Mis-selling a lesson to banks and investors: Bank’s “cynical” awareness of risks “extraordinarily disturbing”

In a recent class action by three councils, Lehman Brothers was found liable for the big losses they suffered when the global financial crisis hit. In assuming the role of trusted adviser, the bank owed a duty of care in providing advice that aligned with the investors’ risk profile.

The councils took action against the bank for recommending and selling them complex, high-risk financial products as investments. The courts found the councils had been misled into buying financial products that in no way matched their need for capital security and liquidity. The products were so complex the judge noted that even he was not sure he understood fully how they worked by the end of the trial. Had the councils been told of the risks they would not have invested.

In finding the bank liable on all counts for breach of contract, negligence, misleading and deceptive conduct and breach of fiduciary duty, the court focused on its process of mis-selling. This occurred in a plethora of ways. The investments were described as having features such as a high level of capital security and liquidity when the opposite was true. Their offering memoranda – withheld from the councils – clearly highlighted that the investments were illiquid, buy-to-hold investments, and only suitable for investors who could withstand a total loss of capital. The misrepresentations were conveyed to the councils by presentations, pitch materials, term sheets, emails and oral communications. Awareness of the true risks in the bank’s internal emails was described by the judge as “extraordinarily disturbing” and “cynical”.

The case shows that advisers may be liable for misleading and deceptive conduct if they do not take care in explanations or information given about high-risk products they offer. Disclaimers may be ineffective if they are irrelevant or not given prominence.