– Misrepresentation of risk and return by bankers, underwriters and training managers -.
False promises and greed for commissions lead to personal liability
The German Federal Supreme Court (BGH) has ruled on 19.02.2008 (Ref. XI ZR 170/07) that an investment advisor had intentionally caused immoral damage, § 826 BGB: The advisor had recommended a capital investment that did not fit the risk profile – for which the client had terminated his life insurance policies for old-age provision.
Speculative products not suitable for retirement provision
As the BGH clarifies, risky investments with a total risk of default (e.g. closed investments, unlisted shares) are unsuitable for additional old-age provision. On this line also numerous higher regional courts lie, which awarded the back completion of credit-financed fund-bound life insurances, share funds, and other tax savings models to disappointed investors. Already the concealment of the total loss risk is an immoral damage (BGH, Az. II ZR 13/03 of 28.02.2005).
Equity capital in leverage transactions is usually fully at risk of total loss
The greed for commission usually led to the leverage between the loan-financed investment and the invested equity being set as high as possible – e.g. 1 to 7 or even 1 to 13. In this way, the maximum commission-bearing sum insured and the maximum loan were achieved for the given available equity.
The amount of equity required relative to the loan amount was based on how the bank valued the life insurance as collateral. Since banks are aware that surrender values can fall below the invested capital, the bank required own funds in the order of magnitude of the probable losses on the life insurance policy. This means, however, that the banks already reckoned with a total risk of loss of the part of the capital invested by the customer in these models.
Intentional immoral damage leads to personal liability
Prerequisite for § 826 BGB is the intentional wrong recommendation – the intention (motive, goal) of an injury does not have to exist, it is sufficient to accept it (conditional intention, consider it possible). Already grossly negligent incorrect advice is immoral, if it is recognizably of importance for the investor decision and the pursuit of own interests is given in the consciousness of a possible investor damage. Already a bare loss risk for the investor is considered here as damage (BGH judgement 13.09.2004, Az. II ZR 276/02).
No bankruptcy protection via Liechtenstein policies German banks and investment advisors have been brokering life insurance policies from Liechtenstein to investors en masse – allegedly with Liechtenstein bankruptcy protection:
The distribution with Liechtenstein right is inadmissible – the choice of law ineffective, which can lead likewise to the adhesion because of deliberate damage (BGH loc. cit.). An advice is already incorrect if the recommended capital investment does not match the investor’s willingness to take risks (advice contrary to the investor and the object, cf. BGH “BOND” judgement, ref. XI ZR 12/93). The own economic interest can also result from high commissions of investor and initiator, or kick-backs, as they are typical in the financial industry, and repeatedly occupied the BGH. The mere “skimming” of commissions is sufficient for a conviction (BGH judgement 13.07.2004, Az.VI ZR 136/03).
Personal advisor liability in case of deception about risks and false promises Then not only the savings bank or bank, the sales company or insurance intermediary GmbH is liable, but also the advisor personally. Again and again investors complain that they were served with wrong promises – for example with the reference to capital guarantees and safety concepts, at any time saleability and safe increases in value, allegedly bank-checked investment models. Also with wrong market value determinations or hidden interest subsidy cling mediators and banks because of immoral damage (OLG Celle “Badenia” – judgement 16 U 5/06).
Training manager teaches “safe investment” – which was worthless
This risk is also borne by trainers if they teach half-truths to the intermediary, resulting in false advice. Basis for it can be also the frequently wrong folders – also with insurance and operational age precaution -: They do not need to be handed over – the use as training basis in the selling concept is sufficient (BGH judgement 03.12.2007, Az. II ZR 21/06).
The Higher Regional Court (OLG) of Celle had to judge such a case in its judgement of 15.12.2005 (Ref. 11 U 107/05). The head of a commercial agent sales department had presented “his” agents with a capital investment “as safe as a bank investment”. However, the sales manager did not have any evidence of this, but was content to state at the trial that he had visited the supplier’s business premises. A well-founded plausibility check of the investment was missing – the sales manager was not even in a position to do this, wrote the OLG in its decision. It would have been the duty of the training and sales manager to “impress upon the intermediaries of his structure” to make it clear to every prospective investor that nothing was known about the structure and security of the capital investment offer! Of course, this also applies accordingly to supposedly seizure-proof life insurance policies.
Excessive lurid advertising and expressions of opinion are non-binding
Intermediaries often take non-binding advertising statements – such as “ideal old-age provision” or “super returns” – and mere expressions of opinion at face value and then assure their customers of certain supposedly understood features of the product in their own words. This gullibility of many agents is also deliberately exploited by insurers and distributors.
They know that they cannot be pinned down later on – what, for example, should be the concrete characteristic of an “ideal old-age provision” and how high is a super return? Obviously, nothing in particular was to be guaranteed – but the agent had unfortunately understood it differently during the training and had advised his customers in this way.
Savings banks and banks particularly affected:
False promises of return If the credit institution includes an investment model in its sales, it must check this for plausibility (BGH judgements 04.03.1987 Az. IV a ZR 122/85, 13.01.2000 Az. III ZR 62/99).
As with the investment advisor, critical expertise in prospectus review is expected to identify dangers of an investment model – as these market participants have more far-reaching demand opportunities. Courts derive the immoral injury from circumstantial evidence, in particular deception about risks and/or returns. This also includes faulty sales training (LG München, Az. 12 O 5224/07, judgement of 24.08.2007).
Money destruction liability: statute of limitations still up to 30 years
Old and new law of obligations still apply side by side:
In the case of incorrect advice, the statute of limitations can last up to 30 years (BGH judgement of 11.12.2003, Ref. III ZR 118/03). Prominent liability cases with large banks are “risk-free Private Equity funds” or also “film funds with inserted tax evasion”: Credit institutes move billion investor funds – with the technical examination of the offered products the salesmen at the front are often completely overtaxed, which at the end first times the investors may ausbaden.
Even incorrect prospectus returns allow for reversal
Masses of capital investments, also in the life insurance sector, are brokered with incorrect information on risk and return. One gateway for disappointed investors is the incorrect reporting of returns – in the case of British life insurance policies, for example, the advertising of a 12.9% or 32.1% “increase in value”, which is perceived as deception in view of today’s 0.5% return. Risks are glossed over gladly also with fund-bound life insurances or “pools” (OLG Duesseldorf, judgement of 30.03.2004, Az. I-4 U 137/03) and represent themselves with financing over credit also as inducement to the share speculation (BGH judgement of 28.10.1997, Az. XI ZR 260/96.) – reason enough for a back completion.
Bankers and investment advisors can rarely do math
In the case of closed-end investments, the profitability forecast is often made to look much higher by using the “fictitious internal rate of return” than would be permitted by correct financial mathematics. There is no other way to explain the fact that, according to the findings of a panel of experts, around 96% of the software used in the area of pension advice has been calculating incorrectly for years. Improvement is hardly in sight.
Experts uncover faulty “model calculations
If bankers, brokers and advisors do not notice how wrongly ratings and software are designed, and use such “tools” to safely give false advice, they lack the qualifications – or they recklessly and unconscionably accept customer damage. A mass phenomenon that facilitates damages and reversal. Time and again, experts have the opportunity in court to demonstrate to the advisor that, even if credit-financed investments had been made in accordance with the prospectus
(a) from the outset there was no realistic chance of profit for the investor – as in the case of options transactions, this results in immorality (BGH judgement 22.11.2005, ref. XI ZR 76/05), or
(b) compared with better alternatives, an unfavourable form of financing was chosen by using a life insurance policy to redeem a fixed loan at the end of the term (LG Hamburg 322 O 138/97).
The non-existent chance of profit also often concerns the brokerage of derivatives, or trading with non-existent (foreign) SLC bank guarantees (LG Tübingen, 08.07.1998, Az. 7 O 1996/97).
Board members and independent intermediaries threatened with withdrawal of licence
In sales, one gladly accepts such false promises to customers, and thus embarks on the path to intentional immoral harm to investors. The Federal Court of Justice is therefore increasingly holding advisors personally liable. In addition, in the case of yield deceptions by commercial agents, liability of the product provider for vicarious agents comes into question, § 823 BGB (OLG Cologne, judgement of 05.04.2005, Az. 15 U 153/04). But also training managers and sales directors can easily come into personal liability as “assistants”, § 830 BGB.
This presupposes neither a communicative agreement with the adviser/intermediary on a plan of action nor participation in the execution of the wrong advice. Contributory causation of the result of the offence is not required either – any deliberate promotion of the immoral damage is already sufficient (BGH judgement of 26.10.2004, file no. XI ZR 279/03).
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.experten.de (published on 22.10.2008)
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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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