You are here: Home » Banking and Payments Asia 2010 » Issues » Banking & Payments Asia » BPA 22 December 2010 » Leverage plays haunt private banks

Leverage plays haunt private banks

Highly-leveraged investments, that once bloomed, are now embroiling private banks in a range of legal actions. A string of court cases worldwide, ranging from disputes about margin calls to one of the first hearings in the Dubai International Financial Centre, throws light on how speculative investments became.

 

Highly-leveraged investments, which clients entered through their private banks during the boom years up to 2008, are coming back to haunt their financial advisers, in the form of a steady stream of multi-million dollar lawsuits around the world.

In a number of cases, clients allege their banks failed to advise them of the risks involved in margin-based trading in a range of speculative deals, often involving foreign exchange trading, while in others, the collapse of investments to junk status is the centre of contention.

 

UBS face clients in account closure suit

Graphic of Singapore flag• In Singapore, UBS is suing two clients, Ng Kok Keong and wife Yow Sin May, for S$9.3m ($1.7m) in debt, interest and costs after it closed the couple’s account two years ago.

The couple are counter-suing for as much as S$9.4m in losses, interest and damages, claiming that the "grossly negligent" behaviour of their adviser caused them to lose their money.

UBS counsel told the High Court that the couple had failed, despite repeated requests, to maintain a minimum sum for them to continue private banking services. Ng and his wife had borrowed heavily from the bank’s credit services to buy currency products in a highly-leveraged deal.

Ng’s counter-claim contends that UBS had breached its duty of care and contract, explaining that he was inexperienced in financial markets and often relied on UBS advice.

He further charged that his adviser failed to promptly close his positions when instructed to do so, causing him and his wife more losses.

UBS counsel argued that as Ng had held a non-discretionary account, it meant he made his own decisions and took his own risks.

It would be "ludicrous" to suggest UBS had a duty to not let his account reach near close-out because it "essentially means he’ll never lose money", its counsel said. The hearing continues.

 

Deutsche Bank in battle over FX account

• In another case in Singapore, the Court of Appeal has allowed the plea of a retired lawyer, David Lam Chi Kin, who sued Deutsche Bank for allegedly reneging on an agreement covering his foreign exchange account.

The court ruled that since currency markets could be extremely volatile, a 48-hour grace period was a valuable right to a sophisticated customer like Lam.

This would give him more time to decide what to do next when a margin call was made. Without this grace period, Lam might not have exposed himself to such large foreign exchange contracts.

Originally, Lam was ordered to pay Deutsche in Singapore an outstanding $1.1m after the bank closed out his currency positions at the height of the credit crisis in October 2008.

Lam contended in his lawsuit that the bank was wrong to have made margin-call transactions in October 2008, as he was entitled to a 48-hour grace period.

Lam claims he had asked the bank not to close his foreign exchange positions but the bank disagreed and closed out all his transactions. Deutsche Bank said the bank respected the court’s ruling and had no further comment.

 

Bank of China manager in mini-bond misselling case

Graphic of Hong Kong flag• In Hong Kong, a manager of the local unit of Bank of China (BOC) has pleaded not guilty to nine counts of fraudulently persuading clients to invest in mini-bond structured products issued by Lehman Brothers, the US investment bank which collapsed in 2008.

BOC Hong Kong manager Cheung Kwai-kwai told a customer who bought structured products linked to Lehman that he would get back the principal, prosecutors said.

Cheung sold the products, which lost their value after Lehman’s 2008 bankruptcy, to unsophisticated investors, Hong Kong’s District Court was told.

The 47-year-old banker pleaded not guilty to nine counts of fraudulently or recklessly inducing others to invest a total of about HK$787,776 ($103, 400) in the securities between 2005 and 2008.

 

Société Générale wins HK margin shortfall dispute

• Meanwhile, Société Générale won a Hong Kong court order forcing a former private banking client to pay back about $180,022.

Mike Panjwani, a British businessman living in Singapore, ignored his banker’s request for margin payments on his trading accounts, leaving the bank entitled to close out his positions after "reasonable" attempts in informing him, Judge Anthony To said in his judgement.

Panjwani’s claim that his relationship manager had said the margin shortfall would not be an issue until the businessman hesitated to pay S$15,000 into the banker’s personal account was dismissed by Judge To.

The former client also failed to transfer S$75,000 to top up his accounts after promising to do so, according to the ruling.

The businessman alleged in his counterclaim that Société Générale had no right to sell his assets as he wasn’t given reasonable notice.

Panjwani also claimed he didn’t pay the S$75,000 due to the bank’s error.

 

Bank Sarasin-Alpen accused of misrepresenting risky investments

Graphic of UAE flag• In the United Arab Emirates, a wealthy Kuwaiti family has won the right to get a full hearing into whether Bank Sarasin-Alpen misrepresented risky investments it had bought as safe.

Rafed al Khorafi is seeking damages totalling $225m from Bank Sarasin-Alpen, triple the $75m amount the family alleges the bank lost on investments.

A three-member appeals panel dismissed Bank Sarasin-Alpen’s argument that the al Khorafis had not made their claims under the correct Dubai International Financial Centre statutes.

The panel also reinstated claims of negligence and misrepresentation that another judge dismissed in July while rejecting an attempt by Bank Sarasin-Alpen to strike out breach of contract claims.

Bank Sarasin was reported as saying the ruling was a matter of procedure and the courts could now begin to address the substance of the case.