Case of the Holders of Convertible Enhanced Capital Securities (CECS or CoCoCos) of the Bank of Cyprus

Our firm has undertaken the representation of the former holders of CoCoCos issued by the Bank of Cyprus –which today have already been converted into common shares– in order to compensate for the damage these holders suffered by the misleading and illegal promotion of said product even to ordinary consumers and time account holders in Greece by the Bank , violating thus the protective provisions of the European and Greek legislation. We already represent more than 350 misled investors while he have also taken on the representation of the Bank of Cyprus securities holders association.(http://maekgr.blogspot.gr/).

The case shall proceed based on two factors:

1)The terms concerning the compulsory cancellation of interests were already in effect prior to and during the issuance of the CoCoCos, whereas two months following the CoCoCos issuance the terms regarding their compulsory conversion into shares were also activated. This means that all of the clients-consumers-investors were deceived regarding the financial condition and the solvency of the Bank of Cyprus, which they entrusted with the placement of their funds. This issue has been addressed through an expert report, conducted on our behalf by one of the largest audit companies in the world, which has verified that the CoCoCos were not issued “thoughtfully” in order to reinforce the capital sufficiency of the Bank of Cyprus, but on the contrary to cover this.

2)The sale of this complex investment product was realized following deficient and deceitful advices by non-accredited employees violating, thus, the European and Greek laws. A relevant recommendation, which vindicated the plaintiffs, has already been published by the Greek Ombudsman against the Bank of Cyprus while the Central Bank of Cyprus in relevant findings has detected some irregularities during the CoCoCos promotion by the Bank of Cyprus.

For further information please contact us on telephone or via email at [email protected].

A few words on the case's background:

In 2011, the Bank of Cyprus issued the Convertible Enhanced Capital Securities which constituted compound financial instruments with complex and risky terms (Contingent Convertible Bonds), completely inappropriate –according to the widely held view– for modest investors who do not wish to risk their money. These securities had no specific maturity date (meaning that the Bank would never had the obligation to return to its customers their capital), while, furthermore, if the Bank's financial state worsened, then the Bank itself or the supervisory authorities could discontinue the annual interests payment and convert the securities in common shares, as it was done.

Nonetheless, all this information was not disclosed to the prospective CoCoCos buyers for the majority of the investors who have contacted our firm. On the contrary, the Bank's employees who promoted these securities overemphasized the safety of their money, taking advantage of the fact that during that period the insecurity for the Greek banking system was obvious and the depositors were seeking for alternative ways to securely invest their capitals abroad. The Bank's employees falsely assured the investors that the CoCoCos were exactly this: an "alternative deposit" in Cyprus, completely safe, with a guaranteed capital return upon five years and a considerable annual and fixed interest rate (6,5%). Of course, these products have no maturity date and are defined by law as hybrid subordinated bonds and thus, they have no privilege in case of liquidation and therefore offered no guarantee. Furthermore, in late 2011 - early 2012, the Bank of Cyprus revealed its real financial state, i.e. that its capital adequacy was under the legal limits, which explains why the Bank decided not to pay the interest coupons to the product holders. As a result the product holders, who believed they had an ordinary bond in their hands with guaranteed maturity, or a product which would be equated with a fixed deposit, realized then that they only held a product, without maturity, without coupons and the value of which is measured only in terms of stock exchange. Logically, precisely because the product had no maturity nor did it yield interests, its value was zero.

In February 2013, following complaints received by the Consumer's Ombudsman by dozens of people who had bought the said product without being aware of the risks, the Ombudsman presented relevant findings addressing a recommendation to the Bank of Cyprus to proceed with the compensation of its clients who had suffered damages, by paying them the capital amounts they had invested on the securities in question.

The misleading practise on behalf of the Bank, however, did not include only the deficient pre-contractual information of the prospective buyers by the employees during the promotion of the products. The most significant illegality on behalf of the Bank lies in the fact that it concealed from them that during the CoCoCos sale period, the provision concerning the compulsory cancellation of the annual interest payment had already been activated (to wit the product's value was zero, because a product with no maturity that does not yield interests upon its issuance, has no substantial value!) More specifically, according to the CoCoCos terms, the Bank could have discontinued the payment of the annual interests in case it considered its financial state as significantly aggravated. Nonetheless, when the CoCoCos were issued this had already become a reality. The Bank of Cyprus had suffered an enormous financial damage due to the reduction of the Greek State's bonds value it had in its portfolio, amounting to almost 2 billion euro, which it was not depicted during the publication of the prospectus. This damage had dramatically affected its main own funds and rendered the discontinuance of the annual CoCoCos interests payment as a given. Indeed, a few months after the "purchase" of the securities, their holders were notified that they were not going to receive their interests!

Since then, the Greek holders of CoCoCos are anxiously trying to receive answers by the Bank's branches in Greece and by the employees who sold them the products in question, but that the latter are claiming that they now work for "Piraeus Group" and they refer them to the Bank of Cyprus headquarters in Cyprus without offering them any answers about what will happen with their money. Moreover, the majority of the CoCoCos holders do not even have the documents they signed during their purchase.

Unfortunately, claiming their money in the Greek Courts is their only way out. Indeed, if the CoCoCos holders manage to prove the calculated deception plan of the Bank at their expense, the Bank shall be obligated to reimburse them the entire capital they lost.

Undoubtedly, it is proven that, when the Bank was selling the securities to its clients it already knew that it would not be able to pay the annual interests, since it had a Core Tier 1 under 8%, and two months after the issuance of the product the same percentage was at 5%.In this manner, the Bank managed to collect an enormous amount of money from the CoCoCos sale (820 million in euro and 95 million in USD), without undertaking at the same time any obligation whatsoever toward the securities holders, who by all appearances where the sole victims of this whole plan. The Bank would only have an obligation if it was supposed to return to the clients a capital or interests.

The CoCoCos have now been converted into common shares, however, whether they had proceeded with that conversion or not, their value would still have remained zero as a perpetual product which does not yield interest has no value at all.

This was essentially an organised way to "gain" 1 billion and not give anything back (guarantee etc.) apart from shares, and that only if necessary. In other words, instead of bringing (institutional) investors to increase the share capital, they draw money in the Bank from the CoCoCos (convertible contingent capital securities)
No man in his right minds would have bought the CoCoCos knowing:
a) that they have no value as they are perpetual products
b) the real financial condition of the Bank, on account of which the bonds provisions concerning non-payment of the annual interest had already been activated and the terms concerning their conversion into shares would be activated within three months.

Essentially, the Bank of Cyprus was in an urgent need of a share capital increase of 1 billion euro and, as the institutional investors were not going to proceed with that nor were private investors to participate in said action, it issued the product in question, which on certain conditions would be converted into shares, while knowing that there were grounds for the cancellation of interests payment and immediately afterwards, in the conversion into shares. For all the above, we have already initiated actions against the Bank of Cyprus (of more than 300 pages) which remains active as a Bank, has not been separated into "good" and "bad", but it is simply not present in Greece; however it has been restructured through the deposits haircut.