A CASE WITH UNEXPECTED CONSEQUENCES BCR, sued for irregularities on the stock market

• The plaintiff is requesting 139,000 Euros in damages

"Muntenia Imobiliare Development" has filed a lawsuit against the Romanian Commercial Bank, accusing it of stock market irregularities.

Along with BCR, the lawsuit has also been filed against its majority shareholder, "Erste Group Bank", and the Bucharest Stock Exchange.

The BSE is accused of not having thoroughly overseen the bank's activity, as liquidity provider for the structured products issued by "Erste".

In October, BURSA was the first to announce that some investors were having doubts that BCR was fulfilling its duties as liquidity provider for the turbo certificates (ed. note: certificates using leverage).

Ciprian Copariu, managing director of the Romanian National Securities Commission (CNVM), told us that several investors have notified the Commission on the problems appearing around the structured products, including on August 5th 2011 (ed. note: the date which the aforementioned lawsuit concerns).

He said: "The CNVM has begun an investigation, following the notifications received from several investors. We have not yet completed the research".

The lawsuit was filed on January 12th with the Court of Bucharest. Some of the complaints made against the bank include the manipulation of the stock market. According to the lawsuit, BCR misled investors by creating a false impression on the liquidity and functionality of the trading system, has issued inaccurate information through the press release and "did not provide equal treatment to investors in closing their positions, because it offered quotations and only closed positions for specific brokerage firms , acting in a discriminatory manner".

However, the representatives of BCR are avoiding commenting on the situation. Valerian Ionescu, the head of the Capital Market of BCR, said: "We do not comment since there is a singular controversy on this matter, which it would be unfair to discuss publicly".

Nicolae Gherguş, the president of Confident Invest", the brokerage of the plaintiff, confirmed that "Muntenia Imobiliare Development" has sued BCR, but avoided making any more comments.

• "The fateful day" of August 5th

The plaintiff is requesting the compensation of the loss it incurred following the trading session with structured products issued by "Erste Bank", of August 5th, 2011. "Muntenia Imobiliare Development" claims that on that day, "it was impossible for it to trade the instruments it had acquired and to liquidate its investment".

The text of the lawsuit states that on August 5th, 2011, the quotations of BCR mysteriously disappeared from the market around 12:00, without the BSE and investors being promptly informed, and the notification by which the liquidity provider (BCR) claimed it was experiencing technical difficulties was only published on the website of the Bucharest Stock Exchange somewhere around 13:57.

The document also states that BCR returned to the market, for a few minutes, at 16:00, without informing the Bucharest Stock Exchange about the remediation of the technical problems. The Code of the Bucharest Stock Exchange stipulates that a liquidity provider which is facing technical difficulties must immediately inform the BSE concerning the remediation of the issue in question, as the Bucharest Stock Exchange was to decide on whether to resume its access to the trading system.

The plaintiff also claims that "BCR introduced quotes in the market and concluded trades during the suspension period without the BSE having agreed to give it access to the trading system".

The request also indicated the fact that "BCR has broken its essential obligation to maintain its bid and ask quotations for at least 80% of the duration of a trading session as well as the obligation to refresh the firm bid and ask price within 5 minutes".

Throughout last year, BCR repeatedly reported the pulling of the quotations from the certificates issued by Erste Bank, due to technical difficulties.

• BCR told "Muntenia Imobiliare Development" that it has no obligation to compensate it

Also attached to the legal brief was part of the conversations between the brokerage firm of the plaintiff, "Confident Invest", and the defendant.

In response to the request for compensation for the losses incurred by "Muntenia Imobiliare Development" SRL following the trading session of August 5th, 2011, sent on September 16th, 2011, on October 6th, 2011, BCR replied that the connection between Vienna and Bucharest broke at 11:48. "In spite of the efforts to reconnect, the connection could not be reestablished in a corresponding manner", according to information provided by BCR, which also said: "BCR sent the notification to the Bucharest Stock Exchange, and it was published on the website of the Bucharest Stock Exchange, at 13:57". The bank also claims that from then on, all of its obligations to provide quotations for the certificates in question were suspended, according to the Code of the Exchange.

The bank claims that the brokerage of the plaintiff (ed. note: brokerage firm "Confident Invest") did not contact the representatives of BCR, but chose to phone directly to Vienna instead. After receiving the complaint which arrived from Vienna, the employees of BCR of the Financial Markets Department, had a phone conversation with one of the employees of "Confident Invest", intending to propose an OTC trade (outside the market) for the closing of the positions, a trade which the bank claims was favorable to "Muntenia Imobiliare Development". Since no definitive answer on that matter was received, BCR considered the trade closed and that the investor accepted the market risk. The bank also mentions the amount that would have resulted from the proposed compensation, namely 93,144 lei, mentioning that the offering was valid until October 14th.

• The plaintiff claims that the BSE should have sanctioned BCR

The lawsuit claims that the Bucharest Stock Exchange should have monitored and sanctioned any failure by BCR to comply with its obligations stemming from the capital market legislation, the Code of the Bucharest Stock Exchange and the liquidity contract.

The document also states that "the violations committed by BCR on August 5th would not have been possible without the permissive attitude of the BSE".

The request submitted by the plaintiff also states: "The admission of the guilt of the BSE came later, through the decision of the Board of the Exchange of November 17th, 2011 based on which the general manager of the BSE (ed. note: Valentin Ionescu), former employee of Erste, who covered up the irregularities committed by Erste and BCR".

Valentin Ionescu however, maintains that the BSE did fulfill its obligations. "The moment the Bucharest Stock Exchange received the information, it was disseminated in the market", he said, and he went on to say: "My dismissal has no connection with this event which concerns the structured products. As you well know, the Board of Directors of the BSE was under the pressure of revocation at the time, on November 16th, and without thinking too much about it they found it appropriate to blame me for their revocation".

The revocation of the Board of Directors of the BSE was approved on January 9th, 2011, in the General Shareholder Meeting.

• In November, the Bucharest Stock Exchange proposed the amendment of the provisions of the Code of the Stock Exchange, concerning structured products

After the issues notified by investors, in October, the BSE proposed the amendment of the provisions of the Code of the Exchange, concerning structured products.

However, the proposed changes were not approved by the Romanian National Securities Commission (CNVM).

Among other things, the newly proposed norms detail the situations when it becomes impossible for the liquidity provider to provide quotations, extend the situations when the trades involving structured products can be invalidated, updates the definition of the reference price for structured products.