Bank of Valletta faced fresh claims for compensation yesterday from 40 investors who said the bank had led them to believe they were investing safely when they were instead putting their money into high-risk securities which performed disastrously or failed.
Highly complex, hybrid products gave little protection in case of financial trouble
The investors, who described themselves as largely made up of a group of pensioners and small investors who put their life savings into the venture, filed a judicial protest in which they called on BOV to come “forward for the liquidation of damages and payment” or face further legal action. The claim is independent of the La Vallette property fund debacle, which earlier this year cost the bank a settlement worth €55 million.
The bank responded shortly after the protest was filed with a statement pointing out that it had already privately told the investors it was willing to meet and discuss their complaints, even though it rebutted their “unsubstantiated allegations”. The statement said BOV would now study the contents of the judicial letter and file a reply in due course.
The claims of the investors centre around what are known as junior and perpetual securities. The investors claimed the bank “erroneously” and “misleadingly” termed these securities as “Straight Bonds” in the Purchase Contract Notes, pointing out that these investments were instead “highly complex, hybrid” financial products which gave little protection to those who owned them in case of financial trouble.
The securities, the investors’ lawyers pointed out, were subordinated to all other secured and unsecured creditors of the issuing company which meant that the investors who owned them came towards the bottom of the list of people owed money in the case of collapse.
Moreover, in the case of securities in Lehman Brothers – the US investment bank that collapsed in 2008 triggering the global financial crisis – the investors claimed that while the bank recommended investment in “deeply subordinated” perpetual securities, BOV was careful to invest only in “low risk securities”.
The investors also accused BOV’s financial management arm of failing to alert them about the deteriorating performance of their investments.
“It is, therefore, only natural to expect that the respondent Bank of Valletta ought to have realised that during 2007 and 2008 there were increasingly manifest indicators of the worsening credit risk of default of the Lehman Group.”
In this connection, they pointed out, there was knowledge as far back as 2007 that the Lehman Group had suffered massive losses in the subprime market through its subsidiary BNC Morgages.
The bank, in this case, should have taken the necessary corrective action to avoid or at least reduce the claimants’ financial losses. In the case of those who invested in the Lehman Brothers securities, the whole capital was lost, according to the judicial protest.
Throughout the judicial letter, the investors stressed the fact that the bank had sold a financial product intended for experienced investors to retail clients with little or no financial knowledge – some of them with little more than secondary education.
Lawyers Ian Refalo, Roderick Zammit Pace, José Herrera and Veronique Dalli represented the claimants.