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Thursday, 25 October 2012

New trend in The Netherlands: Trusted third parties show vulnerability when ‘nearly deceased’ financial institutions play for keeps

In the United States damage claims for millions (or even billions) of dollars and class action law suits against companies and private persons are common practice. In The Netherlands, however, damage claims above €1 mln, as a consequence of unlawful acts by companies and private persons are extremely rare.

The Netherlands has a non-jury administration of justice and civil cases can last for many years when both parties maintain their case until the bitter end (i.e. The Court of Justice of the EU or the Supreme Court in The Netherlands). For private citizens these kinds of cases prove almost always too expensive, as Dutch lawyers seldomly (i.e. never) work on a ‘no cure, no pay’ basis and few people can afford a lawyer’s bill of hundreds of thousands of Euro’s when winning a case is still uncertain.

In most legal cases between companies, the damage claim amount is almost never the true motivation for maintaining such a case: in The Netherlands it is the victory that counts, hardly the money. Only in extremely important cases between equally strong parties, where millions of euro’s are at stake with victory or defeat at the civil court, the battles are fought to the end.

If you keep this in mind, there were two very peculiar news messages in the media this Tuesday, October 23, 2012.

The first article in Het Financieele Dagblad ( was written about KPMG, the official auditor of  building cooperative ‘gone wild’ Vestia,  that suffered monstrous losses on its kamikaze investment of €23 bln in interest rate swaps.

According to the FD, KPMG, one of the Big Four auditors in the world (along with PwC, Deloitte and Ernst&Young), only wanted to approve Vestia's Annual Account for 2011, if Vestia abandoned its right to start a legal claim against KPMG-auditor Marco Noorlander, through a so-called Legal Safeguarding Clause. No clause, no approval of the annual account. Here are the pertinent snips from this explosive story:

Auditor KPMG demands an official promise from building cooperative Vestia, that it will not start a legal damage claim against KPMG auditor Marco Noorlander. Without this promise, KPMG refuses to approve the Annual account for 2011.  

This is stated by various sources close to the discussion. These sources are flabbergasted about this connection.

The current officials of the liquidity-strapped building cooperative Vestia consider starting a claim against KPMG, due to the fact that the auditor unjustly provided its approval on the annual account for 2010. KPMG withdrew this approval itself at the end of April 2012. Supposedly, because the auditor ‘doubted if all derivative transactions had been processed correctly in the 2010 annual account’. 

At the beginning of this year Vestia came in acute financial trouble, due to a staggering €23 bln derivative portfolio.

Already two cases have been started against KPMG auditor Marco Noorlander at the Auditor’s Chamber [a special auditor’s court for disciplinary jurisdiction, based on the Law for Disciplinary Jurisdication for Auditors (i.e. Wtra in Dutch) - EL]. One is started by Pieter Lakeman, an (in)famous lawyer and chairman of the Foundation for Investigation of Company Information (SOBI); the other by the Dutch Authority Financial Markets (AFM).

Although KPMG, the official auditor of Vestia since May 2010, categorically denies to have demanded the legal safeguarding clause as a condition for its approval of Vestia Annual Account 2011, sources close to the matter state differently: ‘the legal safeguarding clause is subject of speech in combination with Annual Account 2011’.

If KPMG has indeed demanded this legal safeguarding clause as a condition for the approval of Vestia Annual Account 2011, this is not a sign of self-confidence, to say the least.

To put it in other, more direct words: this would be an (il)legal, unethical kind of blackmail operation against a customer that is in desperate need of this annual account to just merely survive. If these proceedings at KPMG could be proven beyond reasonable doubt at the Auditor's Chamber or in the national financial press, it would be another knock-out blow against a financial services business that already has received blow-after-blow during the last decade.

Since Arthur Andersen had to close down its auditing operation in the aftermath of the Enron business cataclysm, several nasty cases against the Big Four have been brought to the surface already: in The Netherlands as well as abroad. At this moment, you could state that the auditing industry suffers from an enormous credibility gap and this Vestia/KPMG case doesn’t help at all.

I personally expect the Vestia case to end in a nasty trench war between Vestia and its tenants versus Vestia’s former officials, the banks who sold Vestia the derivatives (DB, BNP Paribas, Barclays and ABN Amro), KPMG and perhaps some other trusted third parties. This whole Vestia case might last as long as ten years to fully unfold and will probably be fought at the criminal as well as civil courts in The Netherlands. The final decision (whatever it might be) will probably send shockwaves through the Dutch legal society.

The second article has also been printed in Het Financieele Dagblad: the curator of Palm Invest, an investment fund seemingly set up with clear fraudulent intentions, has started a summary proceedings in the court of law against ABN Amro.

Palm Invest, an investment fund with the purpose of investing in Commercial Real Estate on the so-called Palm Islands in Dubai, had been started in 2006 by two rogue entrepreneurs.

The fund, with an investment threshold of €50,000 (just above the AFM threshold), had collected €30 mln in investments from wealthy, but naive investors, lured by promises of 9+% annual yields. 

Instead of investing all money in Dubai property, the founders spent no less than €26 mln on expensive cars (the usual Ferrari’s and Lamborghini’s), hotels, yachts and vintage watches, leaving just a ‘token’ €4 mln for the purchase of Dubai property. When the investors found out that Palm Invest had been a fraudulent hoax and their money was gone, a tumultuous hunt for the suspects followed: one of the suspects, together with an uninvolved business partner, had even been kidnapped by a group of fellow ‘business men’ who wanted to extort him.

The whole Palm Invest business blew skyhigh and now a curator is very busy trying to return as much of the original investments as possible. This is where ABN Amro comes in, according to yesterday’s article in FD:

The curator of defaulted investment fund Palm Invest demands, through a summary proceedings, documentation from the state bank. ABN Amro was the house banker of the dishonest investment fund.

The curator demands, among others, the starting contracts that ABN Amro had entered into with the founders of Palm Invest.  He also demands inspection of the customer file for Palm Invest and the due diligence investigation that ABN Amro would have performed into Palm Invest in 2007. ABN Amro refuses, without further explanation.

According to the last curator report, 397 bond-holders and 11 business creditors have a claim on Palm Invest to the tune of  €31,740,825. The curator earlier held ABN Amro liable and responsible for the damage done by the Ponzi fund.

The curator takes the view that ABN Amro violated its due diligence obligation. The ‘very peculiar’ money flow of Palm Invest (according to the curator), has unjustifiably remained unnoticed by the bank. After the bank concluded in a secret internal investigation in 2007 that ‘irregularities had been found’, it took another three months before the banking relation with Palm Invest had been dismantled. The curator demands the paper trail of this internal investigation.

Again a trusted third party – in this case a bank – fulfills an undesired role in a civil / criminal case that could lead to large legal and financial repercusions. Although the maximum amount of €31 mln in financial damage from Palm Invest can be considered ‘peanuts’ for the state bank, the consequences of this case could be grave.

This case could start or reinforce jurisprudence that takes customer research, like a due diligence investigation, to a much higher level and it could cause massive overdue maintenance operations on the customer bases of all banks in The Netherlands.

Besides that, regular readers from this blog know that ABN Amro is one of the four banks involved in the Vestia case that is currently under criminal investigation. Yet another ‘scandal’ could prove an enormous setback for this  tormented bank that is so much longing for an IPO (Initial Public Offering), in order to diminish the state involvement in the bank.

Summarized, the time that auditors and bankers were all considered to be ‘honorable men and women’ in The Netherlands, seems over foregood. Banks and auditors seem to have lost a substantial part of their credit (as in credibility) and this does not only lead to loss of trust by their customers and relations, but it can also lead to legal repercussions of the very nasty kind.

Let the banks and auditors be warned, when nearly deceased financial institutions play for keeps.

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