Category: What’s cooking? By: Dr. Johannes Fiala, Attorney at Law (Munich), MBA Financial Services (Univ.),
Investment in Liechtenstein: over 200 million state liability lawsuit – credit risks or questionable insolvency protection for German investors
In 2003, the Financial Services Authority (AFDL, today: FMA, Financial Market Authority) placed the “Technology Fund Silicon Valley Equities” of the Liechtenstein fund company “Hermann Finance AGmvK” under special observation, a “monitoring”: Despite the obligation to official secrecy and without any legal basis, competitors were apparently informed of this, as the plaintiff’s representative RA Magister Falkner reported. The decision on monitoring was sent to the Liechtenstein Investment Fund Association, an association of all investment undertakings in Liechtenstein. In addition to other mistakes made by ADFL, the negative public impact in particular had led to the withdrawal of investor funds from large investors or had been the reason for gaps in new business. In 2005, the fund was liquidated. The suspicion is that it was an investor-damaging envy campaign by conservative competitors. The question of the causality of the damage is legally exciting. Fund Manager Dipl.Ing. Jürgen Hermann has already successfully defended himself once: the Administrative Court of Liechtenstein decided in 2004 that the monitoring at the expense of “Hermann Finance AGmvK” had already been inadmissible due to serious formal errors. What is piquant is the fact that the fund manager, among others, was not granted a legal hearing. Fund manager Hermann is now demanding 200 million Swiss francs in damages from the Principality of Liechtenstein.
German asset managers and investors flee abroad
Numerous asset managers from Germany have withdrawn abroad – including to Liechtenstein – in view of the threat of “special levy” notices from the EdW (Compensatory Fund of Securities Trading Companies) because of the “Phoenix Kapitaldienst GmbH” case. http://www.e-d-w.de/bibliothek/download/Schadensmeldung-Phoenix.pdf The “Hermann Finance case” shows that there can be considerable “country risk” when doing business abroad. For example, some asset managers from Switzerland have chosen Gibraltar as another location – why not Liechtenstein? The financial scandal culminated in September 2004 in the spectacular statement by the fund manager’s lawyer that “due to a legal error” the investors’ money in the fund did not constitute special assets at the time, but fell into the bankruptcy estate! Hundreds of thousands of German investors are also affected by such risks: Fleeing from German final withholding tax, they invest their assets in life insurance shell companies of foreign insurance companies. Their security is deceptive:
The example of life insurance: Clean financial centre – unclean distribution?
For years, life insurance companies from Liechtenstein have been advertising the “bankruptcy privilege” of special assets in life insurance shells: The unbiased reader believes that he can still “bring part of his assets across the border into safety” at the last moment. However, this has two horse’s feet: on the one hand, there are certain periods of shame to be observed in the German Insolvency Code, the Anfechtungsgesetz and also in the Liechtenstein Bankruptcy Code. In addition, however, “the choice of the law of Liechtenstein is inadmissible in particular in such cases in which it is made by a German national with habitual residence in Germany and the contract is concluded with the assistance of a mediator”. In concrete terms, this means that the contract brokered via a German credit institution is not subject to the bankruptcy privilege. The FMA had repeatedly pointed this out. This also applies accordingly if a German intermediary (e.g. broker) crosses the border together with the customer.
Hedging credit risks – What investors can learn from the Phoenix case
The Pheonix case shows that a segregated fund (e.g. insurance shell) does not necessarily mean effective protection of client funds. All it takes is one or two criminal subjects to cause the customer a total loss. Then it depends on the creditworthiness of the bank, trustee, asset manager and insurance company, namely whether they will be able to compensate for such losses. The usual deposit guarantee may then amount to just 30,000 Swiss francs. As a rule, even renowned parent companies of such insurance shell providers refuse to issue a guarantee declaration for such claims. Malicious rumours say that there was an asset manager who “founded his own US stock corporation”, solely in order to then buy their worthless shares for the managed client portfolio (in the shell of a life insurance company): Later, the manager disappeared without a trace – at the insurer, all this only came to light much later, because there was no close-meshed “monitoring with shadow accounting”: This theoretical example shows that without risk management in the contract design, it will hardly be possible to give the investor the security that is often advertised to him.
Risk management for investors and intermediaries
According to established case law, one of the tasks of financial brokers is to check the plausibility of offers made by banks, insurers and initiators. This also includes the total loss risk. At the latest in the case of investments abroad, customers and intermediaries will not be able to avoid sounding out the creditworthiness risks through well-founded legal and contractual analysis. Missing clearing-up about the total loss risk and wrong clearing-up about alleged bankruptcy protection always entitle investors to the back completion. The good name of a renowned parent company or the reputation of a financial centre do not in themselves constitute any guarantee of sufficient reliability and security of a capital investment – even abroad.
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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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