Intermediary liability: bankruptcy due to incorrect investment advice

A must read for advisors, agents, brokers, employees of distribution companies, employees of insurance companies, partners and employees of credit institutions.


Intermediary liability:

The early death of the investment advisor through bankruptcy due to incorrect investment advice!


New market development trends:

The banking and investment scene is in a state of upheaval. The generation of heirs expects an average of half a million per inheritance, and some of these want to be reinvested. The treasury is becoming increasingly greedy here and is constantly raising taxes. The generation of heirs is more open to riskier investments. The parental home is sold, the estate divided and invested, for example, in investment funds or real estate. Increasingly large amounts are being invested through advisors and intermediaries. If it later transpires that the advice given was incorrect, the investor’s legal expenses insurance will summarily issue a cover note and the financial services provider will be sued.

Sometimes the mediator has then gone into hiding, is unknown, or has been stripped down to his undershirt by a judgment. Bankruptcy or oath of disclosure mean the end of the professional activity! Almost all are investment advisors with strict liability The intermediary, with less liability and responsibility, is a dying breed in the courts. Many intermediaries do not realise that they are confronted with strict advisor liability because – they have described themselves as a professionally experienced financial advisor – they have presented themselves as an international investment advisor and asset planner – they have presented themselves as an investment advisor or sales representative – they have presented themselves as an experienced and successful sales company for tax-privileged investments – they have advertised themselves as a serious and experienced advisor and partner. Such references on letterhead, business cards, advertising material, etc. mean an enormous increase in liability:

The courts assume here that special personal trust has been invoked. The intermediary becomes an advisor, for example, by – acting as an investment advisor – evaluating and assessing investments for the investor – examining the investor’s personal financial circumstances – creating the impression of objective, expert advice – concealing the fact that an internal commission is paid. It is often sufficient that one of the above criteria is already fulfilled, so that individual advice to the investor is assumed by the courts. Limitation of the claim for damages only after 30 years.


The kicker is:

Liability is almost always for 30 years. The capital investment regularly gets into difficulties before the expiry of the 30 years, so that quite a lot of investors can still claim their damages today. Of course, it is only the imbalance that then prompts the investor to look for someone to blame. Many investors would be well advised to have their investments checked by qualified experts before they learn from the media that their investment has failed. After all, it’s first come, first served here too. Many financial service providers without insurance cover The advisers and agents often have no insurance cover for incorrect advice. Few insurers offer retroactive coverage even if there is no known claim by the agent. Here, however, the early way to the lawyer helps decisively to avoid a disaster. The consequence in the case of liability is then often the bankruptcy or oath of disclosure of the financial service provider. Some take the oath of disclosure and then continue to work under the name of the wife, girlfriend or children. These relatives only have a rude awakening when they are confronted with rescission law, insolvency law or liability law and are themselves asked to pay. The enforcement department of the tax office is sometimes the first to strike in such cases.


Advisory error: Unsolicited duty to provide information

The intermediary is not liable for the success of the investment: if an investment company goes bankrupt or the board of directors steals a lot of money, if a share loses value or if the price of the dollar falls, the advisor is almost never personally liable for this. A typical exception would be a guarantee from the financial services provider for the success of the investment. Rather, the basis for the advisor’s liability is the failure to inform the client about risks. The intermediary must provide the investor with complete and correct information about the planned investment without being asked to do so. The advisor must also examine the prospectus documents, for example whether the concept is economically coherent and promising. Furthermore, he must also examine and evaluate the personal financial circumstances. Hardly a passing on on the selling company Some advisors or mediators believe, him all this does not concern, because he would have used at most a visiting card of the selling company. Also these financial service providers are liable themselves, as representatives of the selling company already if they – either claim personal confidence for themselves (practically thus nearly each advisor) – or if a self-interest and/or a self-benefit from the conclusion were aimed, which goes beyond the usual measure e.g. a commission.


Expert liability

Anyone who prepares an expert opinion must expect that people other than the client will read it. The most frequent cases are expert opinions on sales support (compare the case of G.U.B. in Gerlach Direct Investor Protection DA No. 09D/00 of 05.05.2000). Advisor obligations Expertise, conscientiousness and diligence are required. The information provided by the initiators’ sales training courses, which are so popular, is not enough:

The cold buffet of the investment fund initiator or property developer is no substitute for thinking for oneself or consulting specialist information. Consultants have the duty to study professional publications regularly and to do their own research! For advisors, insider information services (e.g. real estate confidential, etc.) are required reading. How else is the advisor to know that it is a dubious offer from a shell company and that the track record has been rated “not recommended”.


The trade journals have a great deal of freedom of expression:

Freedom of the press has recently been strengthened by the federal government, among other things in the area of whistleblower protection. Even material that the press has researched itself no longer has to be released and is free from confiscation. The consultant must be informed about the performance review. Now one would like to think that even “reputable” professional services can be wrong. But according to the case law, it does not matter whether the adviser or intermediary believes that a criticism in the trade press is unjustified. Therefore, the financial services provider must be aware of the negative information in the trade press and pass the information on to his clients. A serious consultant therefore has a high expenditure for own training, advanced training, specialized services, research, support by professionals (StB, RA, WP, experts etc.).


Consultation Content:

It is sufficient for a breach of duty that a required information was omitted. The information provided must be complete, correct, accurate and truthful. The BGH has massively extended these obligations when it requires the advisor to independently examine the prospectus information for economic viability. Investment assessment and risk evaluation (object-oriented advice) as well as determination of investment objectives and risk appetite of the investor (investment-oriented advice) have always been part of the main duties of the advisor (cf. the so-called Bond ruling). It goes without saying that imminent dangers must be pointed out (lack of permits for the investment object, construction projects discussed in the press concerning changes to the route of the Federal Railway, etc.), even if their occurrence is still completely open.

Obligation to investigate until the contract is concluded The adviser cannot rely on third-party information in liability proceedings. The adviser has its own duty to investigate and a duty to verify. For the advisor, this means that when investing in a company that is centrally concerned with real estate, the advisor must also inform himself about it (location, encumbrances, etc.). The adviser must not rely on the word of the management or managing partner of an investment firm. A typical example is the HAT case, where a considerable amount of soft costs can be extracted from the documents by own considerations with expert examination and research. On the other hand, the intermediary only has a duty of investigation of his own if contradictions can be derived from the information in the prospectus.

Otherwise, the intermediary is not liable for the accuracy and completeness of the prospectus information, except in the case of investment fraud. Obligation to provide information after conclusion of the contract The obligation to provide information does not end before the contract has been effectively concluded and also not as long as the customer could still withdraw from the transaction. Important cases here are statutory rights of rescission, revocation, etc. These include – Possibility of cancellation under the VerbrKrG (up to one year under § 7 II) – Ineffectiveness or possibility of cancellation under the HaustürWiderrufsG (possibly several years) – Duty to supplement under § 11 of the Sales Prospectus Act – 10-day period for cancellation in the case of life insurance with a term of more than one year (up to 1 month after payment of the first premium, § 8 VVG) – Information must also be provided without being asked about the notice period for insurance contracts, especially if a loss has increased as a result of non-cancellation.


The scale:

Section 31 of the German Securities Trading Act (WpHG) ! This rule is the general guideline for advisors and for intermediaries who claim personal trust or give the impression of special expertise. Under no circumstances should the obligation to inform the customer of any subsequently identified undesirable developments be overlooked! Every financial service provider would be strongly advised to keep so-called advisory profiles according to § 31 WpHG for thirty (!!!) years and to have legally impeccable instructions about the risks associated with the capital investment signed, and to keep these (especially in the case of credit-financed investments) for thirty years as well.


The liability process:

The end for the financial service provider The jurisdiction assumes that the investor would not have decided for capital investment if he had been informed correctly. This means a shift in the burden of proof. The financial services provider must be able to prove that he has provided information and advice. Without written documentation, the financial services provider has virtually no chance. When in doubt, the financial services provider is also to blame for everything. The law presumes that he is responsible for the incompleteness of his information and advice. For example, only if its research (e.g. investor protection information, correspondence) is preserved (again, the 30-year time limit applies) can the financial services provider even think that a court will believe it on the point of fault. Employees of structural distributors often without a chance Thousands of employees of structural distributors have no chance to defend themselves. The objection that the sales organisation has organised and checked everything is not valid. Instead, it is the duty of every salesperson on the front line to form his or her own picture of the profitability, viability and security of the capital investment. This applies equally to employees of large sales companies as well as to employees of insurance companies and credit institutions. The extent to which employees can pass on liability to their employer is not dealt with here.

The courts show the financial service provider where the hammer hangs What the financial service provider should keep everything (for thirty years) is enormous:

– sales record

– investor profile

– All documents of the initiator

– Receipt of the capital investor concerning handed over expert information evaluations

– Special documentation when employees are involved.


In addition, the adviser must retain other evidence (for thirty years) so that he is not left without evidence if the case goes to trial:


– Correspondence with the distribution company or employer

– All of your own research (e.g. specialist information!) – All of your own research (e.g. specialist information!)

– Correspondence with the initiator Damages can be multiplied.


In general, the investor can choose:

He returns the investment (e.g. to the financial service provider) or he demands compensation. Typically, all expenses must be reimbursed (including interest on the loan), all losses on the investment, the costs of determining the damage (e.g. by an expert) and an appropriate return on an alternative investment (at least 4%). The leverage effect, or compound interest effect, of financing the investment causes the loss to grow to huge amounts in just a few years. Liability for unforeseen crime.



The financial services provider is not liable because a risk has occurred (e.g. the share price falls).


He is liable if he cannot provide proof of careful information. Unverified tax misstatements in the prospectus (allegation of incomplete audit by the financial services provider) are sufficient for the investor to claim liability if the company later collapses. If the proof of diligent information to the client is not successful, the financial service provider is also liable for misappropriation of funds by the trustee. He is then de facto also liable for criminal machinations that no one could have foreseen (e.g. in the case of WABAG, where several hundred million “disappeared”).


So, the charge is “breach of disclosure.”

Only the consequence is: “The financial service provider is de facto also liable for unforeseen events”.

Strategic approaches to limiting liability.


In particular, the financial service provider may pursue the following approaches:

– Documentation (see above, also because of deductions due to tax benefits of the injured party)

– Examination of the investor’s own fault or contributory negligence

– Liability exemption (possible to a limited extent)

– Insurance.


Group insurance policies in particular prove to be problematic in this respect, because the financial services provider cannot check whether the “favourable” premium has been paid on time, resulting in gaps in insurance cover. Criminal liability Disappointed investors repeatedly file criminal charges, for example for fraud or investment fraud. Some financial service providers then study the terms and conditions of their legal expenses insurance for the first time and discover that they have to pay for their defence lawyer out of their own pocket. Because in the case of so-called intentional offences, the insurance company does not pay a penny.



Whoever as a financial service provider either does not take note of the compulsory professional reading or cannot produce any work documentation, has hardly any chance of winning a pot in court in the event of liability.


by Dr. Johannes Fiala


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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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