In its judgement of 17 August 2006, the Munich Regional Court II ordered the broker of a closed-end investment to pay damages on the grounds of incorrect advice in connection with the IRR method (internal rate of return). Lawyer Johannes Fiala, Munich, (www.fiala.de) has discussed the judgement – underpinned with scientific specialist information (selection) on the subject – and sent it to us for publication: The mediator referred with its consultation to a folder contents, in which “effect way and meaning” of the IRR method were not set out in understandable form. Still in addition the investor had financed its participation with a credit – the calculation did not go however obviously for the investor up – it complained. In legal terms, the core issue is the transparency of the IRR yield method from the point of view of the investor concerned, i.e. the specific presentation in the prospectus – to which the intermediary had referred. The court criticized “only” that the investor had not been made to understand the meaning of the IRR. The IRR assumes that each distribution can be reinvested by the investor at the same interest rate – in practice this is almost always not possible on the capital market. Experts call this the “reinvestment premise”, with which (compared to the savings book) “massively embellished” returns can be presented. In individual cases, the (fictitious) reinvestment interest on distributions can also lead to the uninsurable accusation of capital investment or fraud for the parties involved. In the case of loan financing of a closed-end investment, this can mean a loss for the investor that is forecast from the outset if the IRR is calculated in real terms (without reinvestment) and the effective loan interest rates are then higher (negative leverage effect). Only in the case of the zero bond is there in theory and practice the (mathematically and factually secure) reinvestment of income for the investor, admit investor protectors and financial mathematicians. An analysis of the judgement shows that the defendant intermediary failed to take action against the training manager and the initiator in these proceedings, in particular under the aspects of breach of collateral duty and immoral damage: For the intermediary or consultant could have potentially taken recourse against them, i.e. shifted his liability. (cf. OLG Celle judgement of 15.12.2005, ref. 11 U 107/05; BGH judgement of 28.02.2005, ref. II ZR 13/03; LG Augsburg judgement of 29.06.2006, ref. 10 O 1933/05). Guiding principle: IRR (internal rate of return) method leads to regularly uninsurable liability of initiators, training managers and consultants or intermediaries. Liability for damages of the investment adviser.
(DA No 51B.06 of 22.12.2006, p. 5)
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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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