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PCM comment: Christmas crackers as HNWs step up litigation

A staff reporter, 13 February 2005

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Last month there were a bumper number of lawsuits affecting the private banking sector. The range of challenges was broadly based, but fell ...

Last month there were a bumper number of lawsuits affecting the private banking sector. The range of challenges was broadly based, but fell roughly into three categories: prosecutions for fraud, client actions against their wealth advisers and scrutiny of cross-selling practices. Investigations into corporate governance by the US House financial services committee has raised the level of public and media interest in any such perceived irregularities. This is fanning a litigious environment that has implications for private banking at large. First, 'know your employee' may well become a vital risk management standard. While it is not a regulatory requirement in the way that 'know your customer' standards are, settlements in cases of employee fraud can be expensive. Bank Leumi settled out of court for $12m with Allfinanz, but if the matter had gone to trial the cost to the bank could have been up to $100m, the total amount Allfinanz claims was embezzled by Ernst Imfeld, who was the manager for Leumi's Swiss private banking business until 2001. HSBC Republic and Morgan Stanley have also fallen foul of employee fraud from private banking employees. If unchecked by enhanced know your employed measures, such cases could damage the reputations not just of the individual banks concerned, but private banking as a whole. Second, not only are clients more willing to sue in this atmosphere of ritual purification but also there is also greater media interest. Again this presents reputation risk issues for the sector. For example, last month saw the first class action suit by high net-worth investors in the UK against 150 financial services firms who recommended split capital trusts to their clients. Of that total, there are 93 stockbrokers and wealth managers including Barclays Private Clients, Teather & Greenwood, Killik & Co., Grieg Middleton and Brewin Dolphin. In a separate case, Fergus McCann, former chairman of Celtic Football Club is suing Regent Trust for overcharging fees and premiums that he alleges saw his nest egg reduced by £1m. Royal Bank of Canada Global Private Banking owns Regent. The third trend relates more directly to the goings on in Washington as individual HNW clients come under scrutiny from the Congressional committee examining on fairness and transparency in the financial markets. Both Global Crossing's John Legere and Margaret Whitman of eBay have been challenged for receiving privileged access to IPO offerings by Goldman Sachs, which acted both as their corporate broker and private client broker. The investigations throw doubt on whether the practice of cross-marketing between investment banking and private banking will be viable from a regulatory point of view. Private bank and bank employee fraud Bank Leumi $12m Amount paid in settlement with Allfinanz for embezzlement at Swiss private banking arm. HSBC Republic $20m Guilty plea to embezzlement by Stephen Troth, private banker in Monaco. Clients affected include Michael Schumacher (Formula One), Armin Schwarz (rally driver), Liane Foley (singer) and Nigel Robertson (football marketing). Morgan Stanley HK$2m An unnamed private banker allegedly took the money as a bribe to pursuade a client to sell shares in a listed company at the centre of a hostile takeover. Goldman Sachs £4.5m Joyti De-Laurey, a Goldman Sachs personal assistant, went on trial accused of siphoning £4.5m into a Bank of Cyprus account. The money belonged to three Goldman Sach executives. Private client suits Class Law n.a. Class action suit by UK private investors against 150 firms that recommended split capital trusts. Regent Trust £1m Fergus McCann, chairman of Celtic Footbal Club, suing Jersey operation of Regent Trust for alleged overcharging on fees and premiums by £1m. Cross-selling probes Global Crossing n.a. John Legere under investigation regarding IPO investments recommended by Goldman Sachs. Global Crossing was a corporate client of Goldman Sachs and Legere was a private client. eBay n.a. Margaret Whitman under investigation regarding IPO investments recommended by Goldman Sachs. eBay was a corporate client of Goldman Sachs and Whitman was a private client. Source: Scorpio Partnership, Media

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