Who would have thought that in the space of two years the financial regulator would conclude the tough assignment of leading an investigation into the workings of a local bank, after investors took La Valette Management Fund (a subsidiary of BOV) to court, claiming compensation for various acts which resulted in a €50 million loss?

Now we read that at last year’s annual general meeting of La Valette Fund held on 17 February, it was business as usual for BOV directors. There was then, and there still is no admission of guilt for the way things were managed. In a diplomatic manner, the bank stated that it wishes to reiterate that it understands and regrets the distress caused to investors and by the poor performance of the Property Fund. It appealed for calm and for the investors, led by Finco Trust, to conduct themselves properly, professionally and with decorum. In a firm yet somewhat arrogant manner, BOV’s board continued to express its respect for the rights of all to institute legal action, and/or to otherwise invoke the regulatory authority. However, when the investigation by MFSA into its affairs was in progress last year, it had found the conduct of certain involved parties to be distasteful, unbecoming and unprofessional. Audaciously, it states in its AGM statement that BOV certainly has a responsibility to the Property Fund investors – which it readily acknowledges – but it also has a responsibility to its own shareholders, who are not necessarily the same parties.

Now the penny has dropped. Since 12 May 2011, the Bank of Valletta (BOV) under Chairman Roderick Chalmers has been sanctioned by the Malta Financial Services Authority (MFSA) at least six times and fined a total amount of €726,140. This may be beer money for a bank that is so well run and generates superior profits even during the years when the local economy was suffering a mild recession. One may well comment that €760,000 is nothing over a two-year span and could easily be recouped by tweaking the advertising budget. This may be so, but consider the agony of over 2000 investors (some of whom never understood the complexity of the Fund) who lost their nest egg when the Fund collapsed in 2008.

For the past two years, the leaders at BOV have been in denial and none offered to resign − more so the chairman who is appointed by the government, the majority owner. Can this reflect a stance that the “tone at the top” philosophy to reflect accountability and meritocracy so prevalent in most corporations is lacking because, let us face it, the top brass are only responsible to their political masters? The piper answers exclusively to the political master who pays and sets the tune. But the political master is, in turn, responsible for the welfare of the hapless investors and no doubt this is where MFSA as the independent regulator comes into play. However, some may argue that the board of governors of MFSA is also elected by the same minister who elected BOV chairman and therefore a Catch-22 is set in motion. The argument gets even more complex when considering that the bank is such a good milking cow for the economy in general as it nets ample taxes and employs thousands. In fact, the latest results of the Bank of Valletta Group reported pre-tax profits for the first six months of financial year 2012 of €49.1 million. This is an improvement when compared with profits of €45.2 million for the equivalent period ended 31 March 2011.

All this happened when the economy started to slow down, partly because of the international recession and sovereign debt crisis that is crippling the eurozone area. Can anyone not praise the efficient administration of Mr Chalmers, the anointed chairman who recently announced the retirement of chief executive Mr Depasquale and welcomed his replacement Charles Borg − both, in the past, acted as officials involved in the running of La Valette Fund. Little did we expect that, with the onset of strict banking regulations, including the implementation of new stress tests and Basle 111 tough rules which Bank of Valletta last year passed with flying colours, that it would now be fined by MFSA. The bank and its subsidiary La Valette Property Fund faced a number of reprimands and were asked to pay heavy fines by MFSA.

This marks the conclusion of the investigation, which took the best part of two years, into how this fund was operated. MFSA said among other things that “Bank of Valletta appears to have regarded many of these investors as experienced investors solely based on their self-declaration.” It continued to reaffirm that, “In several cases, there was no evidence that Bank of Valletta made any effort to verify the validity of the self-declaration made by these investors. On this basis, the Authority concluded that on a number of occasions Bank of Valletta’s advisers did not take reasonable steps to ensure that these advisory clients were indeed experienced investors before advising them to invest in the La Valette Multi-Manager Property Fund.” Certainly this is not a casual remark but a serious assertion by the regulator who is guided by top legal and professional advice. Unavoidably, it had the onerous job of checking the paperwork of various application forms signed by investors who lost over €50 million when the fund collapsed. It did a good job.

Observers argue that the government, as the majority shareholder, should have also intervened in BOV and its operation of the La Valette Fund case in which about 2,000 families lost their savings after joining a fund with a risk profile meant for professional investors. Luckily for them, sanity prevailed and Bank of Valletta as the Custodian of the Fund (by the way, it netted €7 million in fees) agreed but without admitting guilt to compensate such investors up to 70c of their investment provided they renege on their rights at court. Close to 98 per cent of claimants reasoned that a bird in hand is better than two in the bush and accepted the unilateral offer. This brought to an end the long, drawn-out saga that was about to start the litigious and tortuous road in court and was not doing any good to the solid reputation enjoyed by the financial services industry on the island.

Bad news followed on another type of investment. This time the claim was instituted by stockbroker firm Finco Treasury Management in the name of some 40 claimants who were allegedly encouraged by BOV to invest in Lehman Bros perpetuals. It appears that such investors were ignorant of the risks involved in such perpetuals and lacked any financial background, with most being inexperienced investors. The claimants say BOV failed to explain the risks of the perpetual securities, instead having described them in purchase contracts as “straight bonds”. In their judicial protest, the claimants say they were advised by the bank to place their savings in ‘junior subordinated bonds’ and perpetuals in Lehman Bros. Unfortunately, this triple “A” bank went into bankruptcy in 2008 when housing prices crashed in the United States. The Bank of Valletta has remained silent on the sad news that Maltese investors lost $61 million after they were persuaded by the BOV to put their money into funds ran by Lehman Brothers Holding Inc while BOV itself did not invest in these schemes. The worrying news for BOV is that Finco alleges the bank is at fault for not having warned investors of the worsening credit risk of the Lehman Group when BOV itself had suffered massive losses when investing in Lehman securities. Bank of Valletta’s chairman has rebutted all claims but stated the bank’s intention to meet the claimants to better explain its position. To many savers who lost their shirt, it appears that during times of financial turmoil the incidence of faulty investment advice increases exponentially. There is hope that an honourable solution is found for the hapless investors since the MFSA has concluded its investigation and issued its verdict on the underlying facts that led to their losses.

How can a solid bank with an untarnished reputation, regulated as a listed company led by its professional staff and fully scrutinised by its Big Four auditor (Deloitte, regularly reappointed since 1974) − continue to ignore such sharp comments and act as if it is business as usual? It is regretted that a culture of resignations, even for more serious misdoings, is alien to Malta and the general consensus among financial observers is that it is facetious for captains of any institution to resign on such a triviality when the bank on the whole makes so much profit and contributes so much wealth to shareholders. Another poignant aspect is the fact that had the savers not heeded the advice and guidance of Finco Trust management, the whole issue would have been swept under the carpet and forgotten as another Argentinean debacle. In fact, we see that MFSA’s report in its final summary said inter alia that it had discovered inadequate documentation and weak staff training. This is unacceptable for an institution that follows Basle rules, is fully audited and employs independent members to run its audit committee. Finally, justice triumphed when the MFSA issued a directive to the bank to cooperate with yet another detailed review of investor client files. This will be conducted by an independent professional services firm, which, it is expected, will be engaged by the Authority at the expense of the bank. This equitable albeit protracted solution to the Fund saga is thanks to MFSA and its closely supervised financial services network regulated by trained banking and investment inspectors. Nobody doubted that MFSA would do its job and adopt an impartial and unbiased approach. As a result of its findings it has ordered the bank to pay further compensation to any non-professional investors who were presented with a fait accompli and were arrogantly asked to sign off their rights (for return of missing interest and full principal since five years) if they accept a 75c per unit as a final settlement. The compensation is to be paid by the end of the year and will amount to €1 per unit, less any amounts previously received for each unit.

In conclusion, Bank of Valetta bravely defended its position by saying that although it has not always concurred with the MFSA’s approach and/or its findings, it believed that it had always done its best to cooperate with the MFSA during the course of its various investigations and enquiries – and readily understood and appreciated the extreme pressures that staff concerned had been working under, both at the bank and at the Authority. Really and truly, this has not softened the blow felt by dispossessed investors which hit them like a bolt from the blue five years ago − after all, justice delayed is justice denied.

The writer is a partner in PKF Malta, an audit and business advisory firm

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