Free Unofficial Translation of Judicial Act in Maltese Language filed this 14th day of September 2011; the translator disclaims any legal responsibility for the translation.

In the First Hall of the Civil Court

Today 14th day of September 2011

To:        Bank of Valletta p.l.c. (C 2833)

        58, Zachary Street,

        Valletta VLT 1130

By these presents:

        Identity of claimants as in original Maltese version

all of whom are  clients of the respondent bank, premise the following:

1. Whereas the claimants are all persons who have no financial background, expertise, training or experience in the financial sector, and indeed a number of claimants have an elementary level of formal education, with some having left schooling upon reaching the obligatory schooling age;

2. Whereas the majority of the claimants are old age persons in their pensionable age, as can also be confirmed by their Identity Card number, and their only source of income consists of the Social Security Pension receivable from the State, with their only investments consisting of savings set aside from hard-earned income during their working lives;

3. Whereas most claimants desired to invest their life-time savings so as to be able to generate some additional income to the pension already receivable by them and which pension is too low to suffice for their basic living requirements, whereas the other claimants who were not pensioners desired to accumulate their capital with a view to giving them additional comfort for their retirement;

4. Whereas for the aforementioned purpose, claimants sought the professional advice of the respondent, Bank of Valletta, in view of the trust and reliance they placed in this financial institution and in the advertising and representations of the same Bank of Valletta, and also because many of them were approached and invited by the Bank officials to make use of the services offered by their specialised Wealth Management Services and by the Financial Planning Advisors;

5. Whereas the respondent Bank was conscious of the above personal circumstances of the claimants when the latter requested the investment advisory services, and it was evident to the Bank that claimants were not in a position to afford taking any type of risk that put their capital or income at risk;

6. Whereas the same respondent bank has itself classified all claimants as Retail Clients in terms of the European Union Directive by the name of Markets in Financial Instruments Directive, Number 2004/39/EC, known as MIFiD.  

7. Whereas claimants were encouraged and advised by the respondent Bank to place a major part of their capital available for investment through the same respondent Bank in products or securities that had higher risk characteristics, including junior subordinated and perpetual securities including those issued by Barclays, Erste, HBOS, Lehman Bros, Lloyds Bank, Royal Bank of Scotland and Svensk Export Kredit, and other issuers of perpetual securities, which investments are the subject matter of today’s judicial act.  We attach to this judicial letter, an attachment marked Schedule A in order to identify the securities involved.

8. Whereas there is no doubt that as a result of the personal circumstances of the claimants, including the advanced age, the state of health, the limited financial resources and the lack of financial knowledge and experience, of the claimants, these type of securities that were recommended by the Financial Planning Advisors of the respondent bank were neither suitable nor appropriate as required in terms of law and best market practice;

9. Whereas the respondent bank has, as a result of lack of exercise of due diligence, gross negligence, professional incompetence, lack of adherence of fiduciary duties and of financial services legislation and investment services rules, caused considerable damages to claimants consisting of capital losses and loss of income as a result of the investments recommended by the respondent bank, in some cases leading to a total loss of capital as in the case of Lehman securities;

10. Whereas the respondent bank failed to explain carefully to the claimants the nature, inherent risks and characteristics of the perpetual securities, frequently describing these securities in the Purchase Contract Notes issued by the Bank as “STRAIGHT BONDS”, which description is both erroneous as well as misleading.  These securities are highly complex hybrid instruments that are altogether different from conventional bonds and most of them in fact consist in non-redeemable non-cumulative non-participating non-voting preference shares.

The respondent bank failed to explain to complainants that:

• these securities are subordinated to all other secured and unsecured creditors of the issuing company and that in the case of bankruptcy the perpetual securities rank behind all other creditors, thus causing these securities to have a high risk of loss of capital;
• that the annual dividend could be cancelled, as in fact happened in the case of the Royal Bank of Scotland perpetuals;
• that any dividends not paid in one year would not be payable at a later year, even  in the event that there were sufficient profits from which to pay them in later years;
• that these perpetuals could be mandatorily converted to ordinary shares in certain circumstances and at the option of the issuing company, that is, without the investors being able to oppose such conversion;
• that these securities had no maturity date and therefore was susceptible to a high risk of market value depreciation due to the high interest rate exposure;
• that the perpetuals had  a callable option which was exercisable only by the issuer of these securities, which option issuer would naturally exercise only in circumstances where it was in its exclusive interest, whereas the investors had no right to ask for the redemption of the security which security could remain indefinitely outstanding;
• that these securities ae considered as part of the issuing bank’s own Tier 1 Capital in terms of the Basel Rules for Bank Capital Adequacy;
• that the risk of investing in such securities is so high that the Treasury Management Policy of Bank of Valletta itself, as approved by its Board of Directors, provides that in those cases whee the respondent bank invests its own funds in any perpetual securities these were to be considered as if they were invested in ordinary shares or equities, as results from the publicly available Annual Report and Financial Statements of the Bank fo rthe year ended 30th September 2009, and specifically in the Capital and Risk Management Report thereof, Para 3.9, page 13.

11. Whereas it must also be noted that in the case of Lehman Perpetual Securities:

• the respondent Bank recommended to claimants to invest their capital in particular products issued by a number of Lehman Group companies, specifically in deeply subordinated perpetual securities, whereas the respondent Bank itself was careful, as it itself reassured its shareholders when issuing Company Announcement BOV/159 of the 15th September 2008, to invest only in lower risk securities, namely in senior non-subordinated securities of Lehman, a standard of care falling far short of the bonus paterfamilias requirements of any person acting as fiduciary as indeed the respondent bank was in relation to the claimants;

• the respondent bank was holding itself and promoting itself, publicly and officially, including on Bank of Valletta’s official web site, URL http://www.bov.com/page.asp?p=13155&text=1, as having those technical, analytical and professional resources “to leverage the considerable information and analytical resources of a large organisation” and which would permit its client investors “to have the peace of mind of knowing that a financial advisor is focusing and professionally managing and monitoring their investments” and also that “the investments recommended are thoroughly researched by the advisor and the institution to ensure they are appropriate and in line with the customer’s risk appetite and stand up to the scrutiny of strict selection criteria”.  

It is therefore only natural to expect that the respondent Bank of Valletta ought to have realised that during 2007 and 2008 there were increasingly manifest indicators of the worsening credit risk and risk of default of the Lehman Group, such as:

• the knowledge that the Lehman group had suffered massive losses in the sub-prime market; these losses incurred by its wholly owned subsidiary, BNC Mortgages, were already known publicly in 2007;

• that the gearing of the consolidated balance sheet of the Lehman Group was always reaching fresh alarming proportions of increased borrowing; for example, the gearing or leverage ratio comparing gross assets to shareholders’ equity, which was already at a very high level in 2003 continued to grow throughout the later years to a dramatically high level of more than 30 times the shareholders’ equity in 2007, as the respondent bank, with the “information and analytical resources of a large organisation” it held itself to possess, could have realised when the audited financial statements of Lehman Group for years ending 30th November 2003, 2004, 2005, 2006 and 2007 were published; ^[1]

-        that Lehman’s share price was falling dramatically; for example, by May 2008, Lehman’s share price had fallen by about 73% from the share price as of the 1st January 2008;

• the widening and increasing yields required on Lehman debt securities in the financial markets;

• the spiraling premiums of credit default swaps for Lehman debt, which premium for insuring against Lehman default clearly indicated that the increasing risks of financial failure had spiraled upwards.

Therefore Bank of Valletta should have, as it itself had warranted, promoted itself and committed itself to do in favour of the investors, taken the necessary steps and corrective action in order to avoid, or at least to reduce, the claimants’ financial losses,  which losses in fact were incurred to an extent that the entire capital invested was lost.

12. Whereas the investment advice provided by the respondent bank was negligent and in breach of the fiduciary duties as well as evident breach of Investment Services Regulations found in Part B of the Investment Services Rules for Investment Services Providers Standard License Conditions issued by the Malta Financial Services Authority in terms of the Investment Services Act (Chapter 370 of the Laws of Malta), including the failure by the respondent bank to:

• conduct its investment business in total compliance and observance of the regulations applicable, including the assessment of the suitability and appropriateness of certain products of higher risk; and

• abide by the disclosure requirements for information to retail clients in order to give comprehensive information about the nature and risk characteristics of the investment instruments recommended and to avoid giving incorrect, unfair and misleading information or marketing or advertising communications.

13.   Whereas in the case of certain complainants the Financial Planning Officers of Bank of Valletta had procured in a fraudulent manner the signature of the claimants to “Execute-Only Instructions”, when it is obvious that the claimants did not posses the knowledge and experience to be able to identify and select these type of specialised investments and when the same claimants were also unaware of the meaning and implications of the “Execute Only Instructions” they were unknowingly made to sign, when as a matter of fact these investments were made only upon the specific recommendations provided by the Financial Planning Officers of Bank of Valletta.

14. Whereas even if, for argument’s sake, the complained of investments were executed on the basis of execution-only instructions given knowingly by complainants - a hypothesis that is strongly contested by the claimants involved - the respondent Bank still failed to observe the Investment Services Rules restricting the sale of complex products intended for experienced investors to retail clients on the basis of  execution only instructions;

Whereas there can be no doubt that non-cumulative non-participating non-voting non-redeemable Tier 1 preference shares subject of this judicial protest consist of such complex products.

You are hereby being called upon, with immediate effect and without any further delay, to come forward for the liquidation of damages and payment of the same as above mentioned.  In default, complainants will not have any other option but to proceed against you in terms of law.

With legal expenses and legal interest until the date of effective payment, whilst reserving claimants’ rights to pursue any other and further action at law to enhance and protect their rights, including the furtherance of their complaints relating to the above which they submit to the Malta Financial Services Authority.

Avv Roderick Zammit Pace                        

54, St. Christopher Street,                                

Valletta                                                

Claimants:         The reply to this judicial protest may be notified to Finco Treasury Management Ltd of Level 5, The Mall, Floriana, Malta in the name of all the following claimants:

                Identity and addresses of claimants as in original Maltese version

        Notify:                Chairman, Malta Financial Services Authority, Notabile Road, Attard

Schedule A

-        Barclays Bank p.l.c., Fixed to Float Dividend Rates, Junior Subordinated Non-Cumulative Preference Capital Tier 1 Shares, Perpetual, ISIN XS0214398199

-        Barclays Bank p.l.c., Fixed to Float Dividend Rates, Junior Subordinated Non-Cumulative Preference Shares, Perpetual, ISIN XS022208539

-        Erste Finance (Jersey) (6) Ltd 5.25% Non-Cumulative Non-Voting Preference Tier 1 Capital Shares, Perpetual, ISIN No XS0205935470

-        HBOS Capital Funding No 1 L.P., 6.85%, Non-Voting Non-Cumulative Perpetual Preferred Securities, Perpetual, ISIN XS0165483164

-        Lehman Brothers UK Capital Funding II L.P. 5.125% Non-Voting Non-Cumulative Perpetual Preferred Securities, Perpetual, ISIN XS0229269856

-        Lehman Brothers UK Capital Funding IV L.P. Preferred Securities 5.75%, Perpetual, ISIN XS0282978666

-        Lloyds TSB Bank p.l.c. 6.9% Non-Cumulative Junior Subordinated Tier 1 Capital Preferfence Shares,  Perpetual,         ISIN XS0156372343

-        Royal Bank of Scotland Group p.l.c. 5.5% Junior Subordinated Non-Cumulative Preferred Securities, Perpetual, ISIN XS0205935470

-        Royal Bank of Scotland Group p.l.c. 5.25% Junior Subordinated Non-Cumulative Preference Shares, Perpetual, ISIN DE000A0E6C37

-        RBS Capital Trust B 6.8% Non-Cumulative Perpetual Preferred Securities, Perpetual, ISIN XS015905620208

-        Svensk Export Kredit 5.4%, Junior Subordinated Preferred Securities, Perpetual, ISIN XS0170906233