The “Phoenix” case: On 11.07.2006, the defendants were sentenced to several years’ imprisonment by the Frankfurt/Main Regional Court for fraud and breach of trust: The basis was the largest capital investment loss (328 million euros) in Germany to date, in which “on paper” over one billion euros had been generated as profits in the years 2000-2004. Neither the auditor responsible for drawing up the annual financial statements nor the auditing company appointed by the Federal Financial Supervisory Authority (BaFin) to conduct a special audit recognised that some of the assets were fictitious – as evidenced by falsified bank statements.
Since BaFin’s activities do not serve to protect investors, neither this institution nor the special auditors commissioned by it are liable to the account holders who have been cheated. The usual statutory minimum insurance sum for tax consultants who prepare GmbH financial statements is 250,000 euros – a drop in the bucket in the event of a claim. The liability of the GmbH auditor is limited by law to 1.0 million, so that this compensation is only of marginal importance. It is of little help to those affected when experts say that the usual auditing standards have apparently been violated. At the time of the collapse of the asset manager “Phoenix Kapitaldienst GmbH”, there were still over 600 million euros in deposits (in managed accounts) of 30,000 investors on the books – which were only offset by 228 million euros in bank balances. Investors will receive part of the loss via the Compensatory Fund of Securities Trading Companies (EdW), but only 90 percent of each investor’s deposit is secured – the maximum compensation is 20,000 euros. This year, the EdW will set a special levy of probably 180 million euros at the expense of the approximately 760 licensed securities brokers. It remains to be seen what effect this will have on their creditworthiness. CHECKING SECURITIES AND BONITY Every year, investors lose billions – not only because business risks materialise, but also because the creditworthiness of the contractual partners was not checked. Investors are well advised to also consider the key person risk – the aspect of criminal energy can never be completely ruled out. The consideration of renowned awards, ratings and rankings with regard to achieved increases in value obscures the view of the total loss risk. Gaps in contract design become apparent when the asset manager buys worthless securities on the stock exchange with limited power of attorney: In order to obtain his clients’ money, he had himself set up a corporation in the USA as a sham and obtained a securities identification number. The same applies in the case that a bank or insurance company has the “four-eyes principle with double signature” – but two criminal subjects get together to “clear out” the money of certain customers. Many a provider of “day trading” has not let his “two years on probation” serve as a warning, and undauntedly continues to offer his services through a US company. Popular is also the marriage, connected with a name change of the initiators known for “scorched earth”. Finally, an “auditor” from the German-speaking countries sometimes vouches for the investor – later it turns out that the same had lost his chamber admission years ago because of property offences. Not infrequently, honorary professions and professors sit on the supervisory board of an AG – however, additional consulting contracts regularly violate legal prohibitions. These examples show that, in addition to creditworthiness checks, legal risk management also makes sense for investors. Many a banker in Switzerland reacts piqued when asked about the mere 30,000 Swiss franc deposit guarantee (called bankruptcy privilege). Here too, in case of doubt, not only additional contractual arrangements are required, but also a legal examination in accordance with the Federal Debt Collection and Bankruptcy Act. In the area of occupational pensions, foundations are privileged because the deposit protection level for bank investments per insured person applies here. In the case of deposits, these are segregated in advance in the event of bank bankruptcy. In Liechtenstein, deposits of up to EUR 20,000 are protected – but with numerous exceptions, such as the deposits of insurance companies. When dealing with life insurance shell companies as a tax deferral model, this raises interesting questions regarding the total loss risk for the protection of various bankruptcy scenarios from the investor’s point of view. Historical hindsight shows that insurance and bank bankruptcies usually had a criminal prelude and a criminal aftermath. In such cases, financial loss insurance regularly does not provide any cover. No less explosive is the investment of money and capital by companies in the area of old-age provision. Numerous business managers have already discovered that their company pension scheme provider had moved its funds to the Cayman Islands before filing for insolvency. Since 1998, the Corporate Sector Supervision and Transparency Act has been in force, with the obligation to operate a risk management system. Despite the personal liability of senior management, there are sometimes serious deficiencies in the perception of financial and legal risks, as well as in the reporting of gaps in security and creditworthiness. Wealth management starts with the question of collateral. Where creditworthiness and deposit insurance are not sufficient in the event of an emergency, legal structures and effective coverage concepts must be implemented via non-life insurers.
Dr. Johannes Fiala, Dipl.-Jur.-Univ. Thomas Keppel De-la-Paz-Straße 37, 80639 Munich Tel.: +49/89/17 90 90-0, Fax: +49/89/17 90 90-53,
(! 3/2007, 93)

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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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