German Federal Court of Justice confirms tort liability of foreign broker for taking part in business model violating public policy of domestic broker of forward options | Practical Law

German Federal Court of Justice confirms tort liability of foreign broker for taking part in business model violating public policy of domestic broker of forward options | Practical Law

This article is part of the PLC Global Finance April 2010 e-mail update for Germany.

German Federal Court of Justice confirms tort liability of foreign broker for taking part in business model violating public policy of domestic broker of forward options

by Reinhard Bunjes, Simmons & Simmons
Published on 04 May 2010 • Germany
This article is part of the PLC Global Finance April 2010 e-mail update for Germany.
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The German Federal Court of Justice (Bundesgerichtshof) (BGH) has asserted a tort claim brought by a German investor against a New Jersey brokerage firm for compensation of losses from investments in options at US exchanges that had been arranged by a German broker. The BGH found that the New Jersey broker had frivolously allowed the German broker to use its services to sell the German broker's forward transactions that had not offered any reasonable prospect of success to the investor because of their fee structure (decision dated 9 March 2010 – XI ZR 93/09).
In 2003, the claimant had mandated the German broker to perform exchange-traded contracts for future delivery. The German broker's fee structure provided for extensive fees and profit participation, leaving virtually no room for earnings of the customer. After the claimant had transferred an investment of EUR6,000 to her account with the German broker, the German broker ordered numerous transactions by entering the orders and the respective brokerage in an online platform provided by the New Jersey broker where the transactions were performed fully automatically without any supervision by the New Jersey broker.
After the business relationship between the claimant and the German broker had ended, the claimant only received a payment of EUR205.01.
The BGH has ruled that the German broker had acted against public policy and that the New Jersey broker was liable for the damage caused based on its participation in the violation. The German broker's actions were deemed an intentional violation of public policy because they had not offered any chances for earnings from the outset. The court found that the New Jersey broker had not examined the German broker's business model but had provided him with access to its fully automated online system without any control measures and with the understanding that he would be able to use the system as he pleased.
The BGH has further held that the German broker's business model was aimed at exploiting the greediness and carelessness of uninformed and gullible investors, and that the New Jersey broker had participated in this model despite its business experience and its awareness of the high risk for misuse of forward option transactions by allowing the German broker to use its automatic online system to access the New York exchange without any supervision.
The court argued that the New Jersey broker had at least intentionally taken the chance of the German broker inducing its customers to enter into transactions involving exchange-traded contracts for future delivery that did not offer any chance for earnings from the outset. The court concluded from this behaviour that the New Jersey broker had taken into account that the customer might suffer damage. Because the New Jersey broker had intentionally ignored the pressing potential of a violation of public policy and ensuing damage to the German broker's customers, the court found it liable for the damage caused.