property investors and tech companies to invest in data centres. The rise of artificial intelligence is expected to vastly increase the need for these facilities. 

Blackstone acquired US data centre group QTS for $10bn in 2021, which would manage the project. Rival Brookfield has also invested heavily in these high-tech facilities.

“Blackstone and QTS have the capital, expertise and record required to deliver on growing demand for data centre infrastructure,” the firm said.

However, there is no guarantee that the data centre project will go ahead, even if Blackstone secures the land. The US investor’s plans are contingent on securing planning permission, electricity supply, and sufficient internet connectivity at the site — and gauging customer demand.

The Blyth site benefits from access to renewable power and the infrastructure necessary to bring enough electricity to run a data centre of that size. Difficulty in securing electricity is one of the major stumbling blocks for data centre investments. 

“The data centre construction boom continues globally, with supply struggling to keep up with record demand,” Green Street analyst David Guarino wrote in a note on Monday. “As in most of the world, in Europe, power is the critical limitation on expansion.” 

Blackstone would probably look to lure the likes of Microsoft, Google, Amazon or Meta as a tenant for the site. A future tenant would need to invest billions of its own into the computer hardware inside the centre. The council said this investment could be an additional £5bn-10bn.

Market sentiment is bound to be more fragile than it was only last week

CVC may be a phenomenal dealmaker but it has not had much luck in picking timings for its own listing.

Over the past two years, the European private equity group has twice delayed its initial public offering plans as markets were roiled by geopolitical tensions. It has now announced its intention to float, and in doing so joined the list of those anxiously watching developments in the Middle East.

Despite the circumstances, it is not hard to see why CVC might be keen to proceed. Large private equity groups like having listed stock. It gives them a higher profile, access to capital and — over the long term — offers founders and employees the chance to sell their holdings. The likes of Blackstone, KKR and Sweden’s EQT have taken the plunge. The fact that these stocks have risen sharply over the past year — with KKR up 85 per cent — will no doubt have whetted CVC’s appetite.

CVC can also point to a step up in its size. The group is nearing the end of a €59bn fundraising round, which includes the record €26bn private equity fund it raised last year. That will raise fee-paying assets under management from the roughly €100bn it had in 2023 to somewhere in the region of €140bn by 2025. CVC expects management fees and performance fees on its enlarged asset base to bring revenues to perhaps €1.9bn. Factoring in operating leverage, that might double profits after tax to about €1bn.

How much might investors pay for this growth spurt? Swedish peer EQT trades on a hefty 20 times 2025 earnings but that is after a rapid run in the share price. At a more modest multiple of 18 times, and applying an IPO discount of perhaps 25 per cent, yields a valuation of €13.5bn, at the lower end of the €13bn to €15bn that CVC is reportedly targeting.

The group would be wise to price its IPO conservatively. After all, it is barely putting a toe in listed waters. The €1.25bn that it is planning to raise — with €250mn from newly issued stock and €1bn sold by outside investors including Singapore’s GIC and Kuwait’s Investment Authority — implies a skimpy free float of perhaps 10 per cent. Active employees are holding on to their stock, at least for the time being, and will want to see its value rise. Market sentiment is bound to be more fragile than it was only last week.

Buyout giant seeks valuation of up to $16 billion, sources say

Global buyout firm CVC Capital Partners said it plans to list its shares in Amsterdam, making a second attempt to go public in less than six months.

CVC said Monday that it expects to raise at least 1.25 billion euros, equivalent to around $1.33 billion, by selling new shares as well as stock from some existing shareholders. The listing is expected to take place in the coming weeks, it said.

The Wall Street Journal reported Sunday that CVC was poised to launch the initial public offering. CVC is looking for a valuation of around €13 billion to €15 billion, people familiar with the matter had told the Journal.

The firm pulled a previous IPO attempt in November, after the outbreak of war in the Middle East weighed on an already jittery market. Conditions have since improved, with rallying stock markets helping fuel a rebound in new listings in Europe and the U.S., from companies such as the social-media company Reddit and Swiss skin-care specialist Galderma.

CVC oversees about €186 billion, or about $198 billion, in investments, spanning private equity, credit and infrastructure. It has forged a particularly high profile in sports-related deals. In 2016, a CVC-led group sold the Formula One motor-sport franchise to John Malone’s Liberty Media for $4.4 billion. Current sports holdings include investments in the Six Nations Rugby tournament and the Women’s Tennis Association, according to its website.

For Luxembourg-based CVC, a listing offers the firm’s partners and other shareholders the chance to realize gains on their holdings, while raising the alternative asset manager’s profile to support future fundraising. The buyout firm will also gain a currency to grow faster through acquisitions, which could broaden its reach and help it expand geographically.

Its Swedish counterpart EQT AB struck a $7.5 billion all-stock deal in 2022 to buy rival Baring Private Equity Asia. Its shares are up about 26% over the past three months, in another bullish sign for CVC’s planned listing.

Leading CVC’s IPO effort are the firm’s co-chairman Rolly Van Rappard, and longtime partners Rob Lucas, the firm’s chief executive, and Chief Financial Officer Fred Watt.

Van Rappard, Donald Mackenzie, Steve Koltes and Michael Smith co-founded the business as an arm of Citigroup more than 40 years ago, helping spearhead the development of European private equity.

The partners spun out the business, originally known as Citicorp Venture Capital, in the early 1990s as an independent buyout shop. It has since grown into an investment giant with 29 offices around the world.

Mackenzie stepped back from an active role in February. Smith retired in 2013 while Koltes did the same in 2022.

CVC’s long-term investors include the Kuwait Investment Authority and Singapore’s GIC. More recently, the New York-based alternative asset manager Blue Owl Capital bought a minority stake in 2021. That deal valued CVC at $11 billion, or $15 billion including debt and a portion of gains from CVC holdings that public investors wouldn’t typically receive, said a person familiar with the matter. That sets a benchmark valuation to measure the success of the IPO.

The firm’s recent record of amassing ever-bigger funds is one reason the IPO is expected to attract investors. Last year, CVC raised €26 billion, then valued at the equivalent of $28.8 billion, for the biggest-ever private-equity fund. Blackstone set the previous record in 2019, raising a $26 billion buyout fund.

Some Blue Owl funds committed to buy up to 10% of shares to be listed, CVC said Monday.

Public investors value listed PE firms on their ability to grow assets, because of the steady and growing fees this business generates. Performance income, from selling investments at a profit, is another source of earnings, but is less highly valued by the market because it is more volatile.

CVC has already bought smaller peers to boost fee-generating assets. In September, it agreed to buy Netherlands-based DIF Capital Partners, which manages more than €17 billion in infrastructure assets.

Toyota surges, Tesla slumps as car buyers reassess their options for electrified models

Electric-vehicle sales further decelerated in the first quarter, as purchases of gas-electric hybrids remained strong, accentuating a trend that started last year.

Industry figures released earlier this month showed that hybrid sales rose 43% in the January-to-March period, while EV sales flattened, up only 2.7% in the quarter. Contributing to the sluggish EV sales were weak numbers from Tesla, which accounts for about half of the U.S. electric market, according to data from research firm Motor Intelligence.

Following years of strong sales gains, EVs have cooled in recent months. Consumers are leery of charging availability and hassles, and prices remain too high for many buyers, according to dealers and survey data.

Many car companies de-emphasized hybrids in recent years as they touted new EV models to satiate enthusiasm from consumers and Wall Street. Now, more car buyers are choosing hybrids as a fuel-efficient option that doesn’t come with the complications of switching to a fully electric car.

Toyota 7203 0.00%increase; green up pointing triangle Motor this month said U.S. sales of “electrified” vehicles—mostly hybrid models, along with a few full EVs—surged 74% in the first quarter, helping the Japanese automaker notch a 20% overall vehicle-sales increase. Strong hybrid sales have been powering Toyota results for several months.

The trend has some automakers outlining big plans to add more hybrid models. Ford Motor, for example, said it expects to offer a hybrid version of every vehicle in its U.S. lineup by 2030.

Gapping down
In reaction to earnings/guidance:

Other news:

Gapping up
In reaction to earnings/guidance:

Other news: