Fresh protest against Bank of Valletta over Lehman perpetuals

Specifically, the claimants say they advised by the bank to place their savings in ‘junior subordinated bonds’ and perpetuals – whose debt usually is paid after other senior debts are paid should the company be closed, as happened in the Lehman crash in 2008 when housing prices crashed in the United States.

The claimants say BOV failed to explain the risks of the perpetual securities, instead having described them in purchase contracts as “straight bonds”.

On the other hand, BOV is being accused of having assured its own shareholders that it had invested in “senior non-subordinated securities” of Lehman – the implication by Finco being that it applied more care in its own Lehman investment, while advising other investors to take up riskier products: “A standard of care falling far short of the bonus paterfamilias requirements of any person acting as fiduciary as indeed the respondent bank was in relation to the claimants.”

Finco says it was natural that BOV should have warned investors of the worsening credit risk of the Lehman Group when it suffered massive losses in the sub-prime market in 2007 and debts started accumulating at an alarming 30 times the level of shareholders’ equity; and when Lehman’s share price was falling dramatically.

“For example, by May 2008, Lehman’s share price had fallen by about 73% from the share price as of the 1 January 2008… BOV should have committed itself to do in favour of the investors, taken the necessary steps and corrective action in order to avoid, or at least to reduce, the claimants’ financial losses, which losses in fact were incurred to an extent that the entire capital invested was lost.”

The claimants also accuse BOV of having procured in a fraudulent manner their signatures to “Execute-Only Instructions” – meaning that they could chose products without any specific advice and allow the bank’s officers to manage these investments – when they did not have the knowledge and experience to be able to identify and select such specialised investments, and were “unaware of the meaning and implications of the ‘execute only Instructions’ they were unknowingly made to sign.”

Finco also argues in the protest that the description of the perpetuals as straight bonds is “both erroneous as well as misleading” because the securities are different from conventional bonds, being mostly non-redeemable, non-cumulative, non-participating, non-voting preference shares.

This means that bondholders get a fixed divided, however if payments are missed they do not accrue – the money is lost.

As happened in the Lehman crash, these bonds were ranked behind all other creditors. In the case of the Royal Bank of Scotland perpetuals, the annual divided was cancelled.

Finco says BOV failed to explain to the complainants that the perpetuals could be converted to ordinary shares without investors being able to oppose the conversion; and that the securities had no maturity date, having a high risk of depreciation due to the high interest rate exposure.

The claimants have also said they are mainly pensioners with no financial background, most of them having an elementary level of formal education, having invested their life savings and relied on the advice of BOV’s specialised wealth management services.

The total list of junior subordinated and perpetual securities includes those issued by Barclays, Erste, HBOS, Lehman Bros, Lloyds Bank, Royal Bank of Scotland and Svensk Export Kredit.

Matthew Vella, a freelance journalist at MaltaToday, was formerly executive editor at Malt...

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Anthony Haidon •

We are really living in a special country, nowhere in the world would an authority allow the people who have caused all this trouble to remain at the helm. Is there any person in this country who is man enough (or woman) to resign and face the music? Mentioning again the Valletta Fund, where were the directors during the impeding disaster who looked admirably well after their interest and seemed to have forgotten that the fund did not consist of their money only but it also belonged to hundreds of other people?

Jon Sciberras •

@bhahen: You must be joking or incredibly naive. Ever heard of the National Bank of Malta saga. 38 years later, its still in court. Now imagine that !

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" frequently describing these securities in the Purchase Contract Notes issued by the Bank as “STRAIGHT BONDS”, which description is both erroneous as well as misleading." Definition of fraud...... " A false representation of a matter of fact—whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed—that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury. " If I am right, fraud is a crime in Malta. Where is the MFSA, the PN and the PL ? Where are our elected representatives ? Do they condone such behaviour ?

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My father, an elderly man in his 90's, was one of the bank's clients who was advised to invest in Lehmans. He was never advised of the high risk involved and he took the bank's word that they were a safe investment. When he went to the bank to enquire about his investment after the bank collapsed, he was told ' Imagine you had a brand new car and that you crashed it and it was a write off - that is what happened to your investment' He told them that at least he would have been insured for a car crash! It is obvious that whoever was responsible for suggesting investments to clients did not have their interest at heart and staff were only interested in promoting investments which the bank wanted to push. As for MFSA, it is about time they stop making excuses and start doing the neccessary work to protect clients and ensure that justice is done!

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As a gullible and at the time totally trusting BOV client, I was advised to sell other investments in order to invest in some of the 'Perpetuals' mentioned -these include Lehman 'Straight Bonds'. As a result I have lost most of my capital and all the income which was meant to suppliment my pension. BOV, in refusing to rectify this matter and admit it is at fault, is fast losing its credibility and people's trust. It's all very bad for the Bank's image and shareholders should be up in arms against the Board and BOV's top management.The problem won't coveniently go away - they can be sure. What is the MFSA waiting for? It's time it performs its function using its clout to impose its decisions on the Bank. There is more than enough proof that the clients were misled and misinformed. After all, the Authority does have the power to grant or to withdraw a bank's Investment Banking Licence and we, the much aggrieved victims, are owed its protection.In other countries the relative financial authorities made sure the matter was settled expeditiously and satisfactorily long ago.

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L-importanti id-divorzju biss, Andre Camilleri? fejna il-kuxjenza tieghek issa?

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Bank of Valletta and more importantly, MFSA should be ashamed of themselves! MFSA should be regulating financial institutions like BOV in order to ensure that they do not rip off people. What are the hundreds of well-paid employees at MFSA up to? are they on a perpetual holiday? Wake up MFSA!! do your job!