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 went 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 were under political pressure to buy the Austrian lender.
“Because of the pressure, the accused at least tacitly agreed to overlook the risks involved,” prosecutor Christian Weiss said at the start of trial today. “They acted in a ‘close your eyes and jump’ fashion, in an effort to buy Hypo Alpe at almost any price.”
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. If convicted, they face up to 10 years in jail.
“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, who isn’t involved in the case.
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 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.
Bavarian government officials criticized BayernLB after it lost a bid for another Austrian lender in 2006, and the then-state finance minister said the executives were “too stupid to buy a bank,” according to prosecutors.
Schmidt said today he stood by the purchase. Without the financial crisis, the losses at the Austrian wouldn’t have been as big, he said. Kemmer told the court that financial experts didn’t believe at the time that the subprime crisis would affect eastern Europe.
“I see now that the buy was a failed business decision, for which I do bear responsibility,” Kemmer said. “But I cannot see that I committed any crime.”
Prosecutors claim the men committed another crime when they agreed to buy an additional 3.3 percent stake in Hypo Alpe in November 2007 at the same share price they paid earlier. Four of the men, including Kemmer and Schmidt, are also charged with bribery for agreeing to pay 2.5 million euros to an Austrian soccer club. The late Austrian politician Joerg Haider made the “donation” a condition for the deal, according to the indictment.
In an initial ruling in the case, the court said the men could only be tried on the two related charges and not over the majority stake purchase. An appeals court overturned that decision, saying the allegations can’t be separated. All three issues are now on trial.
The prosecution may have a difficult time with the case, since the same judges who originally didn’t want to hear the major breach of trust allegation now have to try it, Schroeder said.
According to Saliger, the criminal breach of trust 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.”