Financial scandal in the Principality of Liechtenstein shakes financial centre

Category: What’s cooking?
By: Dr. Johannes Fiala, Attorney at Law (Munich), MBA Financial Services (Univ.),

Investment in Liechtenstein: over 200 million
State liability action – creditworthiness risks or questionable
Insolvency protection for German investors

In 2003, the Financial Services Authority (AFDL, now: FMA,
Financial Market Authority) the “Technology Fund Silicon Valley Equities” of Liechtenstein
Fund company “Hermann Finance AGmvK” under a special observation, a
“Monitoring”: Despite the obligation to maintain official secrecy and without a legal basis, the following were
apparently informed competitors of the fact, as the applicant’s representative, RA Magister Falkner
The decision on monitoring was the responsibility of the Liechtenstein Investment Fund Association,
an association of all investment undertakings in Liechtenstein. Besides
other faults of the ADFL, the negative publicity in particular had led to the withdrawal of the
of investor funds from large investors or was the reason for gaps in new business.
been. In 2005, the fund was liquidated. The suspicion is that it is a
investor-damaging envy campaign by conservative competitors.
The question of the causality of the damage is legally exciting.
Fund Manager Dipl.Ing. Jürgen Hermann already defended himself once with success: The
Administrative Court of Liechtenstein had ruled in 2004 that the monitoring to
Hermann Finance AGmvK” already inadmissible due to serious formal errors
had been. The fact that the fund manager, among others, was not given a legal hearing is piquant.
has been granted. Fund manager Hermann is now demanding 200 million Swiss francs in legal action.
francs from the Principality of Liechtenstein as compensation for damages.

German asset managers and investors flee abroad

Numerous asset managers from Germany have, in view of the threatening
“Special contribution” notices from the EdW (Entschädigungseinrichtung der
securities trading company) because of the case “Phoenix Kapitaldienst GmbH”, abroad
withdrawn – also to Liechtenstein.
The “Hermann Finance case” shows that when doing business abroad, there is a
considerable “country risk” may exist. For example, some asset managers from
Switzerland selected Gibraltar as another location – why not Liechtenstein?
The financial scandal culminated in September 2004 in the spectacular finding by the
Fund manager’s lawyer that “due to a mistake in the law” investor money in the
funds 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: On the run
before German final withholding tax, they move their assets into life insurance shells
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 with the
“Bankruptcy privilege” of special needs trusts in life insurance wrappers: The unbiased
reader believes that he can, even at the last moment, get a part of his fortune “over the
Border to safety”. However, this has two horse’s feet: on the one hand, there are in the
German Insolvency Code, in the Avoidance of Proceedings Act and also in the Liechtenstein
Bankruptcy Code to observe certain periods of shame.
In addition, however, “the choice of law of Liechtenstein law in particular in
is inadmissible in such cases where it is held by a German national with
habitual residence in Germany and the contract is concluded with the involvement of a
Mlttelsperson comes about.” In concrete terms, this means that the person who has a German
credit institution is not subject to the bankruptcy privilege. The FMA had
repeatedly pointed out. This also applies accordingly if a German intermediary (e.g.
broker) drives across the border together with the customer.

Hedging credit risks – What investors can learn from the Phoenix case

The Pheonix case shows that a separate special asset (e.g., insurance shell)
does not necessarily mean effective protection of client funds. One to two
criminal subjects to give the customer a total loss. Then it comes down to
Credit ratings of bank, trustee, asset manager and insurance company,
namely whether they will be able to compensate for such damage. The usual
Deposit protection may then amount to just 30,000 Swiss francs.
Franks. As a rule, even renowned parent companies of such
Insurance shell providers to provide a letter of guarantee for such claims.
Malicious rumor has it that there was an asset manager who “made his own
US stock corporation”, solely in order to then be able to offer for the managed customer custody account (in the shell
of a life insurance company) to buy its worthless shares: later, the administrator had disappeared without a trace.
disappeared – the insurer noticed all this only much later, because there was no
close-meshed “monitoring with shadow accounting” was in place: this theoretical
example shows that without risk management in contract design it will hardly be possible to
is to provide the investor with the security that is often advertised to him.

Risk management for investors and intermediaries

According to settled case law, it is one of the tasks of financial brokers to
of banks, insurers and initiators for plausibility. This also includes the
Total loss risk. At the latest in the case of investments abroad, customers and intermediaries will not be
to sound out the creditworthiness risks through well-founded legal and contractual analysis.
Lack of information about the total risk of loss and false information about alleged
Bankruptcy protection always entitles investors to rescission.
Because the good name of a renowned parent company, or the reputation of a
financial centre, do not in themselves constitute any guarantee of sufficient seriousness and
Security of a capital investment – even abroad.

( (01/29/2008))


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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

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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