Financial Services Litigation Update

Simone Peek & Casper Rooijakkers
11 dec 2018

This update highlights some recent decisions from the Dutch courts relating to the financial services sector which we think are worth sharing. Contact us if you have any questions or find out more about bureau Brandeis’ Financial Services Litigation here.

AFM fines both company and director and major shareholder. No double jeopardy.
Where a company breaches the Dutch Financial Supervision Act (Wet op het financieel toezicht, “Wft”), the financial regulators in the Netherlands can also impose a fine on a natural person involved for having actual control of (feitelijk leidinggeven aan) the prohibited conduct of such company.

The highest administrative court in the Netherlands confirms that this is also possible if such person happens to be both the director and major shareholder of the company. In these circumstances the regulator is to verify whether it is proportionate that the two fines effectively punish the same natural person twofold.

In this case, the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, “AFM”) fines a company EUR 10,000 for offering investment services (verlenen van beleggingsdiensten) without a license. In addition, its director and major shareholder is fined EUR 200,000 for having actual control of the prohibited conduct.

The director and major shareholder challenges the proportionality of the fine. He also argues that the fine is to be reduced given his financial capacity. Both arguments however are unsuccessful. The two fines are considered proportionate because the fine for the company has already been reduced to EUR 10,000. The director also fails to prove that he has insufficient ability to pay his personal fine of EUR 200,000. Both fines are therefore upheld.

The full decision can be read here in Dutch: CBb, 7 augustus 2018, ECLI:NL:CBB:2018:413.

AFM is to include restrictions in cooperation charge as to use of requested information.
The AFM sends a regulatory information request (inlichtingenvordering) to a company outside the Netherlands in order to determine whether it is offering consumer credit or providing intermediary services on the Dutch market without the required license.

When the AFM does not receive a reaction to two separate requests, it imposes a cooperation charge subject to a penalty (last onder dwangsom). The alleged credit offeror does not provide any information in response to this cooperation charge. According to the AFM the company incurs the penalty payment as a result.

On appeal the company successfully argues that when the AFM is requesting information within control of the company (wilsafhankelijke informatie) by means of a cooperation charge, the AFM can only do so with the explicit restriction that any information within control of the company shall only be used for supervisory purpose and shall not be used for imposing any administrative fines or criminal charges.

Since the cooperation charge in question did not include a restriction on the use of the requested information, the Trade and Industry Appeals Tribunal (College van Beroep voor het bedrijfsleven, “CBb”) annuls it.

The full decision can be read here in Dutch: CBb, 4 september 2018, ECLI:NL:CBB:2018:444.

Custodian, depository and administrator not found liable for Ponzi-scheme damages.
A fund manager managing three off-shore funds appoints a securities trader as sub-investment manager with the power to invest all assets of the three funds. The fund manager also appoints a financial enterprise as its custodian, depository and administrator. In addition, it requires the custodian to appoint the sub-investment manager as sub-custodian.

The sub-investment manager turns out to be deploying a world wide Ponzi-scheme and goes bankrupt when this is discovered. As a consequence, the three funds also go bankrupt.

Investors in the three funds set up a claim foundation and commence legal proceedings against the financial enterprise that acted as custodian, depository and administrator, arguing that the financial enterprise (i) acted in breach of regulatory obligations regarding outsourcing and protection of investor funds, (ii) breached a duty of care towards the investors, (iii) committed a wrongful act (onrechtmatige daad) against the investors and (iv) issued misleading information.

The court disregards the assertions and rejects the investors’ claims. According to the court, there is no proof that the custodian knew or should have known that the sub-investment manager never actually invested the money from the funds and was essentially running a Ponzi-scheme. At the time, the financial enterprise also had no reason to suspect the fraud. Moreover the court considers that the custodian did not choose to appoint the fraudulent sub-custodian but was required to do so by the fund manager.

The full judgment can be read here in Dutch:
Rb. Amsterdam 22 maart 2017, ECLI:NL:RBAMS:2017:10601.

Both bank and customer have duty of care towards one another. Access to bank account.
While a company is under investigation of the public prosecutor due to suspicions of money laundering and drug trafficking, the police carry out a raid at its offices and seize its bank accounts. As a consequence, the bank terminates its relationship with the company. The company does not accept the termination and commences interim relief proceedings against the bank.

Between May 2017 and January 2018, parties go to court four times. The company states that in the given circumstances it cannot open a bank account with another bank. It therefore argues that its interest in access to a bank account must weigh heavier than the bank’s interest to terminate the relationship due to potential reputational and AML risks. The court finds that the bank was allowed to terminate the relationship because the company had not taken sufficient compliance measures. This has made it impossible for the bank to comply with requirements of the Dutch Anti Money Laundering Act (Wet ter voorkoming van witwassen en financiering van terrorisme, “Wwft”).

However, new facts come to light and the company starts new interim relief proceedings in order to re-open its bank accounts. And with success.

Given the changed circumstances (i.e. the public prosecutor dropped the investigation and the company took serious measures to strengthen its compliance and reduce AML-risks) the court now rules that the bank should allow access to the bank accounts again. In this latest decision the court emphasizes that both parties have a duty of care (zorgplicht) towards one another, and the fact that the company took serious measures to reduce AML risks shows that it has fulfilled this duty towards the bank.

The full judgment can be read here in Dutch:
Rb. Amsterdam 2 november 2018, ECLI:NL:RBAMS:2018:7931.

Decision to place payment service provider under administration can be published.
The Dutch Central Bank (De Nederlandsche Bank, “DNB”) decides to appoint an administrator (curator) at a payment service provider (betaaldienstverlener, “PSP”) for not complying with the Dutch Financial Supervision Act (Wft), the Dutch Anti Money Laundering Act (Wwft) and the Sanctions Act 1977 (Sanctiewet 1977). DNB also decides to publish this decision, since it is in principle obligated to publish administrative sanctions (bestuurlijke sancties) pursuant to section 1:97 Wft.

The PSP commences interim relief proceedings in an attempt to prevent publication. It argues, among other things, that (i) being placed under administration is not an administrative sanction that is to be published pursuant to section 1:97 Wft and (ii) PSD1, which is implemented in the Wft, does not provide a specific ground for publishing these types of sanctions (i.e. being placed under administration). The PSP’s arguments do not succeed.

Even though the appointment of an administrator in principle has an internal effect and does not necessarily have to be disclosed, the interim relief judge considers the appointment of an administrator at the PSP an administrative sanction within the meaning of section 1:97 Wft that can be made public.

The judge also holds that, although PSD1 does not provide a specific possibility for publishing these types of sanctions, publication is possible under the Wft. PSD1 gives Member States the liberty to enforce the directive in a manner they deem fit, as long as the enforcement measures are effective, proportionate and dissuasive. According to the interim relief judge, this is the case with publishing the decision to place the PSP under administration.

The full decision can be read here in Dutch:
Rb. Rotterdam 18 juli 2018, ECLI:NL:RBROT:2018:8284.

Bank may have certain duty of care vis-à-vis professional third-party investors.
It is settled case law of the Dutch Supreme Court (Hoge Raad, “HR”) that under circumstances banks have a special duty of care not only vis-à-vis its clients but given their social function also vis-à-vis non-expert third parties. The Amsterdam Court of Appeal now rules that banks, to some extent, also have a duty of care towards third parties that are acting in a professional capacity.

The Court of Appeal considers that, although professional parties are expected to be able to make their own investment decisions and ask for advice when needed, a bank may have a duty of care towards third parties acting in a professional capacity when it discovers irregularities on accounts held with the bank. When determining the scope of the bank’s duty of care, the fact that parties are acting in a professional capacity can be taken into account.

In this case, a client of the bank has embezzled money from investors using a main account at the bank. The investors have been invited to deposit money to sub accounts that would be invested via the main account.

The Court of Appeal considers that the irregularities on the accounts in question became known to the bank. It also considers that the bank identified representatives of the investors in person at a local bank office in Brussel when they opened the sub accounts and that it was aware of the investors’ co-signing rights on the sub accounts. The fact that the bank nevertheless has failed to inform the investors when it closed the main account and all sub accounts, is considered a breach of its duty of care towards these third party investors.

Although the bank successfully argued that it could not disclose that it was investigating potential fraud of its client, also given the general prohibition from disclosing (tipping-off) reports of suspicious transactions (ongebruikelijke transacties), it should have neutrally informed the investors that the sub accounts were closed, says the Court of Appeal.

The full judgment can be read here in Dutch:
Hof Den Haag 25 september 2018, ECLI:NL:GHDHA:2018:2417.

December 2018.

Simone Peek & Casper Rooijakkers