Structured product houses will have to take greater control of their sales processes in the wake of an England and Wales High Court misrepresentation ruling against Australia and New Zealand Banking Group. "The investment banking community is certainly concerned about this," said Jonathan Kelly, partner at Simmons & Simmons in London, who has discussed the case with around 15 houses. Although the ruling was made in the U.K., it has broad-based implications for firms, no matter where domiciled.
The case highlights the need for firms to police the entire path of structured credit products from origination to eventual sale, Kelly said. Richard Siberry QC sitting as a deputy high court judge ruled ANZ misrepresented the true synthetic nature of a credit-linked note, referenced to Russian treasury bonds known as GKOs, which it sold to Peekay Intermark, a trader of gold and precious metals, through a Dubai-based, private banking agent. Despite signing a contract which outlined the details of the investment, Peekay said in court it believed it had bought an interest in the actual bond, rather than an instrument linked to it. When the GKO defaulted and the investment was liquidated, Peekay received only a small return and sought to recover the difference between this and the investment.
The judge upheld Peekay's claim, saying the contract was void because the investment had been fundamentally misrepresented during the sales process. The company was awarded USD244,081,94 in damages. "The investor thought they were buying apples and they were sold oranges," Kelly said, adding, "there is no room for sales people to get it wrong, then have the lawyers make the deal look beautiful; it needs to be sorted because having it lawyered won't necessarily save your skin." Officials from ANZ did not return calls by press time. Harish Pawani, director of Peekay Intermark, was on holiday and could not be contacted.
Market officials agreed this is a wake up call to firms, which need to protect themselves when selling complex structured products, particularly through an intermediary. One derivatives official said houses will need to source personnel or processes to ensure term sheets presented to clients match contracts. Patrick Clancy, counsel at Shearman & Sterling said the case emphasizes the importance of sales desks and structurers working closely together. "The sales desks--who are the face of the bank from the perspective of the customers--must truly understand the products they offer," he said.
