ponzi sentence

Retribution for the risk-averse

  • Why it matters

    Why it matters

    A case against two managers convicted of a Ponzi scheme gripped Germans who are famously averse to financial risk and is likely to make them even more cautious.

  • Facts

    Facts

    • The founders of the real estate investment company S&K have been sentenced to eight and a half years in prison for embezzling millions of euros from unsuspecting German investors.
    • Of the more than €5 trillion, or $5.4 trillion, in personal household wealth in Germany, some 40 percent of it is parked in ordinary checking accounts or low-interest savings deposits.
    • The convictions were just the “tip of the iceberg,” according to one prosecutor, who said more than 100 other people were also under investigation for playing a role in the elaborate Ponzi scheme.
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    Audio

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Urteil im S&K-Prozess
Real estate agents' Ponzi scheme led to the dock. Source: DPA

As he handed down a guilty verdict against four Germans involved in a Ponzi scheme that had defrauded investors out of millions of euros, the relief on Judge Alexander El Duwaik’s face was obvious.

His decision to sentence 37-year-old Stephan Schäfer and 35-year-old Jonas Köller, the founders of the real estate firm S&K, to eight and a half years in prison for embezzlement came after more than 110 days of hearings that had spanned a year and a half.

The case had gripped Germany ever since authorities raided a handful of firms tied to Mr. Schäfer and Mr. Köller back in 2013, and it had finally come to an end. Mr. El Duwaik said the case had also occupied his mind in his free time.

“Whenever I see a Lamborghini, I have to think of the defendants,” Mr. El Duwaik said. “And you wouldn’t believe how many cars in Frankfurt have license plates with the letters SK or JS.”

Lamborghinis weren’t the only ostentatious display of wealth pursued by S&K’s founders while they were scamming investors out of nearly €100 million ($108 million). Photos of expensive watches, sumptuous houses and extravagant parties had been made public four years ago, shortly before the raids.

According to the original indictment, nearly 11,000 people had been duped into handing over more than €240 million to S&K, which they did under assurances that the money would be returned to them – with 12-percent returns. By the time the final verdict was handed down, however, prosecutors had narrowed their focus to €96 million they said represented the only “criminally relevant damage.” Just how much money the investors will be able to recover from civil proceedings remains unclear.

S&K is yet another case that shows – in a fairly spectacular way – just how inept Germans are when it comes to investing their money. It’s simply not something most people here do. Germany is a nation of savers.

Of the €5.48 trillion that the Bundesbank says represents the entire financial wealth of private households in Germany, two-fifths is parked in standard checking accounts or in low-interest savings deposits.

According to the Deutsches Aktieninstitut, an association representing listed companies, only one in seven Germans over the age of 14 had any money invested in equities or equity funds in 2016.

Prosecutors suspect that many more people had a hand in defrauding S&K's investors. After all, the company shrouded its misdeeds through a complex network made up of 150 entities.

Yet in a country known for its aversion to risk, each year €20-30 million is still lost on the “gray” capital market due to fraud or poor advice. Closed-end funds, such as the kind S&K had offered its investors, currently hold some €100 million, according to estimates.

“Gray” refers to the section of capital markets that are weakly regulated and scrutinized less closely than conventional stock exchanges.

Before they created the Ponzi scheme that ultimately landed them in jail, Mr. Schäfer and Mr. Köller had run a business that was “not wanting,” Mr. El Duwaik said appreciatively.

They started out acquiring real estate at foreclosure auctions and reselling them. Soon, their business became more complex. With the help of the Hamburg-based investment fund United Investors, they created closed-end funds that were also aimed at real estate trading and promised double-digit yields. When these funds ran into trouble, they took over funds from Midas, DCM and SHB, redirecting any money and mortgages into S&K. They also redirected money for private use.

The verdict against Mr. Schäfer and Mr. Köller could have been much more extensive. The original indictment contained 3,150 pages, of which 1,700 had to be read aloud to the court. Initially, the prosecutor’s office had intended to lay many more charges at the defendants’ feet.

The S&K founders stood accused of serious fraud, and other business sectors were mentioned as well, including the purchase of claims from life insurance companies. All of these other accusations were dropped, however, as part of agreements between the prosecution and the defense. Prosecutors said if those agreements had not been reached, the case would have otherwise dragged on for several more years.

In anticipation of a lesser punishment, the defendants made a number of confessions. Mr. Schäfer, for example, admitted that “impatience and recklessness” had driven him to inflict harm on many people. Mr. Köller described S&K’s business model as “rotten” and himself as “dumb and greedy.” Both said they regretted their actions and apologized to the investors they had cheated.

Some investors have been able to recover some of the money they invested in S&K, though many have resigned themselves to the fact that they probably won’t ever see it again. In an unpleasant twist of fate, some of the people who have been able to recover their money were asked to return it – so that an insolvency administrator for two of S&K’s funds could redistribute the money evenly among the victims.

Meanwhile, the S&K drama continues. A man identified only as Daniel F., a former external controller for an S&K-affiliated investment company, retracted a statement he had made during negotiations with the court. Proceedings against him are still ongoing. Another accused, Hauke B., was sentenced last December to five years and three months imprisonment. On Wednesday, Judge El Duwaik also sentenced Marc-Christian S. to six years for fraud and Thomas G. to four and a half years for being an accomplice to fraud.

Prosecutors suspect that many more people had a hand in defrauding S&K’s investors. After all, the company shrouded its misdeeds through a complex network made up of 150 entities.

“They weren’t alone,” Mr. El Duwaik said, referring to the five antagonists who have been sentenced and the one who is still in court. “Notaries, lawyers, auditors, experts, fund managers and other soldiers of fortune were involved too.”

Soon the next S&K-related trial could be put before the Frankfurt district court. Handelsblatt has learned that the prosecutor’s office last year levied charges against a man suspected of having been a further accomplice to the fraud. Additional charges could follow. In total, investigations have been opened against 112 people, according to chief prosecutor Noah Krüger.

The court proceedings of the last year and a half, Mr. Krüger said, were only the “tip of the iceberg.”

Gertrud Hussla, Katharina Schneider and Susanna Schier write about finance for Handelsblatt. To contact the authors: hussla@handelsblatt.com, kschneider@handelsblatt.com, hussla@handelsblatt.com 

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