Bankia probe judge to investigate possible fraud in sale of preferred shares

The High Court has extended an investigation into the events surrounding the stock market listing of Bankia to include the sale of preferred shares by the nationalized lender and some of the savings banks that merged to form it, led by Caja Madrid.

Judge Fernando Andreu’s decision to widen the scope of his probe came in response to a suit by the centrist Union, Progress and Democracy (UPyD).

Judge Andreu has summoned a number of former directors of Caja Madrid, one of the seven savings banks which merged to form Bankia, to answer questions on the sale of preferred shares and subordinated debt – complex financial instruments – in order to determine whether there is any indication of fraud, misappropriation of funds, false advertising, criminal mismanagement or collusion to fix prices.

Holders of these instruments have made huge loses on their investments and many have filed lawsuits seeking to recover their money. The government has also opened an arbitration process at Bankia to determine if unsophisticated customers were mis-sold these products. To date, Bankia has received 109,785 requests for arbitration.

However, the judge rejected a request by UPyD to call the former governor of the Bank of Spain, Miguel Ángel Fernández Ordóñez, and the then head of the National Securities Commission (CNMV) market watchdog, Julio Segura, for questioning.

The magistrate decided to include the preferred share issue within the scope of his investigation despite an informed opinion by the anti-corruption investigator’s office that no offenses had been committed in the sale of the products.

Preferred shareholders made additional large losses when they were required to swap the instruments for Bankia common stock at a price well above that of the market. The swap was one of the conditions imposed by Spain’s European partners in exchange for a bailout to clean up the country’s banks.

Bankia was taken over by the Orderly Bank Restructuring Fund (FROB) in May 2012, less than a year after listing at an initial offer price of 3.75 euros. Bankia’s shares were quoted at around 0.70 in midafternoon trading on Monday.

Bankia came unstuck because of its over-exposure to the ailing real estate sector. Before being taken over, the group initially reported a profit for 2011. However, after it was nationalized, its accounts were revised to show a loss of 21.238 billion euros, the largest ever in Spanish corporate history. The state has had to inject over 22 billion euros into Bankia to shore up its balance sheet, with the bank receiving the bulk of the European bailout.