When Ullrich K. wanted the money he had invested more than ten years ago with wind project developer Prokon, it was “too late,” he laughs dryly. Now ten thousand euros are gone, about half of his stake. The company promised more than six percent interest for its participation certificates. “I even visited the head office once,” says Ullrich K., “and talked to the boss.” The pensioner is by no means alone – around 75,000 investors who lost a total of 640 million euros when the wind power operator went bankrupt in 2015 felt the same way.
The case takes place on the gray capital market, where such a loss is now the rule and not the exception: around 2018, when at least 54,000 investors lost 2.5 billion euros. That’s how much the container provider P&R earned with around one million containers, which, however, were fictitious. The company filed for bankruptcy, and investors were left with high losses. The case is considered the largest investor bankruptcy in German economic history.
Or in 2013, when around 240 million euros from 1,400 investors were lost due to the insolvency of the Frankfurt real estate group S&K. “I am quite sure that there will be more such bankruptcies. And so far there has been no reasonable protection for consumers,” said Stefan Loipfinger at a press conference of the Federal Association of Consumer Organizations (VZBV) on Wednesday. The former fund analyst will present the results of his report on the gray capital market.
But what is that anyway, the gray capital market? The financial products that are traded here are legal. However, there is no government supervision and they are only subject to a few laws. It stands between the white capital market, where financial products are traded by banks or insurance companies and supervised by the Federal Financial Supervisory Authority (Bafin). The other side is the black capital market. Financial products that are traded there are not permitted by the Bafin or are even prohibited.
Investors are attracted by promises of high returns
The offers on the gray capital market lure with high returns, but they are actually very risky. Consumers usually only finance empty company shells and do not invest in direct ownership of material assets. Despite this, they are marketed as such by the companies that offer them. They can be bought by banks, savings banks or financial investment brokers after a consultation.
So far, cases in which investors had lost a lot of money were only dealt with in individual cases. The coalition agreement already stipulates another procedure: “We will commission the Bafin to identify regulatory gaps in the gray capital market.” However, this is too vague for the consumer advice center. It demands that investments in the gray capital market be banned for consumers. “Scandals have a system on the gray capital market. That’s why we have to put an end to the legislative pettiness,” says Dorothea Mohn, an expert on financial markets at the VZBV. It is a mistake to continue advising consumers about such products – and then often wrong. Consumers have ten years to report false advice. But that is far too short, according to the consumer advice center, which calls for a period of 20 years.
Companies exploit the weaknesses of the law
“I wouldn’t be surprised if the models are designed in such a way that they can’t work,” says Mohn. According to the report, it appears that the companies intentionally want to make their business opaque. To do this, they build complicated corporate structures, explains balance sheet analyst and industry insider Kai Wilfrid Schröder. One GmbH for each financial product, another for administration and for each individual project. The company’s transactions are therefore more difficult to see through, they make the cash flows non-transparent. Private investors hardly have a chance to understand them. “It’s not illegal, but they’re exploiting the law’s weaknesses,” says Schröder. “That is far from the basic ethical understanding.” But you often see such structures on the gray capital market. Investors should therefore make sure that their money goes to the company that was promised to them when they made their investment, and demand global consolidated financial statements.
However, the report shows other dangers of the capital market. The equity ratio of companies is sometimes below 0.1 percent. Anyone who invests in such a company is liable themselves in the event of insolvency. At the same time, the return is limited. This creates more risks than opportunities for investors. And this is where another problem comes in: there is hardly any reliable information about the products. Consumers have so far relied on information sheets. They are mandatory and are approved by the Bafin.
However, the Bafin does not check whether the system is worth what it promises, whether the provider is serious and the information is correct in terms of content. In the event of insolvency, investors can prove false information in these sheets in court, but the report also shows that the responsibility for the prospectus is often given to an investment company. Those who are actually responsible are not liable. That too must be corrected.