Leverage transactions ? Liability hammer on dubious investments for independent distributors

A commentary by Johannes Fiala, M.B.A. (Univ. Wales, Cardiff); Banker (H. Aufhäuser); EC Expert (C.I.F.E.); Chartered Financial and Investment Adviser (A.F.A. in the Lloydsbank London, plc Group); M.M. (Univ.).
Prison sentence for BFI Bank founder
The founder of BFI-Bank was legally sentenced to six years and nine months imprisonment by the Regional Court of Würzburg. It concerns ?only? approximately 500 investors, whose damage amounted to approximately 13 millions euro. Background were in particular higher valuations with real estate business and the withdrawal of unjustified profits from Fondgesellschaften. The situation at BKMU-Bank was even more dramatic: In the course of the insolvency, more than 2000 injured parties were identified, who suffered losses of more than 270 million euros.
Loan-financed investments:
Both credit institutions have become known for offering credit-financed investments to their sales partners. If customers had purchased shares in the institutions, their investment had become worthless. But often things got worse because the liquidator or insolvency administrator dramatically increased lending rates on risky investments. On balance, after deducting the cost of the loan, there was nothing left of the meagre income but a business on top: real estate, shareholdings and life insurance policies in particular were financed. The investors turn then gladly to the mediator and/or advisor, and want to get there their damage again. Practice shows: In more than 80% of cases there is no sufficient insurance cover.
Fake friends as distributors:
A particularly disgusting scam of some product or service partners is to blame the intermediary: According to reports, for example, in the case of the product “British life insurance”, it came to the derailment of describing one’s own intermediary as a fraudster and solely responsible. He knew the ?lever concept? only from a training of the distributor ? And if a representative of the product provider was also present at this event?
Product donors pull the teeth:
The intermediary was lucky that many colleagues had still archived the training documents and PowerPoint presentations. Thus he was able to prove the incomplete training ? his lawyer expressed the suspicion of “gang-like incitement to fraud – with the intermediaries as tools”. Thus, the intermediary is able to shift the responsibility to the actual masterminds (among others a ?head-of-sales?) in retrospect. The training documents are often based, after expert examination, on a plethora of half-truths. Whose chair will wobble here in the end?
Wiretap liability:
The latest verdict in the ROSCHE case: The founders of the ROSCHE company, Mrs. Rosche and Mr. Vogelbacher were also sentenced to several years in prison for fraud. Their conduct led to the non-fulfilment of prospectus information, and thus to its incorrectness. This was also established by the judgement of the Regional Court of Freiburg of 21.03.2005 (Gz. 14 O 382/03) as follows: ? According to the case law of the Federal Court of Justice (BGH) – passed on the contractual prospectus liability – apart from the persons and companies who directly publish the prospectus, also those persons and companies are obliged to vouch for the correctness and completeness of the prospectus information who stand behind the investment company and who, apart from the management, exercise special influence in the company and therefore bear joint responsibility. (BGHZ 71, 284; BGHZ 79, 337; BGHZ 115, 213; BGH NJW 1995, 1025). Thus, the circle of responsible persons primarily includes the initiators and founders who form or control the management. ? For this reason, they (investors) typically put their trust in those who stand behind the company and appear to be the ones in charge. Insofar as advertising brochures have been placed on the market with their knowledge and intention, these persons are liable (BGHZ 71, 284; BGHZ 72, 382).?
What the mediator can learn from this:
1. archive your training materials and all brochures ? the expert archive also offers a suitable electronic high rack.
2. safeguard against it being said later that you, the intermediary, had the criminal idea of a credit-funded annuity or an X-rated lever on a UK life insurance policy. How else are you going to make it clear to the prosecution that it wasn’t you who pulled the strings, but a group of backers from the sales department?
Do not forget: In the case of financed capital investments, it may depend on which real value and which real returns (e.g. : ?not the maturity bonus but the annual guaranteed increase in value counts?) of a capital investment is opposed to which fixed credit costs ! Here it concerns criminal-legally sometimes around gang fraud, which only after 10 (ten !) years verjährt. Do you want as a ?simple? Do you want to spoon out the soup for a faulty distributor training?
Take a stand: sales and training records are important evidence. If you were convicted of financial fraud, you would not be able to get rid of the resulting debt ‘cheaply’ through a six-year insolvency process.
5. even if you work honestly: There is always a residual risk. Knock off your distributors, sales reps and product providers: is there a decent consultation protocol for the product? Protect yourself by interposing a corporation (this can only help if there is no criminal offense involved) ! The remaining risk belongs to insurance.
6 According to the BGH ruling of 13.12.200o, you as an intermediary must check the economic viability of a capital investment concept. The decisive factor is the creditworthiness of the contractual partners, § 18 KWG. Why don’t you put it to the test ? check your distributor. In the expert archive you can check if the vest is clean ? or let experten.de start an inquiry.
7. if your distributor does not give you an indemnity, it is time to take care of the right insurance coverage on your own behalf and to question the creditworthiness of the distributor.

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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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