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Class action to be filed against German investment company

About six weeks ago, Expert Investor ran a story on UDI and how it had run afoul of Germany’s national regulator, BaFin.

According to BaFin, UDI was given orders to wind up seven funds and immediately pay back deposits to investors after the watchdog decided that the company, in promising guaranteed returns, was acting as an unauthorised deposit business.

But what appeared to be a routine story of regulation seemed murkier. After being run by Georg Hetz for two decades, taking in €0.5bn from investors, the company changed hands multiple times between October 2020 and when our original story ran. Along the way, it left a trail of multiple insolvencies behind it.

It also seemed that much of the money UDI had taken from investors was paid out as subordinated loans to other parts of the company. Not illegal, according to lawyers who spoke to Expert Investor, but certainly not common.

Much of where the money travelled, and how, remains unclear. As our story said in July: “UDI appears to have operated as a multitude of corporate entities, under the GmbH legal form in Germany, with each fund a separate GmbH. A document forwarded to Expert Investor by one of the legal firms said to be representing UDI companies lists at least 168 GmbHs linked to UDI.”

For those not in the know about German corporate law, a GmbH is a Gesellschaft mit beschränkter Haftung, essentially a limited liability company. The minimum capital required to start one is €25,000.

Cleaning house

There was a slew of entries on the UDI website in July after Expert Investor’s original story. Between 22 July and 27 July, four stories were published.

On 22 July, a piece that translates as ‘UDI Restructuring Team Cleans Up’ was published. Without saying much, it stated that ‘a restructuring team led by Rainer Langnickel is active in realigning the companies’. Langnickel was also quoted, saying: “A final verdict on every point of criticism is not yet possible due to the complex topics and numerous companies. Of course, we work on recognisable topics from the past, internally.”

Langnickel is the managing director of a company called Dalasy, which took ownership of UDI from TE Management in October 2020. TE Management would file for insolvency a few months later.

A release the following day crowed that there had been ‘rapid progress’. Among the technical details, the release talks about the formation of a creditors’ committee that was ‘voluntarily proposed’ by the UDI restructuring team. This committee seems, however, to long predate this 23 July release.

After the weekend, on the 26 July, another release from UDI was put on the site as an update on the subordinated loans coming from the funds UDI Energie Festzins II to IX.

Ominously, this release began, “At the end of April 2021, the new owner, together with his restructuring team, wrote to the investors of these subordinated loans in order to bring about a debt haircut by means of an offer and thus avoid the insolvency of the issuers, after the Federal Financial Supervisory Authority (BaFin) had previously issued a rescission order for the subordinated loan UDI Energie Festzins VI to be implemented immediately.”

The release goes on to say that the funds were all declared insolvent. It then outlines what investors in these funds can expect to receive back.

And at the bottom: “For all investors who have a current contract with UDI Energie Festzins VI or who have not accepted the offer of U 20 Prevent GmbH at UDI Energie Festzins II, III, IV, V, VII, VIII or IX, their outstanding claims can be registered for the insolvency table at the request of the trustee. Due to the ongoing insolvency proceedings, interest and repayments are no longer possible.”

Legal view

The final, most-recent story that appeared on the UDI website is dated 27 July. It is an interview with Sascha Borowski, a Dusseldorf lawyer with the firm Buchalik Brommekamp, in which Borowski gives his sober, legal assessment of the subordinated loans that UDI was making.

Said Borowski: “The UDI Energie Festzins II to IX companies all issued their subordinated loans before the Retail Investor Protection Act came into force. In fact, UDI had always prepared quite detailed issue documents even before the Retail Investor Protection Act. For all subordinated loans thereafter, the required prospectuses were written and approved by BaFin, ie UDI did not use the exceptions at all.

“For example, BaFin approved the prospectuses of the subordinated loans UDI Energie Festzins 10 to 14. The distribution of these investments was therefore carried out with the express approval of the financial supervisory authority. The problem of subordinated loans arose much later due to a change in case law on qualified subordination clauses, ie not by legislation and certainly not by a possible violation of laws.”

We reached out to Borowski for further comment, but received no reply by the time this story was to be published.

Class action

But Expert Investor did speak with Dr Susanne Schmidt-Morsbach, a lawyer with Schirp & Partner in Berlin. Schmidt-Morsbach said that there was nothing new to report in her dealings with UDI.

She went on: “We are waiting for the opening of the insolvency proceedings for UDI Festzins II to IX. It is exciting to see whether the court will uphold the self-administration. We had expressly spoken out against self-administration to the court and the administrator. BaFin also seems to be critical of self-administration.

“However,” she added, “the first investors do not want to wait any longer and we will file a first class action in the near future.”

In a follow-up email, Schmidt-Morsbach said that the class action is likely to be filed in ‘the next two or three weeks’.

To invest in Germany, or not to invest in Germany?

UDI’s troubles echo that of the German Property Group, also known as Dolphin Trust. As Deutsche Welle wrote back in May: “A property investment company based in Hanover, for years Dolphin Trust benefited from a shiny image that presented it as both a safe and profitable choice for those looking for alternatives to banks as places to put their money.”

However, Deutsche Welle continued: “[In] July 2020, the company filed for insolvency in Bremen, with debts estimated between €1.2bn ($1.4bn) and €1.5bn. A month later, German prosecutors began a criminal investigation into suspected fraud. What for years looked like a respectable investment vehicle now bears the hallmarks of a pyramid or Ponzi scheme. […] The properties still owned by the company at the time of bankruptcy are estimated to be worth no more than €150m collectively. With at least €1.2bn owed to investors, and possibly much more, there is no hope of those people getting their money back.”

In July, Expert Investor asked whether dark clouds were on the horizon for UDI. The clouds are definitely there, and not much light is coming through. But if you are looking to invest your money and are looking towards Germany, after this and Dolphin Trust and Wirecard, look twice.

Pete Carvill

Pete Carvill is a reporter, writer, and editor based in Berlin who has been writing for the B2B and mainstream media since 2007. He is a contributing writer for Expert Investor and, in addition, has...

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