Just a few years ago, the Haffa Brothers were high-flying, glamorous symbols of Germany's flourishing New Economy. Together, Thomas Hoffa and his younger brother Florian founded EM.TV, a company listed on the Neuer Markt that gained international clout after purchasing the rights to productions like "The Muppet Show," "Sesame Street," and Formula One car racing. The pair were eagerly photographed by business and celebrity magazines alike.

But these days, they're the subject of less desirable attention: They're being tried in a Munich criminal court for defrauding shareholders. The extent of their fall has been apparent in their trial during the past week, where the once celebrated men have been booed by courtroom observers.

A freefall not even "The Muppets" could stop

During the new economy boom years, EM.TV was a darling of the Neuer Markt, which was seen as Germany's answer to the NASDAQ. But as the fortunes of EM.TV and other firms began to dry up, so did those of the Neuer Markt, which closed down in September. EM.TV shares have fallen from a high of 110 euros ($111) in 2002 to less than a euro today.

Munich's public prosecutor has accused former chief executive Thomas and brother Florian, who served as EM.TV's chief financial officer, of cooking the books and making falsely optimistic statements in order to shore up the company's sagging share price. The executives are also accused of concealing millions in losses while continuing to paint a rosy picture of the company.

In 2000, Thomas Haffa promised shareholders a year-end profit of more than 600 million marks ($310 million). In the end, the company posted a 2.8 billion mark loss. Now, Haffa has become the first manager of a Neuer Markt company to face charges in court for falsifying a revenue report and deceiving shareholders.

Public Prosecutor Peter Noll alleges that the Haffas knowingly issued false half-year results in 2000, "incorrectly interpreting or veiling" the company's true financial position. In presenting his case, Noll has quoted Florian Haffa directly: "We stand firmly behind our forecasts. Business is doing great."

"We presented condition to best of our knowledge"

Thomas Haffa has denied all of the allegations directed at him and his brother. The two "presented the condition of the company to the best of their knowledge," he has said. Forecasting results can be difficult in the tricky world of licensing, he said, where revenues are depended on large deals that do not always happen on a continuous basis. "With a single large contract, we could have still achieved our forecast," he told the court.

The fallen pair's greatest defender, so far, has been defense witness Leo Kirch, a fallen media icon himself. Thomas Haffa was once a protege to Kirch and the two continued to do business together after Haffa set off on his own with EM.TV. Kirch's testimony on Monday supported Haffa's denial of one charge brought by prosecutors: that the company booked revenues from a 60 million mark deal with Kirch during the first half of the year, even though the signed contract was not executed until autumn. Kirch told the court he had verbally agreed to the deal in mid-June 2000, and that he considered it to be a "fully executed verbal contract."

In earlier testimony, the Haffa's defense attorney, Frankfurt Professor Rainer Hamm, told the court that a number of the erroneous bookings attributed to EM.TV executives were the result of EM.TV's complex changeover to international accounting standards.

Test case

The Haffas' trial is the first in a series of trials against high-flying managers who were once stood to represent the opportunities offered by the Neuer Markt. Next up on the dock is former Comroad CEO Bodo Schnabel, who faces charges in Munich for falsifying 98 percent his company's revenues. Recently, police investigators arrested the head of the defunct German film company Kinowelt at his villa south of Munich. Michael Kölmel is accused of committing fraud and violating German insolvency law.

EM.TV has now become a symbol for the bankruptcies and scandals that led to the Neuer Markt's untimely demise. "For that reason, EM.TV has become a precedent case," says attorney Daniela Bergdolt, who is also head of the Bavarian office of the German shareholder's association (DSW). "It's the first time leading executives of a publicly traded company have been taken to court for providing false information to shareholders." In Germany, stock market crime is a fairly unexplored new terrain for the courts.

The Haffa case is being overseen by Huberta Knöringer, the respected chief judge who recently convicted former tennis champion Boris Becker on tax evasion charges. At the start of the current trial, Knöringer announced that the Haffas could face up to five years jail time in addition to fines if they are convicted under a recently passed German securities law. Approved in July, the law requires proof that a stock price actually moved as a result of manipulation. Previously, it was enough for prosecutors to demonstrate the intent to do so.

A criminal act or a peccadillo?

But the Haffa's believe they have a strong defense. Defense attorney Hamm has said a fine is only theoretically possible in the case, because the Federal Finance Ministry, which oversees Germany's markets, has failed to deliver the evidence required by law. Hamm also said he had "serious doubts" about the constitutionality of the case. Convictions are also rendered extraordinarily difficult under the law.

There, even the Haffas' detractors find agreement. Attorney Bergdolt has criticized the existing laws, saying they don't go far enough to protect shareholders. She says shareholders in Germany feel uncertain about their protections given the number of cases that have been overruled by the courts. The improvements contained in the so-called "Fourth Financial Markets Promotion Act" are only a small first step in the right direction.

In the opinion of the shareholder association's Bergdolt, the burden of proof in such cases should lie with the accused, and chief executives of corporations should be held liable for fraudulent financial reporting.

Whatever the conclusion is in the end, the one thing most agree on is that it will be a long, drawn-out trial. The Munich courtroom has been booked for the case through January.