Wheels of Misfortune Discontent Over Deutsche Bank's Dubious Fund Advice
Deutsche Bank is coming under pressure to explain why it advised its clients to buy shares in a Ferris wheel fund and then deemed the project too risky to invest in itself. So far no wheels have been built and many small investors have lost their money.
Peter Schmidt, a retiree in Berlin, was skeptical from the beginning. What reason did he have to get involved with Ferris wheels, he wondered. His retort to his financial advisor was, "I'm not with the circus or the carnival." But the expert at Deutsche Bank described the investment opportunity in glowing terms, talking, at least as Schmidt remembers it, of double-digit yields and of enormous observation wheels like the London Eye, an attraction that has drawn hordes of visitors in the British capital since 2000.
Eventually, Schmidt was won over and bought shares worth 15,000 ($18,800) in a Ferris wheel fund called Global View. He believed then, in November 2006, that after all Deutsche Bank was endorsing the investment, and he had trusted the bank in financial matters for decades.
Schmidt now knows that the bank's recommendation wasn't sound advice. Global View, promoted as a "highly attractive investment," has largely squandered 208 million, without building even a single one of the Ferris wheels planned for Beijing, Florida and Berlin. Berlin's public prosecutors office has developed an interest in the fund, investigating whether those who initiated the much vaunted investment misappropriated investors' money. They deny the accusation. And it remains to be seen whether Schmidt will ever get his money back.
For Deutsche Bank, though, the Ferris wheel project turned out to be very good business. The Frankfurt-based bank earned 19.2 million through Global View thanks to its client advisors, who drew in 160 million from the bank's customers within the space of 10 weeks, primarily from German small investors like Schmidt. The bank itself, however, never invested in the fund. Global View used the bank Delbrück Bethmann Maffei (DBM) instead. Deutsche Bank preferred not to invest its own money in the project, for example through loans. Even when that money was badly needed, the bank declined on the basis of a "market risk" that couldn't "be assessed and covered by the bank."
The uproar over the failed investment plan raised questions again that have been debated around the world since the onset of the financial crisis and the Lehman Brothers' bankruptcy: to what degree a bank shares responsibility for investments it recommends to its clients. Does Deutsche Bank bear a share of the accountability for a project that it first pitched to its clients, then later internally determined to be too high risk? That evaluation can be found in the correspondence between Deutsche Bank, DBM and the project's initiators, which offers insight into dubious business practices on the part of Germany's largest bank. The letters and e-mails raise suspicions that Deutsche Bank not only insisted on unusually high commission rates that were meant to be concealed from investors, but even doubted the project's chance of success.
From the beginning, the bank calculated using an "equity commission of 12 percent." The sales brochure was only supposed to show 10 percent, which called for a creative solution. One Deutsche Bank employee suggested in writing that the excess commission simply "no longer be shown in the brochure" -- in other words, the additional margin should be hidden from investors. The DBM bankers in charge of the deal agreed, but didn't want to pay out the additional 2 percent to Deutsche Bank until the construction of the Ferris wheels was contractually assured.
First Stumbling Blocks
That request was in vain. An e-mail from an employee at Deutsche Bank's Asset Finance & Leasing Department pointed out that both parties had "agreed on an increased commission" to be paid out early in the process -- following closure of the fund, meaning in March 2007.
The first stumbling blocks in realizing the project cropped up in summer 2009 and newspapers reported "financial difficulties." But small investor Peter Schmidt says his financial advisor assured him everything was "headed in the right direction" and that his bank endorsed the investment.
Not long after, by the time funding for the Beijing Ferris wheel fell through, the project had already used up 208 million worth of investment capital in property purchases, banking fees and dubious project development costs, some of which were routed through offshore companies in the Caribbean. In its hour of greatest need, DBM tried to win over Deutsche Bank as a lender for the Berlin Ferris wheel, but the bank's response was cool. Bank loans would "not be possible until completion and generation of revenue to repay principal," reads a letter dated December 10, 2009.
DBM won't comment on these transactions, nor will a spokesperson for Deutsche Bank comment on any possible conversations about loans or investment. The spokesperson refuted the accusation of inflated commissions. "We received 10 percent for procuring capital, as stated in the brochure," he asserts, adding that a "subsidiary company received a further 2 percent of the assets acquired by Deutsche Bank" for consulting services.
The Ferris wheels themselves will probably never be built. DBM considers only the Berlin project still feasible, if a strong investor can be found. Meanwhile, the bank has bought up most of its investors' shares -- for 60 percent of their original value.
Peter Schmidt didn't accept that offer. Along with 300 others, he plans to sue the fund and, if need be, Deutsche Bank as well.