Angry German investors who helped fund the £600m purchase of London's landmark "Gherkin" tower are considering legal action against Deutsche Bank for poor investment advice.
Up to 10 private investors – individuals rather than institutions – in the Euroselect 14 fund, which owns half of the building at 30 St Mary Axe, have contacted the German law firm CLLB to advise them.
Their potential action would follow the success of another investor with a £65,000 stake in the same fund who won a judgment against Deutsche Bank in Germany's Wuppertal regional court last month.
The court ruled that the bank had not met its duty to the investor by failing to draw his attention in a 230 page prospectus to the fee it received for recommending the Euroselect 14 fund, which is managed by the German property company IVG.
A Deutsche Bank spokesman said: "We will confirm that there has been a decision from the court that the bank did not give the investor the right information at the right time about the kickback provision but this is an isolated case. Deutsche Bank will not appeal the decision."
In accepting the judgment the bank has agreed to repay the investor his full £65,000 investment with an additional small interest element.
Deutsche Bank is one of two distributing agents for the Gherkin fund beside Dresdner Bank, which was not named in the action.
Hendrik Bombosch, a lawyer at CLLB, which represented the investor, said: "Our client did not have all the facts before he signed the contract to buy into the Gherkin fund. For example, he did not even know there was a company in London called Evans Randall which owned part of the building [see box].
"But that was not the main issue. We listed a number of points in our case and the court said the deciding factor was the fact that Deutsche Bank had not told the investor what it was earning by recommending the fund as an investment. This is a big discussion point in Germany as there is potential for conflicts of interest."
Mr Bombosch said he was now working with between five and 10 investors in the Euroselect 14 fund which could lead to further court action.
However, the Wuppertal judgment does not act as a precedent for all investors. Anyone who takes such action would have to independently prove why and how they were not properly advised.
Mr Bombosch added that investors were unhappy because although the Gherkin – designed by Lord Foster – was almost fully let and was "getting all the rent it should", its value had declined because of the downturn in the London market. In February 2009, it was valued at £470m which led to a breach of the 67 per cent loan-to-value covenant on the senior debt.
"This devaluation and the loan-to-value covenant clause in the contract meant the banks could ask for more security. This meant the Euroselect 14 fund's dividend was suspended to preserve liquidity," he said. "Some investors do not understand why the banks can ask for more security. No dividends [at a targeted 5.5 per cent] are being paid and the private investors are not pleased."
Slicing through the stakes
Investment bank Evans Randall and Euroselect 14 bought the Gherkin in 2007 for £600m from Swiss Re, with £157.5m of equity and £396m of senior debt. Bayerische sold part of the senior debt to LBBW, Helaba, ING and Deka Bank. Real IS took a £30m stake and IVG loaned £52m to Evans Randall, which sold most of its stake to institutional investors, while Euroselect sold to retail investors. The site will be revalued in February and talks to restructure the senior debt will follow.Reuse content