German politicians are vowing tougher laws to protect investors following the collapse of a wind farm company that exposed investors to potential losses of €1.4 billion.
Chancellor Angela Merkel said Thursday that the government will strengthen securities rules after Prokon Regenerative Energien GmbH firm filed for insolvency potentially leaving losses for about 70,000 private investors.
Ms. Merkel has campaigned ardently for tighter regulation of global markets since the 2008 financial crisis. But the collapse of Prokon shines a light on weaknesses in securities rules closer to home.
Prokon, which operates 50 wind parks in Germany and Poland, had for years enticed retail investors with ‘profit-sharing certificates’ that promised a minimum annual return of 6%. The company’s investor prospectus warned that the value of the certificates could decline. But Prokon’s marketing materials also claimed that the securities were safer than putting money in the bank, thanks to the German Renewables Energy Law which guarantees minimum levels of payment for all electricity generated from renewable sources.
From around 2006 until the first half of last year, investors received payments equivalent to around 8% a year. But that stopped abruptly in late 2013. In December, Prokon asked investors to forgo their returns for the second half of last year to ease what it called a temporary liquidity crunch. The company continued to sell the profit-sharing certificates, but redemptions also began to tick sharply up. Doubts about the sustainability of Prokon’s business model spread after the company failed to publish full financial statements for 2011 and 2012. Selected financials published by the company showed a drop in profitability, with a key biofuels division reporting operating losses.
Earlier this month, Prokon warned holders of the certificates that it would file for insolvency unless investors representing 95% of the €1.4 billion outstanding certificates accepted a restructuring of interest and redemption terms by Jan. 20. The company filed a preliminary insolvency request with a German court Wednesday.
Prokon Chief Executive Carsten Rodbertus has repeatedly claimed the company has been victimized by a financial press under the influence of the banking system that his funding model expressly tried to avoid. At a news conference Thursday, he said that he had made mistakes, notably in funding long-term assets overwhelmingly with the certificates, which can be called at less than two months’ notice.
Some investors were unimpressed. “We were all lied to and betrayed,” said Hubert Hoefler on Prokon’s Facebook page. Mr. Hoefler claims to have invested €20,000 from an inheritance in the certificates.
Justice Minister Heiko Maas, from the center-left Social Democrats, said Prokon’s failure showed “that there is a need for more regulation of the gray capital market”.
Ms. Merkel said that Germany’s Finance and Justice ministries will “make proposals” to strengthen investor protection in reaction to the Prokon case.
Only last year, Germany implemented the EU’s Alternative Investment Fund Management Directive with a law called the Kapitalanlagegesetzbuch. This greatly expands the rights and duties of Germany’s main financial regulator BaFin to supervise ‘alternative’ investment products such as the securities offered by Prokon.
However, Manfred Lorenz, head of capital markets in Germany for the law firm Baker & McKenzie, said that this won’t necessarily prevent a repeat of the problems at Prokon because the wind farm company wouldn’t fall under the definition of an alternative investment fund.
—Harriet Torry and Andreas Kissler contributed to this article
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