The German Federal Court of Justice (Bundesgerichtshof) (BGH) has ruled that an investor's ignorance of errors in his or her investment consultant's advice, or of the advice itself being wrong, cannot be considered to be based on gross negligence just because the investor has failed to read through the prospectus and thereby to check his investment consultant's advice and information for accuracy (decision dated 8 July 2010 – III ZR 249/09).

The defendant in the case had been an investment consultant to the claimant. Following an advice from the defendant, the claimant invested a considerable share of his fortune in a closed-end property fund. The fund developed badly and within six years the claimant lost approximately two thirds of his investment and sued the defendant for compensation.

While the case was not so much about whether or not the defendant had inadequately advised the claimant, the ensuing law suit focused on the question of whether or not the claimant, by reading the prospectus, should have found out about the inadequacy before the investment, and if his omission to read the prospectus was grossly negligent.

This issue became important because if the claimant should have read the prospectus before the investment and consequently was ignorant of the defendant's inadequate advice because of his own gross negligence, the compensation claim would have been time barred at the time the law suit was initiated.

If, however, the claimant only learned of the advice's inadequacy by monitoring the development of the investment fund, and if this delay was not his fault (that is, no consequence of gross negligence or purpose on the claimant's side), time limitation would only start at the time that the claimant actually learnt of the inadequacy, leading to the claim being valid at the time of the law suit.

The BGH argued that a person could only be found to be grossly negligently having ignored information if the information literally forced itself on the person and if he had omitted to use easily available information sources. The omission had to represent what the court described as a severe "violation of duties against himself".

Against that standard the court found that merely trusting the investment adviser's advice instead of checking that advice by reading the prospectus did not represent such a grossly negligent omission. The court argued that prospectuses were often hard to read and to understand. Many investors therefore turned to trusting "their" investment advisers instead, counting on their professional experience and knowledge. Consequently, an investor who did not check the advice received from the investment adviser acted according to the special trust relationship with the adviser and the omission to read the prospectus did not in itself represent gross negligence.

In another decision delivered a few days later (decision dated 22 July 2010 – III ZR 203/09) the court added that even if an investor has found out about certain aspects of the investment adviser's advice being inaccurate, he still is under no obligation to read the prospectus to find out whether or not the investment advice was been otherwise accurate, and there is no gross negligence on the investor's part for not doing so.