A high-frequency trading firm set up by two hedge funds sued Merrill Lynch because a tax-arbitrage strategy linked to French stocks didn’t turn out to be as profitable as expected.

Lycalopex (Dubai) Ltd., a joint venture between Tudor Investment Corp. and Vulpes Investment Management, sued the Bank of America Corp. unit in London, seeking about $10 million.

The strategy, which took advantage of a French tax treaty enabling arbitrage, became less profitable after a rule change in 2012, shortly after Lycalopex and Bank of America Merrill Lynch started the trades. The lawsuit comes as hedge funds face scrutiny over their returns, and authorities debate banks’ roles in helping wealthy individuals and companies avoid taxes. Tudor Investment Corp., the $11.6 billion firm run by billionaire Paul Tudor Jones, is  reducing fees as hedge funds face a growing backlash over their lackluster performance.

Lycalopex appointed Merrill Lynch as prime broker because the bank promised to deliver profits of about $15 million from $10 million committed by the two hedge funds, according to court documents from May released by the court on Tuesday.

$4.6 Million

In fact, the strategy only yielded about $4.6 million before Merrill Lynch ended the arrangement. In February 2013, Bank of America’s then head of prime brokerage, Stu Hendel, sent an e-mail to Lycalopex saying: “As head of pb I would rather u find a different pb,” according to the Lycalopex documents.

Lycalopex representatives held meetings with Merrill Lynch bankers in Greenwich, Connecticut, Hong Kong and London before trading began in April 2012.

The deal involved Merrill Lynch’s structured equity finance and trading group, which has since been closed by Bank of America, according to the Wall Street Journal.

“This is a spurious claim based on the inaccurate premise that a significant level of profit was guaranteed,” Bank of America spokesman Bill Halldin said.

Dubai-based Lycalopex’s strategy involved exploiting a loophole that meant dividends on French stocks weren’t taxed if the holders were based in the United Arab Emirates, according to its claim. It would arrange in advance to buy French company shares, then sell them at a loss, using the tax-free dividend to make up the shortfall. Because the returns from each transaction were small, the strategy relied on large numbers of shares being traded.