Antonio Flores’ Blog

The collapse of the 4th biggest investment bank hit the headlines in a spectacular fashion and sent the world, Spain included, into financial turmoil. The figures were staggering, so big that it remains the largest bankruptcy filing in the U.S in history.

In Spain, the financial debacle has recently been revisited on occasion of the controversial appointment of a Lehman Brothers former director as the new Ministry of Economy. However, little is known about what happened with private investors of generally modest sums, who, through the advice of their branch managers, were beset by the collapse of Lehman Brothers.

An investor with a Professional Profile

The most notorious case was ventilated via the Marbella courts and was ruled against the claimant: UBS, the Swiss Bank, was not to blame for the loss of no less than €12 million, obtained through the sale of land, even though they had recommended the buyer to acquire the soon-to-be defunct stock, among others.

So what went wrong with this mega-rich land owner? The Marbella court found that:

• The investor had a professional profile, as opposed to a retail investor.
• UBS was not administering his funds nor providing advice, but was a mere intermediary.
• At all times, he had been properly informed to make a sound decision.

Well, sound was not to be!

A Savvy Investor Addicted to Email

This other case was mainly decided on the basis of substantial email correspondence between Bankinter and the investor, who happened to be partner at Accenture, a multinational management consulting, technology services and outsourcing company. Again, the courts ruled against the investor because:

• The offering made by the bank was specifically worded “sin capital garantizado” (principal not guaranteed).
• Lehman going bust fell between the probable and the possible, and thus was an associated risk.
• Emails containing words such as “I have substantial structured products with Telefonica”, “Iberdrola is not a stock share I am comfortable with” or “in this particular moment I would be inclined to go for a 3-year BBVA” are not consistent with that of a curious or rudimentary investor.
• The investor profile test (MiFID), which was not a mandatory requirement for the bank to carry out prior to 2007, was however covered by the 1993/612 Royal Decree, and such would have been substituted by actions the investor carried out throughout his business relationship with the defendant bank.

The Man on the Clapham Omnibus With Significant Financial Knowledge

Moving on from these spectacular losses into more mundane scenarios, we also have a ruling against the investor, an ordinary man that took out the Lehman Brothers stock in 2005 at a 7.5% annual yield, and claimed, shortly after the collapse, that he had not been properly advised. The Appeal Court found in favour of Credit Valencia, stating that:

• The investor had bought Lehman stock after selling Deutsche Bank Cap Trust, which would indicate he had significant prior financial knowledge.
• The investor was aware that he had been sold an investment fund product, and that not reading the paperwork he was given is dire recklessness that only he could be held responsible for.
• The bank had properly informed the client, pursuant to article 79 of the Stock Exchange Act (Ley Mercado de Valores), by providing clear, correct, concrete and precise information to avoid an incorrect interpretation.
• The bank had no means to anticipate, in 2005, of what could happen in 2008.

A Trusting Conservative Investor

Conversely, many other rulings favourable to the investor dispute the bank’s allegations that they had acted appropriately. In this one in particular, the Courts pounded Banco Espirito Santo by concluding that that:

• The investor always went with the advice of Banco Espirito Santo, on the basis of his conservative profile.
• In August 2007, when the investment was formalized, Lehman Brothers was already under question due to the advent of the subprime mortgage crisis, in the USA.
• The contracts were deceitful as they made reference to Telefonica, a company that, to the average Spanish investor, is close, reliable, stable and rarely volatile.
• The information provided in the contracts was obscure, insufficient and negligently worded in a manner that was only understandable to professionals belonging to the world of complex investments. Quoting Supreme Court precedent in respect to information that is to not fall foul of the mandatory obligations of transparency, clarity, concretion and simplicity: “It needs to fulfill the double requirement of legible, physically, and comprehensible, intellectually.”
• The bank manager and client had deep trust in each other, to the extent that the former visited the offices of the latter.
• According to the Spanish regulator CNMV, the “analysis of the contract indicates that the financial transaction lacked enough precise, clear and congruous information for the investor to be able to make an informed decision.”

8 Retail Investors Deemed Incapable of Making Informed Decisions on Financial Investments

In a further case instigated by 8 investors who lost everything through bad investment advice by Bankpyme, the Courts found that:

• The forensic expert witness dictated that the profile of all investors was that of a “retail investor”, in spite of which the bank chose to be incoherent with such reality by placing their money in high risk products, not adequate to their profile.
• As a result of the above and consequently their lack of comprehension, the investors could have never made an informed decision about the product.
• According to the Spanish regulator’s (CNMV) report, the whole process embodied a catalogue of bad financial practices for it dismissed crucial aspects such as the profiling of clients, information about the products, lack of diversification of investment (international standards in the matter dictate that no more than 10% of the basket, or clients global position, should go to high-risk complex investment products), lack of warning of loss should collapse occur, and lack of information on commissions charged by the bank.
• The bank sacrificed the clients’ interest in favour of higher commissions or margins.

The rulings analyzed (around 35) help conclude that, almost invariably, the investor profile is crucial for the Courts to decide one either direction. Alongside it, other determining factors are compliance with banking and investment regulations, the quality of the information supplied, the content of the contracts, events occurring prior, during and after exchange, the real intentions of the parties as shown during the negotiation process and whether the bank had one of two obligations: to provide investment advice or to provide information only (albeit correct, transparent and clear).

Antonio Flores Litigation Bankinter, Credit Valencia, Espirito Santo, financial miss selling in Spain, Lehman Brothers, MiFID, UBS