In a judgment dated 17 September 2013, the German Federal Court of Justice (BGH) has once again decided on claims for damages by investors against a bank that recommended investing in certificates issued by the investment bank Lehman Brothers and its subsidiaries and affiliates.

Background

Since Lehman Brothers’ insolvency in September 2008, many investors have sued their banks for damages because bank employees had recommended investing in Lehman Brothers certificates. Apart from the question of whether the bank employee had sufficiently informed the investor about the general risks of buying the certificates, a main issue in all of these cases was the alleged obligation of the banks to disclose their own economic interest when selling such certificates. In a decision dated 19 December 2006, the German Federal Court had decided that a bank has to inform a customer seeking investment advice about “kick back” payments the bank receives from the investment company if the customer buys an investment fund recommended to him by the bank. The claimants now argued that this previous court decision established a general obligation for banks providing investment advice to reveal any payments or benefits the banks receive in connection with investments sold to their customers.

However, in two rulings dated 27 September 2011 concerning Lehman Brothers certificates, the Federal Court dismissed the bank customers’ claims against the bank and ruled that the bank did not have to inform customers about the bank’s financial gain if certificates were sold by the bank itself directly to the customer. In the Federal Court’s opinion, it is obvious to the customer that the bank does not sell the certificates without a profit margin.

The Federal Court has since repeatedly confirmed these judgments. The court’s opinion has been criticised, especially against the backdrop of changes in sections 31 ff. of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) which came into force in November 2007. In particular, section 31d WpHG constitutes a disclosure requirement regarding any "benefits" (Zuwendungen) the bank receives from third parties. These changes through the Markets in Financial Instruments Directive Implementation Act (FRUG) of 16 July 2007, transform European Directives 2004/39/EC of the European Parliament and the Council of April 21, 2004 (Markets in Financial Instruments Directive – MiFID), and 2006/73/EC of the Commission of August 10, 2006 (Implementing Directive) into national law.

Current decision

The Federal Court has now upheld its case law also for investment advice provided after the introduction of the law changes implementing MiFID. The Court referred to a decision of the European Court of Justice (judgment of 30 May 2013 - C-604/11) which stated that contractual consequences of breaches of provisions of the aforementioned Directives are solely subject of national legislature. Since there are no such provisions in German law, the German Federal Court has confirmed that there was no contractual obligation on the bank towards a customer to disclose the bank’s own economic interest when selling Lehman Brothers certificates. Regardless of whether sections 31 ff. WpHG actually constitute a regulatory obligation to disclose the bank’s profit margin or discounts granted by the issuer of the certificate (which the Federal Court has expressly left undecided), a violation of such a regulatory duty does not grant claims for damages under German civil law.

Federal Court of Justice, judgment dated 17 September 2013 - XI ZR 332/12

Dr Patrick Wolff