THE MAIN insurance body for solicitors has claimed its ability to effectively indemnify solicitors has been affected by losses of more than €8 million, allegedly resulting from negligent advice by Bloxham stockbrokers about investing in a totally unsuitable bond. The bond fell 97 per cent in value.
News of the losses had come as a “profound shock” to the Solicitors Mutual Defence Fund, which has 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.
Mr Justice Peter Kelly was told yesterday by John Gordon SC, for the fund, that other legal actions had been initiated over the same investment. Bloxham’s has itself sued Morgan Stanley in the UK for breach of contract relating to the bond but that claim was limited to €42.75 for every €100 invested.
In his affidavit, Mr Shields said Bloxham’s represented in January 2005 that 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 24th that a “mandatory redemption event” had been exercised by Morgan Stanley with the net result that the bondholders, including the solicitors’ fund, would only recover 3 per cent of their investment.
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 USD $1 billion. To create the Dresden 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 bond’s origin and operation had never been disclosed, Mr Shields said.
