2011-02-16 Phoenix Kapitaldienst GmbH

BGH ruling: No right of separation for Phoenix investors

Karlsruhe. In a recent ruling (AZ: IX ZR 49/10) the German Federal Court of Justice (BGH) found in favour of the declaratory action brought by the insolvency adminstrator, Frank Schmitt, Schultze & Braun, in the Phoenix proceedings. The subject matter of the proceedings was the question as to whether individual Phoenix creditors could assert a right of separation, which would have meant that part of the assets secured by the insolvency adminstrator  be distributed outside the insolvency proceedings.

In its order of 10 February 2011 the BGH rejected the assertion that such a right of separation existed in the present case. It is now therefore clear that the assets in question, to the amount of around EUR 170 million, are deemed part of the insolvency estate and that, consequently, they are to be distributed rateably among all of the 30,000 creditors, in accordance with the insolvency regulations.

The general tendency of the position taken by the BGH in this question was already clear during yesterday's proceedings. As part of the presentation of the facts of the case, the presiding judge Godehard Kayser stated that "the accounts had mutated into a tool of the snowball system" and that "the assets held by the trustee in the present case had become mixed with [the company’s] own assets".

Insolvency administrator Frank Schmitt expressed his relief after the ruling: "The effect of this decision is to overcome a massive obstacle. I am very pleased that certainty about the legal position at last prevails on this point and that order has returned to the proceedings. In view of the complexity of the case it is going to take years to realize the remaining assets and complete the insolvency proceedings." In Mr. Schmitt's opinion, the decisive point for today's ruling was the fact that the very large number of account movements had made it impossible to attribute the secured account balances to individual creditors with any degree of certainty.

In consultation with the insolvency court and the committee of creditors the insolvency adminstrator is now examining the possibility of a first distribution to the creditors. However, because it is necessary to consult with the Compensatory Fund of the Securities Trading Companies and the large number of creditors involved, a payout, if any, cannot be expected before the end of this year.

Background information on the insolvency proceedings
Insolvency proceedings over the assets of Phoenix Kapitaldienst GmbH were opened by the Frankfurt insolvency court on 1 July 2005. Phoenix had offered capital investment facilities in the form of derivatives (options and futures) and suggested falsely that large profits were possible. This form of investment, called a Managed Account, started off by making heavy losses. As from 1998 the investors' funds were only invested on a small scale in derivatives trading. Cash was deposited with banks and more than half of the funds paid into the banks was spent on current business operations, including payments to external intermediaries, tax payments and the distribution of alleged profits to investors. To demonstrate the alleged high returns on investment, statements of account were falsified for years on end for a fictitious account.
This fraud was only detected in 2005, leading to the application for insolvency proceedings. The snowball effect of this ponzi scheme meant losses for over 30,000 investors. The total losses amount to around EUR 600 million.

Supplementary information
Frank Schmitt
Photo http://www.schubra.de/foto/fschmitt
Profile http://www.schubra.de/team/fschmitt

Press spokesman: Nico Krespach
Eml: NKrespach@schubra.de, Phone: 07841/708-0
Additional information:
  • 2007-04-25 Majority of creditors agree on insolvency plan – one creditor objects
  • 2006-02-09 Insolvency plan procedure aimed for
  • 2005-05-04 Assets worth approx. 210 million Euros secured
  • 2005-03-16 Involuntary insolvency proceedings opened - 30,000 investors affected
Schultze & Braun Rechtsanwaltsgesellschaft für Insolvenzverwaltung mbH
http://www.schubra.de, Email: mail@schubra.de