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Wednesday, 07 September 2016 18:05

The Debate on the Potential of Fraudulent Actions At Deutsche Bank Subsidiary, Xetra-Gold Featured

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Furthering the discussion of potential fraud at Deutsche Bank subsidiary Xetra-Gold, I enlisted the opinion of a legal professional versed in such matters. Please read on after reveiwing the previous two posts on this topic which provide the necessary background:

  1. Veritaseum Knowledge Exposes Frightening Counterparty Risk At Deutsche Bank for "Gold Investors"
  2. Is Deutsche Bank Prepping for Fraud Charges Against It's Gold Derivative Products?

Here is an email exchange I've been having with a lawyer familiar with said matters.... 

".... There’s no fraud here.

At a minimum, fraud--including claims made under the UK Fraud Act of 2006--requires an affirmative misrepresentation or the concealment of a material fact. Neither is present here.

The “harm” of DB’s failure to deliver physical gold is fully and repeatedly disclosed as a risk in the Xetra investment prospectus. In fact, the prospectus makes it explicitly clear—at least twice—that Xetra investors have the legal status of unsecured creditors (much like a bank’s depositors). It likewise states that Xetra “Notes are not backed by assets” at all.

DB covered itself pretty well with the prospectus. I doubt that investors complaining of no delivery would even prevail on a claim for breach of contract, much less fraud.

I excerpted and highlighted key pages from the prospectus showing disclosures of the many investment risks that appear in the first ~25 pp. of the prospectus. Hell, they even tell investors that their access to gold might be blocked by terrorists.

As for the statement--"an investor is, from an economic point of view, invested in gold"--it's at worst puffery, which courts never put any stock in. Whatever that statement means, it can't mean--based on the many legal disclosures from the prospectus--that investors will be treated as secured creditors who entrusted physical gold to DB as a bailee."

My reply:

That's interesting. The marketing material states "an investor is, from an economic point of view, invested in gold" and that, from a factual perspective is in direct contravention to the statements in the prospectus... See below. I understand the point you have made, but if there is admittedly no correlation to the gold price, no ownership of gold, and no promise to be able to redeem for gold, there is no reasonably plausible or justifiable grounds to asset that someone is economically invested in gold. The delta between the marketing claims and the prospectus legal mumbo jumbo appears (to this layperson) to qualify for "an affirmative misrepresentation or the concealment of a material fact.". Can you walk me through how I am wrong?

... The phrase "from an economic point of view" is the kind of hopelessly vague qualifying language that lawyers added to inject uncertainty about what the sentence means.

But even if that language weren't there, and the statement just said, "you're invested in gold," a claim for fraud still wouldn't work, imo. Why not? Because the disclosures in the prospectus expressly say that the investment is unsecured, isn't backed by gold, etc. DB, in other words, is disclosing in writing the exact risks that investors are now complaining of.

By the same token, any contradiction between marketing materials and the investment prospectus is going to be resolved in favor of the latter. The prospectus is the controlling document, and in this case it is replete with disclosures that the investment is in no way tantamount to possession of physical gold. That fact is a killer for any fraud claim hinged on publicly available materials like a prospectus and marketing materials.

Looked at another way, DB covered its bases by saying that both (X) and (negation of X) are true. A court looking at that will say, nothing about that is misleading; confusing, perhaps, but not deceitful, and deceit is the essence of fraud.

There's one more disclosure that I didn't flag in the excerpt I sent last time (b/c I hadn't gotten to it yet). It's from the top of page 27 and made me almost fall out of my chair when I read it: "Deutsche Bank AG is not, in any way, obliged to protect the interests of the investors."

DB's candor is just astonishing. So is the credulity of anyone investing with them.

My reply: 

I see. My proclivity to deal in facts materially hampers my lawyering abilities. Now, let me put my argumentative hat on. If marketing materials are negatively contradicted by the prospectus then the marketing materials are fraudulent and misrepresentative, no?

I'm with you on the point of DB disclosing in writing the exact risks that investors are now complaining of. That is only the case because the investors are complaining about the wrong thing. 
No matter how many disclaimers the prospectus puts in, if it blatantly contradicts the marketing material then the marketing material is misleading at best (I'm sure that's against some law) and fraudulent from a layman's perspective (which I fully admit means nothing). The bar for fraud in the UK is affirmative misrepresentation, and that is exactly what the marketing material is. Now, I also understand the qualifier "economic", but there is no plausible way to spin that as an investment while simultaneously stating that there is no price correlation, no underlying rights and no underlying ownership. Those are the three pillar of an "economic" investment if there is such a thing.
I'm simply thinking out loud, but I really do feel if I were put on the stand as an expert witness to debunk the economic investment statement, facts will fly through flesh.

... i just found some US law that seems to corroborate your assertions re: marketing materials, but on 2nd glance, the economic investment statement was mentioned in the prospectus as well, which seems to nullify the protections that would have been provided in the US if the customers were qualified investors (which I don't believe they were) (and whose protections are downright silly). If UK law is similar, I guess it boils down to the supposed ambiguity of the terms (although as an investor, I don't find them to be ambiguous at all, they're just plain wrong!).

In closing from the lawyer:

"If marketing materials are negatively contradicted by the prospectus then the marketing materials are fraudulent and misrepresentative, no?

Misrepresentative, yes (accepting your definition of economic), and the marketing materials probably do in fact flout any number of laws against false advertising.
 
But fraudulent, no. The essence of fraud is to falsely induce someone by words or acts into doing something against his interests that he wouldn't have done but for the dishonesty. Courts consider the totality of the circumstances. So while you would undoubtedly tear the economic investment statement to shreds, you'd still be left with the many other statements from the prospectus that are true, and herein lies the problem.
 
The UK Fraud Act of 2006 is a criminal statute. So each element of the crime has to be proved beyond a reasonable doubt (or whatever the English equivalent burden of proof is). The first element of fraud by false representation under the Act is "dishonestly makes a false representation." The problem posed by the prospectus is that it would preclude a finding that DB acted dishonestly beyond a reasonable doubt. I mean, you've got one false (but arguably vague) statement vs. several clear-cut disclaimers that are accurate. The totality of the statements are perhaps half false and half true, but dishonest beyond a reasonable doubt? Fuhgetaboutit. DB played the game with all of its cards face up. Yeah, they contradicted each other, but they were damn sure visible to investors, who can claim they were misled only in a subjective (personal) sense, not in an objective way (which is how a judge would look at it).
 
Now, if--in addition to the mktg mat's and the prospectus--you've got some Goldman-like behavior where DB took out massive insurance policies on the investments it sold and concealed them from the buyer, it's a totally different story."

contradictory statements in Xetra-gold prospectus

DB

 

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