OLG Hamm recognizes claims for damages in favor of investors in the ‘Dubai 1000 Hotel Fund’
On November 8, 2011, the Higher Regional Court (OLG) of Hamm issued landmark decisions in several related legal disputes in favor of investors in the so-called ‘Dubai 1000 Hotel Fund.’ The judgments (Case Nos. I-8 U 51/11, I-8 U 55/11, I-8 U 71/11, I-8 U 72/11) address the question under what circumstances investors may claim damages if they participated in a closed-end fund based on inadequate or misleading information. The court’s assessment also addresses fundamental legal questions about investment advice and prospectus liability.
Background on the fund structure and sales process
The ‘Dubai 1000 Hotel Fund’ was designed as a closed-end real estate fund, aiming to generate returns for participating investors through investments in hotel properties. During the initiation and placement of the fund, numerous investors were approached and prompted to subscribe by sales organizations. The key factor in the investors’ decision-making process was regularly the information provided through prospectuses, sales discussions, and accompanying documents.
According to the court records, several investors felt disadvantaged in their decision because they claimed to have been insufficiently or incorrectly informed about the risks, the functioning, and the economic prospects of the investment. At the core of the legal dispute was the question of whether the initiators or the companies involved in the sales process had breached their duties of disclosure and advice.
Key findings of the OLG Hamm
Deficiencies in disclosure and advice
The OLG Hamm explained in detail that providing the investor with accurate and complete information about all essential aspects associated with the investment is a fundamental part of investor-appropriate advice. In the view of the court, significant risks associated with the investment were not sufficiently explained in the prospectus and in advisory discussions. This particularly concerned the risk of total loss, the limited marketability of fund units, and the fact that distributions could not be guaranteed.
According to the court’s findings, investors were either not informed at all or not to the necessary extent about these circumstances, making an informed and responsible investment decision difficult or impossible. The breach of disclosure obligations thus gives rise to liability of the responsible parties for damages.
Prospectus liability and responsibility
Another focus of the OLG’s decisions is the examination of so-called prospectus liability. The judges explicitly emphasized that the prospectus, as the central information medium, must provide all essential information clearly, comprehensibly, and truthfully. If risks are downplayed, opportunities are overemphasized, or important facts are concealed, this constitutes a prospectus error, which may engage the liability of the initiators and, where applicable, those responsible for the prospectus.
In the present case, the OLG Hamm found that the sales prospectus did not meet the requirements for proper risk disclosure and was incomplete or misleading in several respects. Considering all the circumstances, the court also denied that the so-called presumption of causality had been rebutted by later clarifying advice or other factors.
Significant consequences for damages
As a result of the established breaches of duty, affected investors are entitled to the rescission of their fund participation. In principle, the claim for compensation aims to put the investor in the position they would have been in had the investment never been made (‘differential hypothesis’). The corresponding claims for damages can, however, be met with objections and deductions by the defendants — for example, due to distributions received or tax benefits.
Implications for investors and capital market law
Significance of the decision for similar investment products
The case law of the OLG Hamm makes it clear that the highest standards of transparency and completeness of information must be applied to the structuring, distribution, and advice regarding closed-end fund investments. Both initiators and distribution partners are required to fully and accurately inform potential investors about the opportunities and risks associated with each investment. These principles apply without exception to investments in foreign real estate projects or other, especially illiquid, fund structures.
Duties of care in investment advice and the preparation of prospectuses
The decisions further serve as a reminder that errors in prospectus preparation and advisory documentation can have far-reaching liability consequences. For investors, recent case law increases the possibilities to assert claims for damages for inadequate risk disclosure. Companies that develop or distribute comparable products must be aware of their increased duties of care and information.
Further proceedings and presumption of innocence
It should be noted that it cannot be ruled out that further legal remedies were lodged against the judgments or that individual proceedings were continued. If the legal disputes have not yet been fully resolved, the presumption of innocence applies to all parties involved. A final clarification of outstanding issues is therefore reserved for the further court proceedings.
Source: Judgment of the OLG Hamm of November 8, 2011, Case Nos. I-8 U 51/11, I-8 U 55/11, I-8 U 71/11, I-8 U 72/11 (<a href="https://urteile.news/OLG-HammI-8-U-5111-I-8-U-5511-I-8-U-7111-I-8-U-7211OLG-Hamm-Anlegern-des-Dubai-1000-Hotel-Fonds-steht-Schadensersatz-zu~N12523″>see here)
Contact for legal queries
For those who have similar questions regarding their duty to provide information, liability, or the assertion of claims in connection with complex capital market products or closed-end funds, the lawyers at MTR Legal Rechtsanwälte are available as contacts. With extensive experience in capital market, commercial, and corporate law, MTR Legal advises companies, investors, and high-net-worth individuals on all legal challenges relating to structured financial products.
