A year after Banco Popular's demise, the Spanish bank's ghost has still not been laid to rest.
The lender's resolution and subsequent fire sale in June 2017 are the subject of dozens
Plaintiffs contend that European regulators, when dealing with the failing Madrid bank, unduly influenced markets, ignored certain viable options and failed to make the process transparent, undermining the integrity of the continent's banking union project.
Test case
The EU's new Single Resolution Mechanism, created in the wake of the global financial crisis to deal with failing banks, faced its first test in spring 2017 when it oversaw the resolution of the struggling Popular and its sale to Spanish rival Banco Santander SA for a nominal €1.
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Regulators hailed the event a success, but investors, who collectively lost about €3 billion, beg to differ. Ninety-nine admissible lawsuits have been filed against the Single Resolution Board, the SRM's decision-making body, and the European Commission at the European Court of Justice, and the court is proceeding with six test cases. Many more cases have been brought in Spain.
The litigation provides a chance to question the workings of the new system, lawyers say.
Alberto Ruiz Ojeda, a lawyer at Cremades & Calvo-Sotelo, which is representing minority shareholders in a Popular-related lawsuit, said the lack of legal precedent gave lawyers a large window of opportunity to present untested arguments. Kern Alexander, chair for law and finance at the University of Zurich, said it is important to have test cases such as these in a new area of law.
"It's probably good that it be challenged so we can discuss it and think ... 'Is it working properly?'" he said in an interview.
The SRB, the EC and the ECB declined comment to S&P Global Market Intelligence for this article. Sources close to the EC said the body would respond to the cases in court.
Questions over valuation
In 2017, Popular was saddled with about €37 billion in nonperforming real estate loans. Just before its resolution on June 7, 2017, its share price collapsed and its depleting capital approached the trigger level at which its Additional Tier 1 bail-in-able bonds would be converted to equity. Depositors panicked and withdrew funds, leading to a liquidity crisis; the authorities deemed it "failing or likely to fail" and oversaw its sale to Santander.
It marked the first time that investors lost money on Additional Tier 1 bonds and caught investors off guard; Popular did not technically breach minimum capital levels before regulators deemed it nonviable, meaning the bonds did not trigger and convert to equity, and investors were left with worthless securities.
Central to the current litigation is that auditor Deloitte produced multiple valuation reports on Popular.
Deloitte's provisional sale-of-business report, which was used by the SRB to inform its resolution decisions, valued Popular at between €1.3 billion and negative €8.2 billion, with a best estimate of negative €2 billion. But lawyers dispute its validity and say regulators ignored the fact that Popular was seeking to either raise capital or find a buyer. A version of the report was made available in February, but it was heavily redacted, which prompted criticism for a lack of transparency.
"The SRB did not properly explore a private solution, and the valuation exercise by Deloitte they relied on was also fundamentally flawed," said Richard East, a lawyer at Quinn Emmanuel who is representing Popular bondholders who together lost €850 million and include Pacific Investment Management Co. LLC, Anchorage Capital Partners LP, Algebris Investments (US) Inc. Ronit Capital and Cairn Capital Partners LLC were also formerly part of the group.
Market cap
Furthermore, the bank's pre-resolution market capitalization of €1.3 billion was not taken into account, according to Jordi Ruiz de Villa, a lawyer at law firm Jausas who is representing investors who had €100 million tied up in Popular.
"The market considered that the bank had a value — a positive value," he said.
Deloitte itself said that, when preparing the report, it had not had access to certain critical information, and that the valuation should be regarded as "highly uncertain." It also said it was given 12 days to prepare the sale-of-business report, when it would normally take six weeks. According to a fact sheet prepared by a legal team at Quinn Emanuel representing litigating bondholders, and seen by S&P Global Market Intelligence, plaintiffs are concerned about the rushed nature of the process, also claiming the EC took 77 minutes to assess and endorse the SRB's resolution decision.
The lack of transparency is another key concern, they say.
A Deloitte spokesman told S&P Global Market Intelligence that he was unable to discuss the matter.
Some legal experts say the SRB had no choice but to resolve the bank as quickly as possible.
"Resolution by necessity has to be quick and decisive, otherwise it is not going to work," said Wolf-Georg Ringe, professor of corporate law and financial markets at the University of Hamburg.
'No creditor worse off'
After the resolution went ahead, the SRB was obliged to comply with the "no creditor worse off," or NCWO, principle, which calls for a detailed independent valuation to be carried out to ensure shareholders and creditors do not incur greater losses than they would have under normal insolvency proceedings. Such a valuation must be completed "as soon as possible."
Deloitte was also responsible for producing this subsequent NCWO valuation report, prompting bondholders to accuse it of "marking its own homework."
"They are effectively being asked to review their own work," Quinn Emmanuel's East said. "They are clearly not independent and remain conflicted."
The lawyer representing several Popular bondholders also said there has been a "substantial and inexplicable delay" in the completion of the new report.
"We continue to have significant doubts and concerns regarding the outcome and the extent to which the new report will be heavily redacted, especially in view of the SRB's previous lack of transparency and accountability," he said. Without full transparency, the legitimacy of resolution is "fundamentally undermined" and market trust is eroded, he said.
The SRB said June 13 that Deloitte has now provided the final report and that it will be made available after mid-July.
Resolution rules
Also under scrutiny is the part played by SRB Chair Elke König, who, it emerged in a Reuters report shortly before the resolution, had allegedly warned EU officials that Popular could be wound down if it failed to find a buyer. Critics claim this precipitated the bank's demise.
"The SRB precipitated the crisis which they relied on for the purposes of using their resolution powers," East said.
Such an allegation is serious, but the onus is on bondholders to prove that information was leaked and was responsible for Popular's downfall, according to the University of Hamburg's Ringe.
Whatever the outcome, the lawsuits will shine a spotlight on the EU's new bank resolution mechanism.
Some lawyers believe the framework is too cumbersome, with various European entities involved. The ECB supervises banks and decides when an entity is failing, the SRB oversees resolution, and the EC approves the decision.
Cremades & Calvo-Sotelo lawyer Ruiz Ojeda called the current legal framework "defective" and said the rules need to be clearer.
Ringe said the system was complex and would be better under the umbrella of a single authority, but that judges in the Popular cases are unlikely to make rulings that will lead to a complete overhaul, as that could destroy the whole system.