New SKAT Trial on Competing Claims of Breach of Settlement Agreement

June 2025 – Hughes Hubbard is representing the Danish tax authority SKAT in litigation arising from a May 2019 settlement agreement. From April 29 through May 1, U.S. District Judge Naomi Reice Buchwald in the U.S. District Court for the Southern District of New York conducted a three-day bench (non-jury) trial on the parties' competing claims that the other side breached the settlement agreement.

In May 2019, toward the beginning of SKAT's multi-district litigation to recover $2.1 billion from a fraudulent tax refund scheme, SKAT entered into a settlement agreement with three of the fraudsters – Matthew Stein, Jerome Lhote and Luke McGee – as well as the friends, family members and business associates they recruited to participate in the scheme.

Stein and Lhote are the former business partners of Richard Markowitz and John van Merkensteijn, the two lead defendants in the recent jury trial before Judge Lewis A. Kaplan in the U.S. District Court for the Southern District of New York, which resulted in fraud judgments against the defendants totaling approximately $500 million. After participating in the fraud together using Sanjay Shah's Solo Capital, Stein and Lhote split with Markowitz and van Merkensteijn during the midst of the fraud and bought a German Bank with Luke McGee. Stein, Lhote and McGee then used their new bank to create the fake trading records to support the fraudulent tax refund claims, allowing them to cut out Shah and Solo Capital and keep more of the supposed tax refunds for themselves.

Rather than be sued by SKAT along with Markowitz and van Merkensteijn, Stein, Lhote and McGee elected to settle. Under the agreement, SKAT agreed to release its claims in exchange for Stein, Lhote and McGee returning all the proceeds they and the others they recruited to the scheme received, about 1.6 billion Danish Kroner (DKK) (approximately $250 million), and providing certain cooperation to SKAT in its investigation of claims against others. Under this favorable “first mover" settlement, Stein, Lhote and McGee avoided exposure to joint and several liability for the entirety of the loss the scheme caused SKAT – DKK 4.1 billion – and committed to paying back every kroner of SKAT's money that they pocketed for themselves. The agreement further gave Stein, Lhote and McGee four years, until May 2023, to pay SKAT back in full, so that the three of them could sell assets, including their interests in the German bank, the proceeds of which they would pay to SKAT under the agreement.

While the three made the requisite DKK 950 million upfront payment to trigger SKAT's releases under the agreement, Stein and Lhote concluded in 2021 or 2022 that they no longer had to pay SKAT the remainder because SKAT had supposedly breached the agreement. SKAT was obligated under the settlement agreement to bring certain settlement terms to the attention of the Danish prosecutors investigating the fraud, and to make certain limited representations to the prosecutors, including, for example, that the settlement was in SKAT's best interest. After Stein and Lhote were interviewed and then indicted by the Danish prosecutors in spring 2021, they concluded that SKAT must have breached the agreement, in part because the Danish prosecutors didn't seem to know much about the settlement during their interviews. But they did not tell SKAT that they no longer intended to pay the remainder of the settlement. Instead, Stein and Lhote strung SKAT along until March 2023, when they preemptively sued SKAT seeking partial rescission of the agreement. In response, SKAT joined McGee to the case and counterclaimed against the three of them for failing to pay the settlement in full.

Judge Buchwald heard evidence on the parties' competing claims for breach during a three-day bench trial from April 29 to May 1. The court heard testimony from Stein, Lhote and McGee, and the two former top officials in SKAT's Antifraud Unit responsible for the settlement negotiations and the overall investigation into the dividend withholding tax refund claims. SKAT also presented a forensic accountant to testify about the final amount of the settlement, which was subject to adjustment based on the exact amount of proceeds the settling parties netted from the fraud. The parties presented expert testimony on the extent of the Danish prosecutors' discretion to decline to indict Stein, Lhote and McGee, given the extent of their fraud.

The parties filed post-trial briefs in early June and await the Court’s decision.

Marc Weinstein, Bill Maguire, Neil Oxford and Dustin Smith led the Hughes Hubbard trial team representing SKAT, with key assistance from John McGoey, Greg Farrell, Kiran Rosenkilde, Elizabeth Zhou and Richard Bosch.