PREFERRED SHARES SCANDAL

Court orders inclusion of preferred share issue into Bankia listing probe

Magistrates’ panel rules that sale of complex debt instruments was integral to preparations for stock-market flotation

The Spanish High Court has ordered the judge investigating the ill-fated stock listing of nationalized bank BFA/Bankia to include as part of the case the issue of preferred shares sold by the seven savings banks, known as cajas, that merged to form Bankia.

The decision follows a suit filed by the company Bochner España, which acquired 100,000 euros of the complex debt instruments. These preferred shares had been issued by Bancaja, one of the seven publicly controlled lenders that formed Bankia. As a result, the director of the Bancaja office that sold the shares faces being indicted in the case.

Preferred shareholders have made huge losses on their investments. As part of the terms of the 40-billion-euro European bailout of Spanish banks, the bulk of which went to Bankia, preferred shareholders were obliged to accept a haircut on their investments. They made further large losses after being obliged to swap the debt instruments for common stock in Bankia at a price of 1.35 euros, a figure well above the market price on Tuesday, the day the swap became effect. Bankia listed in July 2011 at 3.75 euros per share. Its shares were trading at 0.65 euros at midafternoon on Thursday.

Bankia was nationalized in May of last year, less than 12 months after listing. The bank’s 2011 earnings were then restated to show a record loss of 21.2 billion euros, compared with the profit of 213 million euros that had initially been announced. It subsequently received 22.4 billion euros in public money.

They created an artificially sanitized product through the massive sale to small savers

According to figures provided by the chairwoman of the National Securities Commission (CNMV), Elvira Rodríguez, 1,138 lawsuits have been filed by Bankia preferred shareholders who believe they were mis-sold a product they thought had the same level of risk and liquidity as bank term deposits. Courts have so far ruled in favor of the plaintiffs in 12 cases and ordered the bank to return the amounts invested with interest.

The three High Court magistrates that ordered Judge Fernando Andreu to include the preferred share issue in his probe argued that the hybrid debt instruments were issued in order to recapitalize the Bankia merger members, whose balance sheets had been deteriorated by their exposure to the ailing real estate sector in order to pave the way for Bankia’s listing, and as such constitute an integral aspect of Judge Andreu’s core case.

“They created an artificially sanitized product through the massive sale to small savers of products with nil financial value,” the ruling said.

The ex-chairman of Bankia, Rodrigo Rato, who is a former managing director of the IMF and ex-economy minister, has been formally implicated in the case, along with 31 ex-directors of the bank.

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