Bloomberg News

Eurohypo to Lose Second Profit Certificates Appeals Case

January 24, 2012

(Updates with ruling date 10th paragraph.)

Jan. 24 (Bloomberg) -- Commerzbank AG’s Eurohypo unit is likely to lose a second case over so-called profit certificates filed by a U.S. hedge fund, a judge said at a hearing today.

The Frankfurt appeals court will probably rule in favor of QVT Financial LP, which brought the case, Associate Judge Klaus Maier said in a preliminary assessment. QVT won in a lower court over certificates originally issued by Hypothekenbank in Essen AG and is also likely to win on those issued by Rheinische Hypothekenbank AG, Maier said.

Commerzbank acquired Eurohypo in 2007 and agreed to cover any losses by its unit under the terms of a so-called profit- transfer and domination accord. After being bailed out following the financial crisis, Commerzbank stopped the payments in 2009.

“Profit certificate owners in these circumstances need at least as much protection as shareholders,” said Maier. “They may even need more because they have no influence on contracts changing corporate structure, which shareholders get to vote on.”

Commerzbank last week said it would be able to raise more capital than necessary to fill a 5.3 billion-euro ($6.9 billion) shortfall identified by the European Banking Authority. Commerzbank is trying to sell Eurohypo by the end of 2014 as a condition for its rescue by the German state following the collapse of Lehman Brothers Holdings Inc.

Profit-Transfer and Domination

Because the 2007 profit-transfer and domination accord between Commerzbank and Eurohypo didn’t address profit certificate owners, the court must add rules the parties would have agreed on in good faith, had they considered it, Maier said. Those rules would require Eurohypo to pay, he said.

Eurohypo attorney Manfred Hechtl argued the certificate owners profited from the fact that Commerzbank took over Eurohypo. Had Eurohypo remained on its own, it would have suffered from the sovereign debt crisis, leaving investors with losses, he said.

QVT attorney Josef Broich rejected the argument, saying it turned the situation upside down.

“The real fortune hunter here is Commerzbank,” Broich said, adding that by illegally withholding payments on the securities, the lender pushed their trading price down and at the same time took advantage by buying them back cheaply.

The court scheduled a ruling for Feb. 7.

The same court had already ruled against Eurohypo on Dec. 13 in a related appeals case brought by private-equity firm Crown Ocean Capital Ltd. Judge Maier said today that the chamber allowed the lender to appeal the rulings to Germany’s top civil court because of the importance of the matter.

Profit certificates are securities that entitle the holder to a portion of a company’s profits without giving them any ownership interest. Commerzbank had a 2009 loss of about 4.5 billion euros, with Eurohypo’s deficit totaling 902 million euros.

Today’s case is OLG Frankfurt am Main, 5 U 92/11.

--Editors: Anthony Aarons, Peter Chapman

To contact the reporters on this story: Karin Matussek in Frankfurt via

To contact the editor responsible for this story: Anthony Aarons in London at

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