P&R Scandal: First Financial Advisor Ordered to Pay Damages for Mis-Selling | Investor Protection

The billion-euro collapse of container investor P&R Group threatens to become a disaster for many private investors. The company has slipped into insolvency, and the company founder Heinz R. is under investigation. Of the allegedly 1.6 million containers the company from Grünwald near Munich was supposed to own, only about 618,000 were locatable. Much suggests that for a long time, not all newly collected funds were invested in containers but were necessary to settle ongoing liabilities. There is not much left to recover for the customers. 54,000 investors invested 3.5 billion euros, making the P&R collapse one of the largest financial scandals in the history of the Federal Republic.

Unless the victims can hold an intermediary or bank advisor liable and prove mis-selling to them. Then, their professional liability insurance must cover the incurred damage. Precisely such a judgment has now been issued by the Erfurt Regional Court, as several law firms and the Verbraucherzentrale Hamburg report.

The Case: Long-Term Investments Turn Sour

In the specific legal dispute, the plaintiffs turned against the managing director of an Erfurt financial service provider, who is today registered as a financial investment intermediary under §34f. As early as 1992, contracts with the total of four operationally active P&R companies were first mediated to the victims. They had invested a six-figure amount. These investments were initially renewed in 1999 and 2013. After the insolvency of the financial house, the private investors demand damages.

Specifically, the business model looked like this: P&R sells sea containers to investors and small investors to then lease them back. Then, the Bavarians offered the leased containers themselves on the international trade market and leased them to large leasing companies. On the one hand, P&R promised investors guaranteed rental income, paid out quarterly. On the other hand, after five years, investors received a repurchase offer for the container of 65 percent of the original purchase price. A total of four subsidiaries of P&R were involved.

The subject of the dispute in the present judgment is only the money from the last investment, i.e., from 2013. But already in earlier sales talks, the intermediary had presented the investment as "absolutely safe and reliable," as it now says in the certified transcript of the judgment, which is available on the website of the law firm Dr. Roller & Partner. P&R investments were "the best there is," so the investors were promised. Explicitly, the plaintiffs had pointed out to the intermediary that they planned the investment as retirement provision and that it was less about returns but about security.

The Court's Decision: Violation of Disclosure Obligations

In fact, the plaintiffs were successful in court. The plaintiff would be entitled to damages because the financial service provider "culpably violated its disclosure obligations incumbent upon it in the mediation of the purchase and administration contracts with the P&R companies," emphasized the Erfurt Regional Court. It referred to § 280 Para. 1 of the German Civil Code (BGB).

When the investors again sought the advice of the investment intermediary in 2013, a disclosure contract had come about tacitly, the judges justified their judgment. The investors could have relied on the fact that the intermediary, due to his expertise, was obligated to provide a "complete and correct disclosure" about the investment product. The defendant had violated these disclosure obligations by not informing about risks of the investment model.

The judges particularly emphasized one point: Thus, the intermediary would also have had to explain gaps in the prospectus. The purchase and administration contracts would have suggested to the buyers that the expected rents were "guaranteed" and that there was insurance against all risks resulting from it, so that in the event of a total loss, an equivalent container would be transferred to the investors. That was not the case. Instead, the assumed guarantees would have been subject to the reservation of significant risks:

"About the fact that in this case, a total loss risk exists up to the private insolvency of the investors, the prospectuses remain silent," it says in the justification of the judgment. The intermediary would have had to inform about the risks. The judgment is not yet legally binding.

Mixed Outcomes in Other Cases

This judgment gives hope to many victims. However, the Handelsblatt points out that several private investors have also lost in court. Thus, the Flensburg Regional Court rejected two lawsuits from investors who had invested 17,000 euros and 32,000 euros each with P&R. A similar judgment was made by the Regional Court in Ansbach (Case No. 3 O 557/18, also not legally binding).

The court "assumed a pure container order here, so that the defendant intermediary had no disclosure obligations," explains Jan C. Knappe from the Munich law firm Dr. Roller & Partner to the "Handelsblatt." Here, the fine difference between advice with disclosure obligation and pure execution of a purchase order ("execution only") also plays a role in court.

Implications for Investors and Advisors

The Verbraucherzentrale Hamburg argues: "Now each case is differently situated, but the judgment of the Erfurt judges shows that investors can indeed demand damages from their intermediaries with prospects of success if these did not fully inform them about the risks associated with the investment." The court has shown the obligations of financial intermediaries who mediated P&R contracts very detailed. Here, it is also important to observe limitation periods if one wants to sue in the matter. To assert claims in the insolvency proceedings over the assets of P&R boss Heinz Roth, the filing deadline ends on April 18, 2019.

Insurers and brokers are struggling in claims management with high backlogs, increasing claim frequencies, skilled labor shortages, and growing customer expectations. Manual processes are expensive and slow.