From prospectus liability to distribution liability – aspects of economic risks in distribution, in particular for closed-end investments, leveraged annuities, life insurances in connection with loans, off-market shares, pp. Loans, off-market and pre-market shares, pp.

A. Intermediary liability goes further than prospectus liability:

Indispensable for a financial advisor is the certainty that – a complete initiator performance record is available, and – a complete prospectus audited without objections. Already here the financial advisor is often dependent on experts, because numerous auditor prospectus audit reports are for their part incomplete or faulty. Also the financial advisor stands personally (further) in the obligation, because he must examine critical specialized press (instead of many: Judgement of the OLG Celle of 15.08.02 ?AWD?) and to the customer disclose. Already a plausibility check, as it offers now, contains in the consequence the reference to the Finanzdienstleister to touch some product only “with pointed fingers”. The obligations of the investment adviser or broker go after the judgement of the Federal High Court of Justice of 13.01.2000 still further, because

– The intermediary or advisor must examine the investment for plausibility (this includes, among other things, closing (!), prospectus and advertising materials) and for economic viability (this requires specialist knowledge of industries and the economy, often also of taxes and finances).
– The BGH allows to tell the customer that this check was not done ? but then what client still underwrites a capital investment. In liability cases, it is regularly stated that “the sales department” has checked the product, “the broker pool” has given a positive opinion, “the head of a sales structure” has checked and trained the product. All this relieves the investment adviser or intermediary regularly as good as not at all !

B. Examples of non-transparency and liability traps:

The investment description of offers meaningful initial indications of the duty of the intermediary to provide more detailed information: The BGB demands transparency in its new § 307 BGB, also on the side of the initiator or product provider. If there is no transparency, this has a negative indicative effect and, in the absence of own investigation and documentation, presumably leads to liability.


“Fall ROSH”

What use is it to the intermediary or advisor to later claim that the initiator’s management is also liable because it did not strictly separate personal interests from those of the company? The accusation of breach of trust according to § 266 StGB1 does not always have to be present ? a breach of corporate responsibility2 is sufficient if, for example

– performance and consideration are no longer (approximately) equivalent in economic terms,
– the consideration is not secured by sufficient creditworthiness (see, inter alia, section 18 KWG),
– the provision of the consideration is enforced in a delayed manner,
– sensible investments are not made and there is no “additional profit”. When the initiator is in insolvency, the management fugitive, the money “disappeared”,

then the broker or advisor need not be surprised if it goes against him. As said, often but not always there are prospectus errors3 which include the accusation of lack of transparency. It is of little help to the broker or advisor to refer to others in the event of liability if he himself has checked carelessly. Usually, a breach of the obligation to publish a prospectus4 leads to liability, in particular for damages.

“Fall Banghard”

The Banghard judgement (OLG Stuttgart of 27.11.02) and others show that in practice the sales department is also obliged to inform the capital investor about the risk of a planned investment5 , in particular if – prospectus errors became known through an auditor’s prospectus audit, – a prospectus audit did not take place, – a proper performance record of the initiator is missing, – critical negative press coverage has resulted.

“Fall Yield Advertising”

In the area of closed-end investments, it has repeatedly happened (e.g. in the case of ship and real estate investments) that the investor was given the impression that the distributions were a “real return” (comparable to a savings account return). (comparable with a savings book yield) would act. As errors of the capital investor in particular came into question: – The investor was presented a net yield after the ?internal interest foot method? – It was concealed from the capital investor that the distribution takes place economically (partly) from the substance (all the same whether over own or outside capital financed). – The investor did not realize that the distributions are (partially) recoverable from the initiator.
For the advisor or intermediary, it is important to critically examine brochures and advertising materials, as well as sample calculations created with software programs. Such liability cases are not limited to the area of closed-end investments, and they may even lead to investigations by the public prosecutor’s office on suspicion of fraud6.

C. Recourse of the intermediary/consultant to the distributor and initiator:

The situation becomes precarious due to the vicarious liability: Just as banks are liable for their employees7 , structural distributors8 are also liable from the point of view of – the instruction and training responsibility, as well as – the prospectus liability as ?backer?9 (without being in the prospectus!), i.e. in case of doubt.
However, the BGH now goes even further10: In sales, the seller must expect that a commissioned brokerage firm will in turn engage sub-brokers and the seller must be responsible for their (incorrect) sample calculations (in particular with regard to costs, profitability, etc.) also at the level of sub-brokers (!). The special value of an “investment description” after the sample of lies in the sensitization, because before court naturally all folder errors are brought forward. The intermediary or advisor is obliged to inform the investor of all circumstances that are significant for an investment decision: The information or advice must be correct and complete.

“Funding Trap:

According to case law, a duty of disclosure already exists if the distributions announced in the prospectus ?depend on the extent of debt financing?12; and thus even more so if it is a matter of distributions (in the absence of debt financing) from the capital invested by the investor. Both (distribution from equity capital or borrowed capital) do not at least represent a generated “return”, and the associated risk of additional contributions13 (in particular in the form of a repayment of received distributions) or the risk of insolvency of the investment company for related reasons is subject to a prospectus. But why should an advisor or intermediary expose himself to (avoidable !) liability?

Why should he allow himself to be reproached for the fact that the investor would have refrained from investing in the product in question if he had acted “correctly in terms of the information provided “14. Why should an intermediary take on the work and the risk of possibly suing the initiator, the distributor or a person responsible for the prospectus? One objection repeatedly and unsuccessfully15 put forward by investment advisors is that the end customer had been provided with prospectus material: the objection that the investor was able to obtain the necessary details from these documents does not exempt the intermediary and, if applicable, the distribution company from liability.


To summarize:

Whereas in the case of financing an investment the capital investor cannot as a rule expect any advice from his credit institution, i.e. a duty to advise16 will only exist in exceptional cases17 ; investment intermediaries and investment advisors, sales companies and initiators have a particular duty towards the capital investor. Also renowned initiators from the real estate sector18 once believed that they could exist in a similar situation ? a mistake, as has long been proven by the termination of distribution agreements of large sales intermediaries. The consultant and broker is well advised to undertake the transparency check as early as possible, especially in the form of the ? online check?: An important indication for the question of ?transparency and completeness? is provided by a look into the expert archive. Because this supplies first important reference points and indications: Finally no advisor or mediator would like to be voluntarily with the annually over 20.00019 adhesion processes ?

1 Fundamental: Behrendsen/Fiala (1997) Gefahren bei Anlage und Verwaltung von Fremdgeldern, in: Der Deutsche Rechtspfleger, 1997, p. 271 ff.

2 Lange (2002), Judgment Annotation, in: NJW 2002, p. 1102 f.

3 IDW (2000), IDW Standard, Principles of Proper Assessment of Prospectuses for Investments Offered to the Public

(IDW S 4), WPg, 53rd Jg. (2000); S. 922-937. 4 cf. IDW, loc. cit., inter alia on the obligation to refer to “special circumstances”.

5 Fundamental: BGH judgement of 13.01.2000 and OLG Stuttgart judgement of 28.10.1998, both in: Gerlach Direct Investor Protection, DA doc. no. 00.9011.02 and 98.0441.02, with further references.

6 Exemplary: Investigations of the StA Cologne against the initiator A.A. Jagdfeld (FundusFonds “Pyramide”).

7 BGH, judgement of 04.03.1987, Az. IV a ZR 122/85.

8 Partly in place of the sales representative at the front: cf. LG Coburg, judgement of 02.10.2003; as well as BGH judgement of 24.09.1996, Az. XI ZR 318/95.

9 BGH, judgement of 13.11.2003, Az. VII ZR 26/03.

10 BGH, judgement of 14.03.2003, Az. V ZR 308/02.

11 BGHZ 111, 314 and 123, 106 ff.

12 OLG Frankfurt/Main, judgement of 28.03.2001, Az. 9 U 117/00.

13 OLG Frankfurt/Main, loc. cit.

14 Instead of many: BGHZ 64, 51; BGHZ 124, 159; BGH NJW 1992, 3296 ff.

15 Cf. inter alia AG Göttingen, judgement of 09.04.2002, Az. 24 C 113/01.

16 Principles: Fiala et al. (1997), Haftung bei Steuerspar- und Erwerbermodellen, in: BuW, 1997, p. 538 et seq.

17 Cf. inter alia the “Badenia” case according to the PwC report, in: DFI Report of 19.11.2004.

18 a.o. Dr.Hanne, HAT, Roland Ernst.

19 Press release, Hamburg (AP), in:


by Johannes Fiala, lawyer, law firm Fiala Freiesleben & Weber, Munich


by courtesy of (published on 05.04.2004.)

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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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