– What are the liability risks for investors, advisors and intermediaries?
German investors lose up to more than 40 billion euros annually on capital investments. Time and again, public prosecutors or insolvency administrators are interested in whether the calculation of returns or the practices in balance sheets and accounting have been all too creative in the end.
If there is no “perpetuum mobile in the financial economy”, investors should actually be warned about offers of capital investments with fabulous returns in connection with highest security. Often it concerns thereby from the outset not secret recipes, exaggerated profit expectations or miscalculations, but simply and simply around fraud, by being financed completely without profits, without genuine plant of the funds and after deduction of substantial commissions the disbursements to the in such a way believing “investors” from their remaining substance or with the money of new “investor” victims. Investors are then not only surprised that it comes to the total loss, but even more saddened if you have to pay income tax on the unearned return.
snowball systems, flying games, pyramid systems, gift circles
When people at the top (recipient circles), organized like a pyramid, receive gifts from other members (giver circles), the givers move up into the recipient circle. The previous recipients are eliminated. The moved up recipients then have to find new people as teammates, for the new giver circles. Only if the won investor becomes a distributor himself by recruiting further investors or fellow players is there a real snowball system, the contracts of which are judged to be null and void because of immorality.
Gambling debts are debts of honor, so they are not enforceable. There is also nothing back if you have paid, § 762 I 2 BGB. The hopelessness of legal action then leads to investment not in lawyers and legal costs, but in weapons, ammunition and personnel with special skills in thumb-breaking.
If it is a snowball system, one can demand its employment however after the protective purpose exceptionally also judicially back, §§ 138, 817 S.2 BGB (Federal Court of Justice, judgement of 10.11.2005, file no. III ZR 72/05).
Ponzi scheme: Modified snowball system
Some closed participation has therefore already been described as a “modified” snowball system. Occasionally the public prosecutor’s office also charges initiators later, regularly after the investors’ money has already evaporated. If investors receive tax-free money back as “distributions”, it is mostly a matter of pure capital repayments – especially if the investments – if any – have no balance sheet profit to show. A later appointed insolvency administrator will then point out to the investors as limited partners or GbR partners that the personal deposit liability has thus revived and the money is to be paid (back) again to the investment company in order to increase the insolvency estate there and to compensate for the losses.
These are disguised sources of alleged high profits or bogus returns, a so-called “Ponzi scheme”. This does not collapse systemically as quickly as a snowball system. All too often, sales are done through multi-level network marketing.
Tax liability despite bogus returns from Madoff & Co.
For decades there have been models for the miraculous multiplication of money on paper. The initiators often only need a telephone, perhaps a secretary, and certainly a printer to produce account and deposit statements. The Federal Fiscal Court (ruling of 28.10.2008, Ref. VIII R 36/04; of 16.03.2010, Ref. VIII R 4/07) assumes that even fraudulent fictitious credits are only fully taxable on paper as long as the initiator would still have been able to pay out the investor’s credit, which is no longer the case once insolvency has been declared.
Phönix: Repayment obligation in the event of payment of fictitious profits or fictitious returns
The Federal Court of Justice (BGH) has not only ruled that investors in units of closed-end funds continue to be liable in the case of capital repayments in the form of “distributions by fund companies”. In addition, the insolvency administrator can rather also contest and demand back the payment of fictitious profits or fictitious returns, which only existed on paper, like gifts for up to four years, § 4 AnfG, § 134 InsO (BGH, judgement of 11.12.2008, ref. IX ZR 195/07). Investors will then try to offset the original payment of their deposit and/or claims for damages, but usually without any significant prospect of success.
If an initiator uses the deposits of new customers to pay back the deposits of old customers, the old customers are allowed to keep the deposits they have received back (BGH, judgement of 09.12.2010, file no. IX ZR 60/10), but must still reckon with a challenge by creditors and insolvency administrators in the case of paid-out fictitious profits for up to four years.
Contestation of performance-related commissions
Numerous intermediaries, including those who worked in-house for the initiator, have already had to establish that their commissions are to be paid back as immoral or contestable gifts (BGH, judgement of 21.12.2010, ref. IX ZR 199/10), for example if the bogus returns served as the basis for calculation.
Slow payment by initiators contestable for up to 10 years
If initiators are slow to pay investors their contributions or profits, the presumption of insolvency applies, § 17 II InsO. If investors agree to an instalment payment or deferral, they would also have to prove that an imminent insolvency has thereby ceased to exist, because otherwise a subsequent insolvency administrator can successfully contest the payment (BGH, judgement of 06.12.2012, file no. IX ZR 3/12). The same effect of voidability for up to 10 years has the provision of security for loans by shareholders, or for transactions similar to loans, such as leaving profits with one’s own investment company.
Example: Profit participation capital with up to more than 8% return
When initiators march into insolvency, one may ask retrospectively whether the business model, for example in the case of investments in industrial or wind power plants, had a good prospect of returns of up to more than 8% from the outset? If this were not the case, they could have been sham returns. In this context, it is up to the managing director to explain in detail which hidden reserves or other values relevant for an over-indebtedness balance sheet are not reflected in the commercial balance sheet, which should still have allowed the disbursements (BGH, judgments of 16 March 2009 – Ref.: II ZR 280/07, of 27 April 2009 – II ZW 253/07, of 5 March 2011 – Ref.: II ZR 204/09, 19 November 2013 – Ref.: II ZR 229/11).
If an initiator invests in forests, real estate, wind turbines or ships in the medium to long term, the granting of relatively short-term termination options for profit participation certificates may later lead to accusations of conditionally intentional bankruptcy. For intermediaries involved, including those employed by the initiator, this can also lead to personal prospectus liability and such liability for intentional immoral damage. According to the golden rule of financing in business administration, long-term investments cannot be financed with short-term borrowed (profit) capital. It is worth recalling the corresponding losses in the Depfa/HypoRealEstate case, with similar fundamental errors or simply speculation that what was almost certainly expected would not occur.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
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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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