The wave of litigation which has followed the turmoil in the financial markets as a result of the credit crunch has led to many decisions that have resulted in those suing financial institutions being left to lick their wounds (and also facing sizeable legal bills).
Two recent cases have been decided in favour of financial institutions that sold complex financial instruments to buyers who were subsequently left out of pocket – in one case by $70 million.
In one case, the action was brought on the basis that the downside risk of an investment, the value of which was based on the stock market index, was inadequately explained to the investors.
In the other case, the claim was that the investment was mis-sold to the investor. In evidence, sales literature was presented which claimed that the investment offered ‘guaranteed rates which remove any short-term uncertainty’ and ‘As all the assets purchased are very high quality and short term in nature, the fund shall be considered to be very cautious, with a very high degree of capital protection’. Although the sum invested here was smaller (£1.25 million), the fact that the investor was a solicitor and his wife had been a merchant banker may have weighed against his attempt to persuade the court that he had been mis-sold the investment.
However, the cases do show how hard it can be to persuade the court that investment products have been mis-sold and, even if you do succeed in so doing, the court will only compensate you to put you in the position in which you would have been if you had not undertaken the investment in the first place.
By way of contrast, HSBC has recently been fined more than £10 million and ordered to compensate more than 2,000 elderly people who were sold entirely unsuitable investments by one of the bank’s subsidiaries.