Facts

Parties and procedural history:

The proceedings concern the appeals of the Office of the Attorney General of the Canton of Zurich against Y. (managing director and shareholder of A. GmbH) and X. (employed as a telephone salesperson at A. GmbH) on the grounds of the accusation of qualified breach of fiduciary duty (Art. 158 para. 3 SCC) and complicity therein. The accusations were confirmed by the District Court of Bülach in the first instance, while the Higher Court of the Canton of Zurich acquitted both defendants. The Zurich Office of the Attorney General challenged this decision with appeals in criminal matters.

Factual background:

Y. served as managing director and shareholder of A. GmbH from 29 August 2002 to 3 July 2007, which, among other activities, offered investment advisory and asset management services to clients. X. was responsible for acquiring and servicing clients as a telephone salesperson. A. GmbH managed the assets deposited by clients with C. Trading Corporation (a US brokerage firm) and conducted futures transactions on its behalf and at its risk via an online trading platform provided by C. Y., as the sole competent managing director and trader, made independent decisions regarding the number of contracts and the conclusion of legal transactions.

Private claimant Z. was acquired as a client in September 2006 and transferred USD 50,000.- to an account with C. on 29 September 2006. He authorised A. GmbH to trade futures at its own discretion with the deposited funds. Subsequently, he made additional payments totalling USD 179,520.- to secure his investment. Y. engaged in intensive futures trading with the entire assets (USD 229,520.- plus a credit of USD 5,000.-). Within 34 of 54 possible trading days, transaction costs (commissions and exchange fees) amounted to a total of USD 169,900.18. The commissions totalled USD 161,557.-, of which USD 136,600.- flowed back to A. GmbH. X. received a commission of USD 10.- for each contract traded.

During the trading period from 3 October to 20 December 2006, the average net assets of the private claimant were turned over 54 times. At the end, of the total deposited assets of approximately USD 230,000.-, only USD 459.52 remained. The claimant’s assets were practically completely depleted by transaction costs and trading losses.

Accusations:

  • Y. is accused of having deceived the private claimant regarding the frequency of trading transactions and the amount of commissions and retrocessions, thereby breaching his fiduciary and duty of care obligations.
  • X. is accused of having assisted in the duty-violating trading activity by persuading the private claimant to make additional payments.

Considerations

Legal classification of breach of fiduciary duty (Art. 158 SCC):

The offence of breach of fiduciary duty requires that the offender, based on the law, an official mandate CO a legal transaction, is entrusted with managing CO supervising the management of another’s assets and, in breach of their duties, causes CO allows the other party to suffer a loss to their assets. A managing director within the meaning of Art. 158 SCC is someone who, in an actually CO formally independent and responsible position, is responsible for a substantial asset portfolio in the interest of another. The offence requires proof of financial loss, which may already exist if the assets are endangered to such an extent that their economic value is diminished. There must be a causal link between the breach of fiduciary duty and the financial loss. Subjectively, intent is required, with recklessness being sufficient. The qualified offence additionally requires the intent of unlawful enrichment.

Churning as a form of breach of fiduciary duty:

“Churning” (excessive trading) refers to the frequent reallocation of an account contrary to the client’s interests without economic justification, by which the asset manager CO broker generates commissions, fees CO other charges. The objective element of churning is the existence of excessive trading activity CO disproportionately frequent reallocation of the investment account. An indication of excessive trading activity is a particularly high number of transactions within a short period. Churning violates the agent’s duty to safeguard the principal’s interests and fulfils the offence of breach of fiduciary duty if the other party suffers a loss to their assets as a result.

Application to the present case:

In the present case, Y., as managing director of A. GmbH, managed the private claimant’s assets and engaged in excessive trading activity. Within less than three months, the average net assets of…