Thursday, 30 April 2009

Banks in the firing line for misleading investors

In the wake of the credit crunch a number of banks are in the firing line as investors allege that they were misled concerning the purchase of particular financial instruments or the true state of the bank's financial situation.

A class-action lawsuit was launched against the Royal Bank of Scotland (RBS) in the US earlier this year based on allegations that the bank misled investors by failing to disclose the damage caused by debt securities on its balance sheet, as well as the damage caused by the acquisition of ABN-AMRO, and its inadequate capital buffer to safeguard it against subprime losses.

RBS, which is now majority owned by UK taxpayers, suffered the biggest loss (in excess of £24 billion) in corporate history back in February, has been a high profile victim of the subprime meltdown. But it is not the only bank in the firing line over misleading investors.

Italian police are also reported to have seized $630 million worth of assets belonging to Deutsche Bank, UBS, Depfa Bank and JP Morgan as part of an investigation into an alleged fraud against Milan's city authority.

The alleged fraud dates back to 2005 when Milan's city authority was sold derivatives contracts linked to a bond issue. According to the allegations the banks failed to adequately inform the authority of the risks linked to the derivatives and "falsely claimed" the authority would save money.

Losses for the authority are estimated to be in the region of €300 million , although it could be more. The banks however pocketed more than €100 million in" illicit profits", according to the allegations.

It will be interesting to see if the authorities can prove that the banks deliberately misled the city authority, as the lack of suitable reference data surrounding some derivatives contracts and the subsequent emergence of a less favourable interest rate environment, may make it difficult to establish whether the banks intentionally set out to defraud the authority.

No comments: