Ex-Hypo Real Estate chief Georg Funke faces criminal charges

The former chief executive of German property lender Hypo Real Estate (HRE) is facing criminal charges of false financial reporting, six years after the near-collapse of the bank's Dublin subsidiary, Depfa.

State prosecutors confirmed yesterday they had concluded their investigation into the bank's ex-CEO Georg Funke. The final decision whether to proceed with a trial once charges are filed rests with Munich regional court.

The near-collapse and nationalisation of HRE/Depfa was the largest bank rescue in German history, with a price tag of €140 billion and counting.

After years of speculation over a criminal case, Munich prosecutors have reportedly dropped several charges against Mr Funke, such as embezzlement of bank funds, because of reported difficulty in proving the claims. If found guilty on the remaining charges, Mr Funke could face a maximum three-year sentence. However, Munich legal analysts suggested yesterday that a guilty verdict would probably result in a fine.

Denies all charges

Mr Funke denies any wrongdoing and will seek an acquittal if the investigation goes to trial, his lawyer

Wolfgang Kreuzer

said. “We’ve already succeeded in having the major part of the case dropped,” he said. “We will also succeed in getting an acquittal on the rest,” he added.

A spokesman for the state prosecutor in Munich refused to comment on the case but confirmed that the investigation had concluded against Mr Funke and seven other former board members. German prosecutors have accused Mr Funke and the board of underplaying HRE/Depfa exposure to the financial crisis.

After the 2008 collapse of Lehman Brothers, causing short-term liquidity to dry up, the Dublin-based Depfa struggled to refinance around €5 billion in long-term loans and turned to HRE, which acquired the IFSC-based bank in 2007.

Facing collapse, HRE in turn sought emergency assistance from other German banks and the federal government in Berlin, comprising €10 billion in capital and guarantees that have swelled to over €140 billion and counting.

A criminal case against Mr Funke, if opened, would be the second case involving HRE/ Depfa before Munich courts.

Some 100 former shareholders have brought a test compensation test case in a civil suit against HRE and its new owner, in effect the German state. They are seeking €1.1 billion in damages, claiming Mr Funke and HRE executives acted recklessly in proceeding with the 2007 Depfa takeover and later withheld existential problems when they came to light.

Cancelled appearance

Mr Funke was expected to testify in the civil case in February but cancelled his appearance at the last minute, citing the risk of criminal charges still hanging over him.

If the criminal case is heard, he will be obliged to testify.

In the civil case, lawyers for shareholders, squeezed out by the state during the HRE nationalisation, claim the Depfa purchase was a “death sentence” for the Munich group.

But former HRE executives have denied that Depfa was a “ticking time bomb” for the Munich lender.

The prospect of a criminal case against Mr Funke is the latest in a series of court actions against executives of German banks that struggled in the financial crisis. However, two previous cases against public banks – HSH Nordbank and LBBW – ended without convictions.

In May, HRE cancelled its planned sale of Depfa after the German government, its effective owner, decided instead to wind down the Dublin-based lender over 20 years.

The European Commission had demanded HRE dispose of Depfa as a condition for state aid it received, but Berlin's last-minute U-turn prompted the resignation of HRE chief executive Manuela Better.