Initiator Support And Controlling: Products, Such As Participation ...

The ad-hoc release from 02.01.2006 – Allgemeine HypothekenBankRheinboden AG (AHBR):

“AHBR expects negative annual result for 2005, Frankfurt am Main,2 January 2006Allgemeine HypothekenBank Rheinboden AG (AHBR) expects a negative after-tax result for the 2005 financial year. Thiswill be in the range of EUR 1.1 to 1.3 billion, according to the Bank’s preliminary estimates. The background to this is the final realisation of losses from charged interest positions and the revaluation of the loan portfolio in the course of a comprehensive restructuring and repositioning of the Bank following the now completed takeover by the American financial investor Lone Star. In view of the expected balance sheet loss, the liable equity capital provided by profit participation certificate creditors and silent partners will be drawn upon to a significant extent. Creditors of subordinated registered and bearer bonds are not affected by the measure. To support the repositioning of theBank becomes Lone Star of AHBR at the beginning of the 2006 financial yearinject an appropriate amount of new equity.”

Billions in profits had turned into billions in losses ?Meanwhile, so-called investor-protection attorneys, labor and employment lawyers…interest groups and “victims” associations, the poorerinvestors who have become investors.

The story usually arises in the middle market’s search for equity:

The conversation with the credit department of the banks sobered manyMiddle class. The equity ratio has increased from less than 20% 25 years ago todecreased by less than 8% on average. The credit rating getseasier to their limits “so the middle class needs liableEquity.” Already a windy prospectus consultant is found, whoMedium-sized company in an initiator for the placement of capital investmentstransformed: At the core, the newly minted initiator is given aContract bundle (legal services, shelf company, advertising agency,software programming, trade fair presentation, sales services) “from a single sourcehand” offered “regrettably” all too often with the “wrongProduct” as a solution approach.

Those initiators, who at first had to go to trade fairs “to sell theirprofit participation rights”, potentially form later informalcommunities of interest because of false sales andProspecting Advice. Many initiators from the small and medium-sized business sector note thatit is difficult to place the profit participation capital with the investorlets. And this is not just a consequence of so-called “scandals”, such asthe “AHBR”, “VermögensGarant AG” or “Securenta/Göttinger” casesGroup” (BGH judgements of 21 March 2005 ? II ZR 124/03 , II ZR 140/03, IIZR 149/03, II ZR 180/03 and II ZR 310/03 ), “SüdwestRentaPlus Group”,etc.

Profit participation right and profit participation certificate:

Originally, the Genusschein was an instrument for restructuring, mergerand liquidation of companies – the share capital wassettled, and only one profit (enjoyment !) could follow.Today, “profit participation capital” or “mezzanine capital” is used to refer to a variety ofof designs offered on the market ? in essence this meanstoday for the investor first of all a fiscal and factualParticipation in the (total!) loss.

One speaks of a profit participation certificate if the profit participation right in a documentwas securitized as a security. In the mid-1980s, theProfit participation certificates in vogue ” mainly because a German Banking Act (KWG)amendment allowed banks to increase their liable equity capital byto “expand” and issue multiples of loans.

The sky’s the limit:

Statutory provisions on the form of the profit participation certificate can be found injust as little as on the type and content of profit participation rights.Rights of co-determination, such as those enjoyed by a shareholder, are regularly notprovided for. There are numerous contract variants – this makes theproduct already requires a great deal of consultation and offers numerous pitfalls in the case ofof the prospectus design: Here investment advisors and initiators can easilyhave been held liable for “misadvice and prospectus liability”.

Nothing’s been checked:

A widespread misconception in the practice of investment brokerage is thatwith regard to BaFin approval or prospectus review. Therebyit is merely a formality check, not a factual one,content and economic controls. It is therefore crucial thatsome investment advisors offer such products to their clients as supposedly“safe investment.” This means that the liability of the intermediaryor investment advisor is pre-programmed.

Nothing is insurable:

One reason why profit participation certificates are so difficult to sellis the fact that the investment intermediary in the usualInsurance policies covering his professional risk this product…you won’t find it. Ralf W. Barth, a specialist broker for property damage liability insurance, points out that VSH insurers are systematically withdrawing from this market segment. Nevertheless there are initiators, who let themselves be “made believe” by your folder advisors, such Private Placements are easily sellable over distributors at investors. Medium-size entrepreneurs fall gladly on such folder advisors, who pull for years the (nearly) always same folders from the drawer – connected with the announcement that with these folders the own capital funds would be as good as safe ready.

Criminal prospect consultants ?

It is difficult for the medium-sized company tosee through. Numerous investment scandals are based onbrochures and concepts of the same old brochure consultants. On themarket (e.g. FALK, Dreiländerfonds, GöttingerGroup) potentially lead to countless problems for those prospectus advisors in particular.process follow-up orders, which may have originally been ?the soupby their negligent design to the initiator? have.Practically every initiator needs controlling, i.e. ?control, planning,Steering and control of legal and economic processes? in theImplementation Phase. This is where lawyers and management consultantstogether in order to prevent erroneous and possibly criminalProspectus advice to ward off. This range of services is offered byonly select law firms have been offering.

A particularly blatant approach of some prospecting consultants is to offer theInitiator to recommend ?small-money-action? at once: Often with theTip, “with this you can already recoup the first costs againGet.” Moreover, this is dubious because without prospectus approval of theFederal Supervisory Office for Financial Services (BaFin) the Initiatorfor the most part, may not yet begin to make any investment fundsto collect. This is particularly harsh for these early investors whenthe project does not find a distributor in the aftermath, in order toguarantee.

Another popular variant, is the prospecting through aInadequately insured tax firm without legal authority:The only thing that the look in the commercial register and acredit rating inquiry show is the inadequate capitalization. Forthe medium-sized company that pays its five- or six-figure consulting feepaid by such constellations there is no financially bonideSecuring the liability of the firm. by the way, at the latestLiability insurer of the Steuerberatungs-GmbH the liability to pay,for violation of the Legal Advice Act.Such conceptual errors are not uncommon ? for the medium-sized company can be aContract with the ?wrong? Prospectus advisor into the safe own (!)Lead to insolvency. For the monitoring of such a concept, the following should be considereda law firm for controlling additionally from the medium-sized company resp.Initiator, because the costs for the monitoring standout of all proportion to the conceivable damage. Also forFinancial service providers and distributors are advised to focus in future only onfocus on concepts that have been re-examined.

by Dr. Johannes Fiala