Defrauded CS Fund Investors: Constitutional rights upheld in theory but not in practice

Investors in the former CS Funds, and regular followers of our website (www.akro.cz), will have seen that AKRO, on behalf of these investors, in July 2020 lodged a complaint to the Constitutional Court. In this blog, we briefly outline the background to this complaint.

In the "tunneling" of three former C. S. funds in March 1997, as a result of which the funds lost an amount exceeding CZK 1.2 billion (EUR 44m), the notary JUDr. Roman Hochman played a key role. In violation of the law, he wrote a notarial deed, which allowed the perpetrators to dispose of the funds' accounts and thus transfer the money on them abroad, where they eventually disappeared irretrievably. The investment company AKRO, which took over the management of the stolen funds in 1997, then began to recover damages from the Ministry of Justice of the Czech Republic, precisely because of the state's liability for flagrant breach of duty by the notary Roman Hochman.

Finally, after almost 20 years of court proceedings, in May 2020 the Supreme Court ruled that the Czech Republic was not responsible for the failure of the notary Hochman in connection with the "tunneling" of C. S. funds. The Supreme Court justified its decision in a remarkable way, concluding that according to the then (i.e. in March 1997) effective Act No. 58/1969 Coll. the state was solely responsible for the maladministration of state notaries. However, as of 1 January 1993, it was abolished and replaced by a system of notary offices and notaries, which, however, were not covered by this Act. The Supreme Court has acknowledged that while the State is generally liable for maladministration by its institutions under Article 36 § 3 of the Charter of Fundamental Rights and Freedoms, damages caused by maladministration by those authorities can only be claimed under paragraph 4 of this provision. In view of the absence of such implementing legislation at the material time (March 1997), the State was held not liable for the notary's mistake and cannot provide any compensation. According to the Supreme Court, the investment company should have demanded damages directly from the notary. The question of the enforceability of this compensation with regard to its amount (in excess of CZK 1.2bn) was declared irrelevant by the court.

The investment company AKRO has challenged this decision by filing a complaint before the Constitutional Court the outcome of which has not yet been decided.

Among the arguments put forward by AKRO, on behalf of the defrauded investors, is that the state cannot rule out its liability for the actions of subjects upon which it has to some extent delegated the exercise of the state's authority (i.e. typically a notary). Furthermore, it is unacceptable for the state to achieve this by means of a formalistic reference to the absence of necessary legislation.