Judge Criticizes Telekom in First Hearing

A German court hit out at German telecommunications giant Deutsche Telekom, criticizing the methods used to value the group's vast real estate portfolio in a landmark lawsuit that began in Frankfurt on Tuesday.

During the first day of hearings, Judge Meinrad Wösthoff rapped Deutsche Telekom's over the knuckles for valuing a huge portfolio of real estate comprising 35,000 buildings and plots of land as a whole rather than individually as required by German law.

Shareholders are suing the company, claiming Deutsche Telekom deliberately misled them about the valuation of its property portfolio in stock exchange prospectuses for two public share placements in 1999 and 2000.

They 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.

Judge issues cautions

The so-called "cluster" method of valuing property used by Deutsche Telekom "did not correspond to the rules," Wösthoff stated. But he immediately 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. About 15,000 small shareholders are suing the mighty telecoms giant 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.

And investors very quickly saw their savings go up in smoke as the news sent what once 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.

And the roughly 15,000 investors have instructed 750 lawyers to file 2,200 separate lawsuits for a total of around €100 million euros ($130 million) in compensation.

The plaintiffs 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.

Share price plummeted after VoiceStream deal

Deutsche Telekom paid more than $40 billion for VoiceStream, a price seen as too high by many analysts, and 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 at the height of the Internet boom to an all-time low of €8.59 on June 26, 2002.

Judge Wösthoff said those complaints were not justified and added that former CEO Sommer could not be held responsible for the slide in the share price.

Case could possibly take years

Because it is not possible to file class-action suits in Germany, the court must decide on each case individually. To make his task easier, Wösthoff is hear to just 10 cases which will then serve as a basis for his rulings for the rest.

The next hearing was convened for June 21, 2005, giving both plaintiffs and defendants time to prepare their cases in such a complex matter, the judge said.