The Federal Court of Justice recently ruled on two parallel proceedings on the extent of information that banks must provide to investors when selling certificates. Investors had sued the savings bank which sold them certificates of a Dutch subsidiary of US investment bank Lehman Brothers Holdings Inc for damages.
The first proceeding (XI ZR 178/10) concerned an investor who invested €10,000 in a so-called 'Protect Express' bond, based on the recommendation of an employee of the bank in December 2006. The second proceeding (XI ZR 182/10) related to the same savings bank, in which the investor, based on a recommendation by another staff member, invested €10,000 into a 'Bull Express Guarantor' bond. In both cases, the bonds were bearer bonds issued by Dutch company Lehman Brothers Treasury Co BV, which were guaranteed by the US company Lehman Brothers Holdings Inc. The amount of the repayment of the bonds was tied, in the case of the 'Protect Express', bond, to the value of a stock basket consisting of 10 titles from the DAX index (a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange) and, in the case of the 'Bull Express Guarantor' bond, to the value of the Euro Stoxx 50 (a stock index of Eurozone stocks). The worst-case scenario for both bonds was that the investors would receive back their invested amounts with no interest. As no assets are separated for these types of bond, the investors bear the risk of the creditworthiness of the issuer, in addition to the underlying market risk.
Due to the insolvency of the issuer and the guarantor, in September 2008 the bonds became practically worthless. The investors accused the savings bank of having breached its duty to inform its investors and claimed for the repayment of their investment plus issue surcharge and interest.
The Federal Court of Justice decided in favour of the savings bank, ruling that it had not breached its duty to inform its investors. At the time of the advisory talks with savings bank employees which led to the investments, no risk of the insolvency of the issuer or the guarantor could have been predicted by the savings bank. This fact was not disputed by the investors. However, the savings bank was obliged to inform its investors of the general issuer risk which investors bear in relation to this kind of certificate, which means that the repayment of the invested capital depends on the creditworthiness of the issuer. The savings bank had complied with this obligation. The investors had been sufficiently informed of the risk that, were the issuer and the guarantor to become insolvent, the investments would be lost. The court stated that, in such cases, the further information that the types of bond at issue are not included in a deposit guarantee scheme need not be provided, as this information has no independent value in relation to the creditworthiness risk.
Further, the savings bank had no obligation to inform its investors with regard to the profit margin of the bonds. According to existing case law, a bank which recommends its own investment products is not obliged to inform investors that it is making profits from such products, as it is evident to the customer that the bank has profit interests when selling such products. This principle also applies in the cases at hand, as products from different banks were sold on the savings bank's behalf, as fixed-price transactions, at a higher price than that offered by the savings bank. The case law on hidden internal fees or kickbacks, to which information duties apply, cannot be applied here, since banks cannot be obliged to disclose their profit margins in such a broad manner. The fact that the purchase of the bonds took place on the savings bank's behalf is therefore not considered to be information of independent value, as it relates to the banks' profits, about which investors need not be informed.
These judgments show that customer information cannot include future facts and that compliance with information requirements should always be fixed in writing for evidentiary purposes. Before the Lehman insolvency, such insolvencies were considered unlikely; in the future, however, the question of whether insolvencies could have been predicted in advance might be judged differently. Therefore, banks must assess the risks associated with the products that it sells, including the risk of the issuer and/or guarantor becoming insolvent.
For further information on this topic please contact Bettina Röder at Noerr LLP by telephone (+49 69 97 14 77 0), fax (+49 69 97 14 77 100) or email ([email protected]).
Federal Court of Justice dismisses claims over sale of Lehman certificates
Noerr PartGmbB | Banking & Financial Services - Germany