Telekom Investors' Suit Starts 2nd Round
October 25, 2005
The second round of a landmark lawsuit against German telecommunications giant Deutsche Telekom is set to begin Tuesday, nearly one year after a preliminary hearing. Some 15,000 small investors divided into almost 2,200 groups are suing Deutsche Telekom for some 100 million euros ($119 million).
The focus of the suit is the shareholders' claim that Deutsch Telekom deliberately misled them about the valuation of its property portfolio in stock exchange prospectuses for two public share placements during the height of the Internet and dot-com boom in 1999 and 2000. At the end of the preliminary round of hearings last November, the small investors already booked a small victory when Judge Meinrad Wösthoff criticized the methods used to value Deutsche Telekom's vast real estate portfolio.
The judge hit out at the company for valuing a huge portfolio of real estate comprising 35,000 buildings and plots of land en bloc rather than individually as required by German law. The plaintiffs said the value of the properties was consistently overstated, inflating the book value of Deutsche Telekom itself, which in turn meant that investors paid a stiff premium for their shares.
"People's share" loses dramatically
Wösthoff said last year that the so-called "cluster" method of valuing property used by Deutsche Telekom did not correspond to the rules. But he cautioned that that did not automatically mean that the valuations themselves were wrong.
The Deutsche Telekom court case is legally and logistically without precedent in Germany. The 15,000 small shareholders are suing the company because they feel they paid too much for shares bought when the former state-owned monopoly was privatized in the 1990s.
It was only when Deutsche Telekom was forced to write down the value of its real estate holdings at the beginning of 2001 that shareholders became aware of the problem. Then investors quickly saw their savings go up in smoke as the news sent what Germany had once proudly dubbed the "people's share" into a long and precipitous slide on the stock market. Now, the pensioners and small-time savers who believed their hard-earned savings would be safe in Europe's biggest phone company want their money back.
Lots to blame in precedent setting case
The roughly 15,000 investors have instructed 750 lawyers to file 2,200 separate lawsuits for a total of around 100 million euros in compensation. No stone is being left unturned by the plaintiffs who are suing everyone involved in the privatization of Deutsche Telekom -- the company itself and its former chief Ron Sommer, the government, the state-owned privatization vehicle KfW bank, and even the underwriting banks, such as Deutsche Bank.
Investors also feel cheated that they were not fully informed about the risks connected with Deutsche Telekom's planned acquisition of US mobile phone operator VoiceStream barely a month after the third share offering in July 2000. In a takeover that many analysts called much too expensive, Deutsche Telekom paid more than $40 billion for VoiceStream, and it became another key factor behind the dizzying fall in the price of the German group's shares.
They lost almost 92 percent of their value, plunging from the giddy heights of a record 103.90 euros at the height of the Internet boom to an all-time low of 8.59 euros on June 26, 2002.
Judge Wösthoff said last November that those complaints were not justified. The court also said that Deutsche Telekom's former chief Ron Sommer could not be held responsible for the slide in the share price.