Alleged negligent advice puts solicitors’ defence fund in jeopardy

THE main insurance body for solicitors in Ireland has claimed its ability effectively to indemnify solicitors has been affected by more than €8 million losses allegedly resulting from negligent advice by Bloxham Stockbrokers about investing in atotally unsuitable bond which fell 97% in value.

News of the losses had come as a “profound shock” to the Solicitors Mutual Defence Fund, which has some 3,500 members, and had invested one third of its investment portfolio in the bond, fund chairman Laurence Shields said in an affidavit to the Commercial Court.

When admitting the case to the court yesterday, Mr Justice Peter Kelly was told by John Gordon SC, for the fund, other legal actions have been initiated over the same investment. Bloxham’s has itself sued Morgan Stanley in Britain for breach of contract relating to the bond, but that claim is limited to €42.75 for every €100 invested in the bond.

In his affidavit, Mr Shields said Bloxham’s expressly represented to the fund in January 2005 the bond was a suitable investment issued by Dresdner Bank, but the fund learned in 2008 the bond was not issued by Dresdner and was not suitable.

The fund was also unaware in 2005 there was a “call option” exercisable by Morgan Stanley which compromised the integrity of the bond as a secure investment vehicle, he said. Tadhg Gunnell and Angus McDonnell of Bloxham’s had informed him on June 24 last a “mandatory redemption event” had been exercised by Morgan Stanley with the net result that the bond holders, including the SMDF, would only recover 3% of their investment.

Bloxham’s, having acted for the SMDF since 1991, was fully aware the investment represented over 30% of the SMDF’s portfolio and of the implications of it for the fund, Mr Shields said.

He said a January 21, 2005, contract note from Bloxham’s for the bond stated the investment was: “Saturns Inv Europ plc FRN 05/07/2031 €100”, referred to “your purchase of the Dresdner Bank 6.25% 2031 Bond” and stated: “For administrative reasons, this appears as SATURNS in the stock description line of the contract.”

Contrary to what was stated, the bond was not a Dresdner bank bond, he said. In May 2008, the fund learned its investment represented some 24% of the total SATURNS fund which was illiquid such that the sale of the investment could only ever take place at a distressed price, he said.

The bond was “not at all” the same one as described by Bloxham’s and conformed in no material fashion whatsoever with the investment goals of the fund.

In response to requests from the fund, Bloxham’s had in July 2008 advised: “The original Dresdner ‘Saturn 6.25%’ bond which form the underlying collateral of the Dresdner ‘Saturn 6.25%’ bond were issued in US dollars, the issue size being €1 billion. To create the Dresdner Saturn bond, the originator Morgan Stanley bought in the market an amount of the dollar denominate bonds.

“Morgan Stanley then repackaged this bond, swapping its dollar cash flows into euro and created a product that would suit investors whose investments were in euro. The new product was then marketed as a euro-denominated bond, its issue size being €35 million. The marketing clearly outlined the size of the issue and the terms and conditions attaching to it at the point of sale”.

This information caused “significant additional alarm” to the fund because this explanation about the origin and operation of the bond had never previously been disclosed. It was clear such information was in a memo which had not been given to the fund, he said.