Professional protection for intermediaries and investment advisors too rarely implemented
The Federal Supreme Court (BGH) made clear by its judgement of 14.06.2007 (Az. III ZR 300/05) and further decisions (Az. III ZR 125/06 and III ZR 185/05) that initiators (including Hintermänner) and chartered accoutants are responsible to the investor. Conversely, the question for intermediaries and consultants is how liability can be reduced?
What are initiators?
The liability of the initiator is not limited to the persons named in the prospectus. Backers with special influence, for example members of the management and controlling shareholders, are also responsible. This group also includes general representatives, heads of planning companies, de facto managing directors, i.e. persons who belong to a management group, even if they do not appear externally. Prospectus auditors who are not named are also liable. In the present case, it is particularly a question of a company having been “advanced or interposed”: In this case, too, the initiator’s liability comes into play.
Lack of leaflets!
The case decided by the BGH concerns a film fund, with which the losses of the investors should have been limited according to folder to approximately 20%. However the proceeds default insurance had not been present yet at all – factually it concerned thus a glossing over in the folder, because for the investor a real total default risk existed first. From the specialized press it is well-known that large banks took over the folder contents unchecked, and to the investors an “almost safe” plant mediated – without reference to the actually existing total loss risk. The liability suit was thus as certain for the bank as the Amen in the Kriche.
Gerlach and Winterling would have recognized it?
The BGH decision also calls into question the quality of the analyses of major banks, because at the latest since the case of “faulty” revenue default insurance at Cinerenta & Co. , every analyst should be familiar with this delicate topic. However, the investment advisors of the major banks apparently did not follow up on the matter – and were later convicted of giving faulty advice. Experten.de has been propagating transparency in capital investments and models for years: It is not for nothing that, in addition to formal questions (how many criminal records are there in the certificate of good conduct?), the disclosure of the essential original contracts is also demanded for intermediaries and customers. By then at the latest, it should have been clear to every intermediary or advisor that there was a total risk of default, because there was obviously not always a revenue default insurance policy in place at the start of underwriting.
When are auditors (WP) liable?
The prospectus impression that there was a safety net for investors (maximum risk of loss 21.6% of the subscription capital) was adopted by the appointed auditor as the overall picture. moreover, the BGH suggests that there was a key person risk which was apparently not underlined, because a shareholder had taken it upon herself to take out the loss of earnings insurance. In addition, the market for such insurance is narrow – the options on the insurance market are therefore limited. Overall, the BGH considers the presentation of the “worst-case scenario” to be defi cient, which is in fact reflected in the prospectus audit report. However, the auditor is only liable to those investors who have made the prospectus opinion the basis of their decision. The BGH judgements show probably massive errors of the “investor protection lawyers” who sued the chartered accountant with, but investors represent, who never saw its folder appraisal before the investment decision.
Tips for intermediaries
1 Stay away from non-transparent offers and providers. The mediator’s life is too short to have every bad experience by yourself. Example FALK: Do you know the story of the incentive trip, where the agent was not provided with the proper tax document without being asked. Even such a suspicion of “incitement to tax evasion” (as charged today) should suffice as a warning signal? If a deposit trustee, a fund allocation controller, a prospectus appraiser operates through a corporation, special scrutiny should be given to their insurance coverage. In a Cinerenta film fund case, it was stated in the prospectus that DM 8 million of liability was supposed to have been compared to a three-digit million investment capital – such underinsurance must also be explained to investors as a total default and key person risk: The creditworthiness information about the functionaries may also be necessary in order to identify backers – especially those who already have a criminal record or are wanted by arrest warrant. Force the initiator to provide complete tax opinions, legal opinions (with reference to the specific! forms and models used) for distribution. The duty to investigate negative press must also be observed. A network of colleagues is essential for survival in order to check the plausibility of an offer.
2 Own inquiries with a tax advisor, lawyer and a debt collection agency can help to recognize which model providers are neither bonide nor up to date in terms of “tax saving model”: The accusation of incitement is spared to the mediator/consultant – the advance to one’s own defence lawyer is many times higher than an initial assessment of the “allegedly liability-proof” offers.
3 Only by means of clean contracts can the tax and legal advice or plausibility check, which is usually impossible to fulfil but which is otherwise regularly required in the case of capital investments, be excluded. Investment advisors usually need insurance experts as network partners, because otherwise, in addition to the willingness to take risks, the risk capacity can rarely be represented in the liability process. Particularly delicate are the incomplete to ineffective “declarations of exemption” of insurers pp. in the BAV: Also with these “tranquilizers” the greatest caution is required, because the intermediary is always in the first row in the case of liability. Declarations of exemption without an original signature, for example, are often completely worthless.
4 about the total loss risk is just as compellingly to instruct, as also about the mostly missing Fungibilität (see recently BGH judgement of 18.01.2007, Az. III ZR 44/06). Fortunately, this also applies to investments for old-age provision: In this respect, even “bad” reinsurance for pension commitments can be easily reversed. The standard market sample forms of initiators are rarely demonstrably prepared by specifically named lawyers with proven insurance protection: This includes not only the “holey GGF-BAV insolvency protection” but also, as an example, the painless handling of missing revocation instructions in leasing models.
5 It is not only investor advice that needs to be documented, but also the training provided by distributors and initiators: More and more often, the investment intermediary and advisor are presented with a “bank-like security” or the like, which never existed. Therefore, increasingly often deceived intermediaries take their customers to court together against training managers and distributors. Can a million junk real estate investors be wrong: They were at the notary’s office and reported dubious dealings – what does it matter if the same notaries turn up again somewhere? Networks help to make such things transparent – as do the electronic high shelves (Gerlach, Winterling pp.).
6 The duty of disclosure can be reduced or excluded in individual cases (not by means of standard contracts!). A waiver of disclosure by the customer requires documentation and legally compliant training. Particularly high levels of liability can be found in working time account and BAV models, even those offered by extremely reputable providers: In the latter, it is not uncommon for department heads to act without effective board control. With nice regularity, the alleged legal opinions of “famous” professors, etc., are not even remotely adequately insured. At least this can be checked by the broker/consultant – the fact that the purchased appraisals are sometimes also wrong is another matter.
7 The fund wholesaler provides “exemption declarations by initiators” for the intermediary or advisor on the Internet, among other places, for downloading. These documents are worthless in an emergency. From “Phoenix, FALK, HAT, ROSCHE, HAG, Columbus-Capital etc.” nobody would get a cent more for such explanations. Obtaining credit information on the initiator (in the area of occupational pension schemes also some U-Kasse !) shows that a gust of wind is sufficient and the allegedly “liability-proof declaration of exemption” becomes recognisable as a “sample without value”? Also with closed participation the Vertriebssoftware is to be found: It calculates as a rule simply wrongly. The adviser/intermediary is later accused of having been able to recognise it. Here, too, no exemption is of use, but only a demonstrably insured appraisal by a professional expert. Breits the creditworthiness information about the software house is sufficient to recognize that own plausibility checks are necessary before the employment. If you then know that, for example, in retirement planning advice, according to experts, at least 96% of all software products calculate “incorrectly”, the dimension of your own risk becomes clear.
8 Only in the insurance sector is it currently conceivable that the customer signs the application “at the first appointment”. Without proof of delivery of a prospectus some time before the investment is signed, the intermediary or adviser is certain of liability. The investor can always say that he did not have the opportunity to read it. It is at least as frequent that the consultant is not knowledgeable enough to recognise that the figures shown in the prospectus deviate considerably from the industry average: How else would it be possible for an initiator to buy a property for 9 million through “friends” and then sell it on to the “fund” for 19 million – fully placed, and not checked for economic plausibility by the broker!
9 It is not sufficient that a WP prospectus opinion exists. This must also be verifiably insured: Anyone who brokers a product without an IDWS4 certificate is risking his entire private assets – the number of insolvent brokers speaks volumes about this. Many prospectus appraisers and fiduciaries are unable to demonstrate adequate insurance coverage upon request – such “plausibility checks” are also reasonable for advisors/brokers. In addition, the investor must also have demonstrably received the auditor’s opinion before making the investment decision: Hardly any intermediary or advisor has proof of this in his client file – in case of doubt, a liability case will arise. The above-mentioned BGH judgement now demands exactly this from the investor, i.e. the proof that he received the prospectus appraisal before the investment decision, as basis of his investment decision. So it is of little value to the intermediary/consultant if the investor only had the option – if he does not want to be solely responsible. It is of little use to read the Gerlach system for exoneration from liability (unobjectionable prospectus expertise and complete track record) – one must also be able to implement it in a way that reduces liability as an intermediary/advisor.
10 In addition to legally secure documentation and effective contracts with the customer, it is also important that the broker/consultant has a liability-reducing archive of his own – and Experten.de “sets about” closing the gaps through inquiries ! And another thing: if commissions are to be disclosed, then in future it will be the intermediaries who distribute the money, not initiators and insurers. Therefore, those intermediaries and advisors are in a better position to say “no thanks” more often when there is a lack of transparency.
Only happy customers come back – the others often enough go to court.
Judgment BGH III ZR 185/05 Judgment BGH III ZR 125/06 Judgment BGH III ZR 300/05 Judgment BGH III ZR 44/06
(experten report 11 10/2007, 9)
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About the author
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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