For seven former Bayerische Landesbank executives, a deal that led to 3.7 billion euros ($5 billion) of losses may land them in prison as they face a first-of-its-kind criminal trial over the bad bet.
The men will go on trial in Munich today over claims they overpaid by 550 million euros when they purchased a majority stake of Hypo Alpe-Adria-Bank International AG for 1.63 billion euros in May 2007. They’re charged with “breach of trust,” a criminal offense unique to German-speaking countries that punishes misuse of other people’s money.
In the case, the first in Germany to put management board members on trial for overpaying for an acquisition, prosecutors claim the executives at state-owned BayernLB rushed the deal. They didn’t properly assess the risks and didn’t include precautions in the agreement because they wanted to buy the Austrian lender at any cost and were under political pressure to do so, the government alleged.
“M&A has long been pretty much a criminal-law-free zone but we see that this is now changing, especially when the buyer regrets the deal,” said Juergen Wessing, a criminal defense lawyer in Dusseldorf, Germany.
In the wake of the financial crisis, the deal turned into a disaster, causing the losses at BayernLB until 2009, when the unit was sold to the Austrian government for one euro. Hypo Alpe has cost Austrian taxpayers 4.8 billion euros so far, and the Alpine country has European Union approval to spend another 6.4 billion euros to fund its wind-down. The losses have triggered litigation between the two banks and probes in both countries.
The defendants, who include Michael Kemmer, now general manager of BdB Association of German Banks, have denied the allegations. They argue they acted in good faith and tried to access new markets through the purchase. In early 2007, when the deal was negotiated, the repercussions from the financial crisis weren’t foreseeable, they said. If convicted, they face up to 10 years in jail.
The breach of trust rule doesn’t allow authorities to prosecute over a management decision that was made with proper preparation and information, said Christian Schroeder, a professor at Germany’s Halle University.
“Company leadership has a relatively wide leeway,” Schroeder said. “The fact that an acquisition later proves to be a failure doesn’t turn it into a crime.”
‘Other People’s Money’
Prosecutors have used the breach of trust provision in several prominent German financial crime cases, including the Siemens AG (SIE) corruption scandal and a trial over the approval of bonuses to Mannesmann AG officials. It was also used in the prosecution of Juergen Sengera, former chief executive officer of WestLB AG, over his role in a 1.35 billion-euro loan to a bankrupt consumer-electronics company.
“It’s totally justified that prosecutors are looking at deals where you may suspect the management may have dumped away shareholder money with their eyes open,” said Frank Saliger, a professor of criminal law at Bucerius Law School in Hamburg. “The breach of trust provision’s rationale is to control how other people’s money is handled - and even more so if we’re talking about public funds.”
In the BayernLB case, the defendants include Werner Schmidt, the bank’s chief executive officer at the time, and Gerhard Gribkowsky, who is currently serving an eight and a half-year sentence for accepting bribes from Bernie Ecclestone over the sale of BayernLB’s stake in Formula One. The Bavarian government owns 75 percent of BayernLB.
A spokesman for Kemmer declined to comment. Lawyers for Schmidt and Gribkowsky didn’t respond to requests for comment.
After an initial ruling in the case that said the evidence against the men didn’t suggest they violated their duties, an appeals court said the issue couldn’t be separated from two related minor charges and had to be tried. The prosecution may have a difficult time with the case, since the same judges who originally didn’t want to hear the breach of trust issue now have to try it, Schroeder said.
In the U.S., the case couldn’t be prosecuted because there isn’t a criminal offense for breaching fiduciary duties, Vincent Marella, a lawyer at Bird Marella in Los Angeles, said. A similar scenario would trigger civil suits in the U.S., he said.
According to Saliger, the rule is a German peculiarity few other countries share.
“The provision has the potential to become an export hit, because it can be used to tame unrestrained capitalism,” he said. “Some excesses the financial crisis has brought to light could well be bridled with its help.”
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