Germany’s taxpayers thought they had seen the last of the 2008 financial crisis. A court ruling on Monday has brought the memories flooding back.
The mortgage lender Hypo Real Estate, or HRE, was handed a bitter defeat before the Munich-based Higher Regional Court. In a lawsuit brought by a former investor against the now state-owned bank, presiding Judge Guido Kotschy ruled in favor of the plaintiff.
The ruling has serious consequences for the bank, its former management, and for Germany’s taxpayers.
The charge: HRE was found guilty of manipulating its balance sheet and misleading investors about its exposure to the U.S. subprime mortgage collapse in 2007. According to the ruling, HRE published press releases in 2007 and 2008 that were "false and incomplete."
HRE could now face damages of more than €500 million from lawsuits brought by some 90 investors with similar complaints. The case, decided Monday, serves as a precedent for the other lawsuits under German law.
The claims will ultimately have to be paid by the German state, which nationalized the mortgage lender in 2009.
"With today's model decision, the plaintiffs’ chances of receiving compensation have increased considerably," explained attorney Andreas Tilp, who represented the plaintiff in court.
"We will not know what amounts are in question until we have completed a detailed analysis of the extensive model decision. As of today, we assume that the total will be well in excess of €500 million," he explained.
HRE could face claims for damages of more than €500 million from lawsuits brought by some 90 investors.
Mr. Tilp's client is Frankfurt attorney Christian Wefers, who in turn represented the claims of more than 90 investors, including large mutual funds, who had originally sued for more than €1 billion in damages.
However, the court concluded that claims could only be asserted by investors who had purchased HRE shares between August 3, 2007 and January 15, 2008. The overall damages awarded should therefore be less than €1 billion.
Nevertheless, observers believe that the higher regional court's decision is a clear defeat for the bank.
According to the court, trouble was already brewing for the bank, under the leadership of its then chief executive, Georg Funke, in the late summer of 2007. Despite that, on August 3, 2007, the real estate lender concealed from investors the highly risky asset-backed securities already on its balance sheet, especially those related to the U.S. market.
Instead, the bank stood by its earnings forecasts and said it did not anticipate any negative consequences from the U.S. mortgage crisis, which was already in full swing at the time. A listing prospectus from the lender, issued one month later, also painted an overly optimistic picture of the company, according to the court.
It was only on January 15, 2008 that HRE announced a substantial write-down of its securities portfolio.
Judge Kotschy said the announcement was not made early enough. Under German law, a company is required to issue an “ad-hoc statement” as soon as it becomes aware of developments that could affect its share price.
The write-offs of close to €300 million ($373 million) mentioned in the January report came as a shock to investors. Shares of the lender, listed on Germany's blue-chip DAX index, lost more than a third of their value in a single day.
Things continued to go downhill for the bank. The interbank market, on which HRE’s subsidiary DEPFA depended for its financing, dried up during the course of the Lehman Brothers bankruptcy in September 2008.
As a result, HRE, one of the biggest players in the German mortgage market, was on the verge of collapse. Over the course of several months, the German government had to step in with loan guarantees and cash infusions of well over €100 billion.
In 2009, HRE became the first German bank to be nationalized since World War II, which is why taxpayers are now footing the bill.
This is the price of living in a nation of laws, said attorney Daniela Bergdolt, who also represented the plaintiffs. Banks should not be allowed to deceive investors and get away with it, she added.
The decision by the Munich court is not legally binding just yet, and the bank plans to file an appeal.
"We believe the decision is wrong and will contest it in an appeal on a point of law before the Federal Supreme Court," said an HRE spokesman. "In the course of the proceedings, important circumstances were not correctly recorded and were incorrectly appraised by the court. For that reason, we expect the Federal Supreme Court will reverse the decision."
But the floodgates have now opened and additional lawsuits relating to HRE can be expected. Each investor will have to assert their individual claims in separate cases before their respective regional courts.
In addition, the Munich public prosecutor's office has brought charges against former bank chief executive, Mr. Funke, and some of his fellow executives.
Judge Kotschy had already earned the nickname "the horror of banks" because of his role in the damage suit against Deutsche Bank brought by media mogul Leo Kirch. That suggests Mr. Funke might also be sitting in the dock very soon.
Kerstin Leitel is Handelsblatt’s correspondent in Munich, covering the insurance and banking industry. Christopher Cermak also contributed to this story. To contact the author: [email protected]