Hedge Fund Scandal Undermines Investor Confidence in Germany

Paul Das

21 March 2005

Investor confidence in hedge funds in Germany has been undermined by the recent closure by the regulators of Phoenix Kapitaldienst, a Frankfurt-based derivatives brokerage. The German financial regulator BaFin asked the courts to begin insolvency proceedings against the brokerage because the firm is unable to repay investors. Up to 30,000 investors are likely to be affected by the scandal, according to reports in the German media. The Compensatory Fund of Securities Trading Companies, or EdW, has asked investors to submit claims for compensation. Prosecutors in Frankfurt said they are probing allegations that a Phoenix employee faked the existence of about €700 million ($934 million) in assets. Financial regulator BaFin asked the courts to begin insolvency proceedings against the brokerage because the firm is unable to repay investors. Investors can claim 90 per cent of their investments back, or up to a maximum of €20,000 euros, EdW said. EdW has 760 securities trading companies assigned to it by BaFin. It can raise additional fees and may seek loans if compensation payments exceed the money available, EdW said.