EN: The Czech Republic’s ’Alice in Wonderland’ legal System And the Case of the Former CS Funds

''Oh, my'' exclaimed Alice, ''my fund has been tunneled!''


The topsy-turvy, upside-down, inside-out, nature of the Czech Justice System, where: right is wrong, the guilty are rewarded, the innocent are punished, where time stands still, and you end at the start, can have no better illustration than with the current plight of investors in the former CS funds (CS fondy).

For 20 years, the 60,000 investors in these funds [OK, less those now dead] have been seeking compensation from the Czech State for in relation to one of the biggest frauds of the 1990's. The investors' claims are a consequence of the Financial Analytical Unit (FAU), then a department of the Czech Ministry of Finance (MoF), allowing KC1.2bn to be sent abroad despite being warned that the money had been stolen (''tunneled'') from the CS funds. The stolen money, after initially being 'frozen' by the MoF, was inexplicably 'unfrozen' and quickly transferred abroad. In a further twist, the MoF (at that time also the financial market supervisory body) delayed lodging a criminal complaint making it extremely difficult for the police to reclaim the money or apprehend the perpetrators. It was almost as if state officials were actually helping the fraudsters.

While the maladministration of the State is no longer in dispute, in true 'Alice in Wonderland' style, after inordinate delays, the Czech courts recently decided...wait for it... defrauded investors not only had to return compensation previously obtained but pay penalty interest on that compensation. Yes, reward the guilty and punish the victims! Not only was previously awarded compensation returned, with the penalty interest added, investors were left with nothing.

How was this perverse outcome possible?

Lack of a Fair Trial -

''Guilty! ...Oh, I'd better add some evidence''

Fifteen years from the outset of the legal case against the Ministry of Finance, with the State having failed to prove its innocence, a Court in Prague 6 declared that investors' compensation should be returned, with penalty interest, on the basis of an expired limitation period. This is the period of time within which claimants must file a legal action. The issue of Limitation Period had already been reviewed at the start of legal proceedings, and again in 2012, in favour of investors. But in Czech Wonderland's 'back-to-front' judicial process: Why not review it at the end...or better still after the end? Reviewing such a basic legal concept, at the end of proceedings, was itself unusual, but reviewing it years after compensation had already been paid is just incredible, possibly unprecedented. It's probably not unfair to claim it broke new legal ground...hurrah! Lawyers describe this as a lack of 'Good Manners' ... but there again, Wonderland was never famed for its manners, was it?

In a scene reminiscent of the trial described in Lewis Carrol's famous book, Alice in Wonderland, the presiding judge admitted all the evidence of the MoF with regard to the Statute of Limitations, but refused to admit any evidence from AKRO investiční společnost, a.s., who were representing investors. [Let's face it, conflicting evidence was only going to confuse the issue]. Without hearing the evidence, AKRO's evidence was declared: ''redundant!''

Not content with admitting just the evidence from the State [maybe even that wasn't enough!], in the written reasoning for the judgement, the judge added additional ''evidence'' not proposed by anyone. Quite literally, as in the Carrol's fictional trial of the Knave of Hearts, the verdict was given with evidence supporting the decision added later! 

Hehehe... Armed with right result, the compensation had to be returned to the State with (unbelievably) penalty interest added at 8.05% p.a. Of course, AKRO investiční společnost, a.s. could have avoided the risk of penalty interest completely if it had returned investors'compensation earlier (on the basis there might be a reason later), but returning the compensation would, under Czech case law, have forfeited investors' rights to any compensation. So in a case against Czech State, it's a no win situation. To be fair, it's taught a lesson to anyone who's considering getting compensation from Czech State! Undoubtedly, it will discourage others from trying a similar trick.

Adding a welcome layer of amateurishness and confusion, the judgement made no legal distinction between the assets and liabilities of the separate funds nor those of the investment company [bit of a laugh, I know!]. Let's face it, the legal nitty-gritty of who's actually suing who is such a bore! The fact the investment company was merely acting as an agent claiming compensation on behalf of some of the funds it manages was ignored. They were all jumbled together [as the Czech's like to say, into a bit of a goulash]; meaning investors in one fund stand to pay the liabilities of completely separate investors! This nonsense judgement, undermining the basis of the entire mutual fund industry, will have also undermined any chance of the Czech Republic being regarded as a serious financial centre: So nothing new there.

On appeal, the Municipal (Appeal) court did write that there could have been a 'procedural error', but it couldn't be taken into account by the Municipal Court. Why it couldn't, wasn't explained. The Appeal Court also found that the right to default interest arose from the law and did not find grounds for refusing that right. [That this formalistic approach to the law results in punishing the victims and rewarding the guilty doesn't appear to have been a consideration].

The Constitutional Court, for its part, barely addressed the issue of the fairness of proceedings [perhaps an unfamiliar concept!], but noted reassuringly: ''the previous courts have carefully considered the case and duly substantiated their conclusions.'' In a sense, the Constitutional Court is right, the State did substantiate the State's case after carefully considering just the State's evidence...with the judge sticking on a bit of extra evidence later for good measure. So what's all the fuss about?  

Deliberate Delays in Hearing the Case -

Where Time Stands Still

While the Czech Republic has a reputation for a legal system which moves at a glacial pace (something even the Czech President bemoans), with the former CS funds, the situation hit a new low. Multiple requests from AKRO to speed-up the case, in true topsy-turvy Wonderland style, led to the State not only purposefully and unjustifiably delaying the hearings but then rewarding itself for the delays with statutory interest at 8.05% p.a.! Perverse.

In a recent twist, Czech Television (CT) has also fallen foul of the Czech Courts over their coverage of the case in 2015. CT are appealing against the decision so I will not comment further. By way of background, however, the assets of a well-known and politically well-connected Czech businessman were allegedly frozen, by the Swiss authorities, following an attempted transfer of assets which flagged a Suspicious Transaction Report (STR). According to media reports, the Swiss authorities believed the money may have originated from the CS Fund fraud, but that the money eventually had to be unfrozen due to a lack of evidence. We are then left wondering: Was there a lack of evidence or rather a lack of co-operation from the Czech authorities?

Whatever the truth of that matter, it should be noted that a key institution for processing of STR's, whether received domestically or through international collaboration, is the Financial Analytical Unit (FAU). Yes, the same institution whose maladministration facilitated the original fraud! Therefore, the freezing and subsequent unfreezing of these assets, if they were indeed linked to the CS fund fraud, would in fact bring the story full circle: In true Wonderland style, the story would end where it began!

The case of the former CS funds has made a mockery of the Czech legal process. A (seemingly never ending) process that has failed not only investors in the former CS funds, the Czech capital market, but society as a whole. The importance of formalistic procedures has superseded core issues of right and wrong, innocence and guilt. The absurdity of the of the Czech 'Wonderland' system of [in]justice, with the State's blatantly unfair and perverse application of laws, never-ending process, and broken system of incentives, is apparent for all to see.

Alas, for the thousands of now elderly investors in the former CS fondy, the Czech 'Wonderland' system of injustice is no fantasy land but a hard reality. The last remaining chance of any kind of justice for these investors will now be at the European Court of Human Rights in Strasbourg.

Jeremy Monk

Investment Director

AKRO investiční společnost, a.s.

Email: Jeremy.monk@akro.cz

28th January, 2020

A fuller description of the case can be found at: https://www.praguepost.com/opinion/do-investors-in-the-former-cs-funds-hold-a-european-trump-card 

Further information can be found at: https://www.akro.cz/ and https://www.akro-blog.cz/

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