Customers of Lehman’s bonds were not aware that they could sell their bonds, nor of the pending financial insecurity of the bank

The ruling by the Court of First Instance number 1 of Badajoz, recognizes the responsibility of Citibank in not adhering to its obligation of informing its client to sell bonds acquired (bond 65-65), and sentences the bank to pay the affected client 38% of the bond’s nominal face value, based on the value it held on the last day it could have been sold, the 12th of September of 2008, a few days before Lehman Brothers was declared bankrupt.

And while the directive on Markets for Financial Instruments (Mifid) was not in place when the bonds in question were acquired, it was, however, in place in September 2008.  This key detail was omitted, and Ausbanc’s client was not notified – eventually loosing all their money.  Therefore, the judge stated that Citibank was negligent in not informing or advising its client.

Moreover, the banking contract, in its liquidity risk epigraph, specified that "the distributor will facilitate the existence of a secondary market, preferably on a daily basis, that would allow the sale of the bonds at their current quoted value, which could be above or below its face value". However, the affected consumer was not advised of this, nor that he could sell his bonds in the face of growing uncertainty over the financial security of Lehman Brothers.

In Germany, the law has already come down against two credit companies to compensate consumers for their investments, arguing – as in the Spanish case – that they breached their information obligations and hid the fact that they had acquired Lehman bonds and needed to offload them to their clients – or suffer huge losses themselves.

Lehman Brothers’ collapse, which triggered a huge run on financial markets around the globe – Spain’s Ibex 35 collapsed by some 5% - has hit 2,500 consumers in Spain who invested some 2.6 billion Euros through accounts receivables negotiated by Spanish banks. Lehman did not operate in Spain as a traditional bank, but like an investment bank.

Ausbanc said it was also taking collective legal action against Citibank Spain over subscribers to “Bond Semester x5. 100x100 protected", a product marketed by Citibank Spain, but issued by an American investment bank.

The collective action is going ahead because bond holders say they feel let down as their complaints have been disregarded and instead remitted to creditors in the U.S. and Holland. Look out for future reports on this.

By Money Market Staff (Madrid)