The great preferential share swindle
Ordinary savers are thought to have been mis-sold 30bn euros worth of complicated financial products, but many are now fighting to get their money back in the courts
Four years ago, Rosa Ordóñez García's mother was widowed. Since then she has had to survive on a state pension of 500 euros a month. Her parents emigrated to Paris during the hungry years of the 1950s, working hard and saving all they could until returning to Spain in 1969. Rosa's father got a job making corsets and surgical trusses and continued saving, eventually putting by some 95,000 euros for a retirement nest egg.
So far, the family hasn't had to use the money, but now Rosa's brother is facing financial difficulties and needs the savings. The problem is that the bank holding the money won't let him, because the money is tied up in preferential shares.
Rosa Ordóñez is aged 40 and lives in the working class neighborhood of Ciudad Lineal, in the northeast of Madrid. She says that over the last few months, as many of Spain's banks and savings banks have lurched from one crisis to another, she has learned more than she ever imagined she would know about economics.
She and her mother regularly attend the meetings organized by associations representing the thousands of others like them who were mis-sold billions of euros worth of preferential shares. Many of these people were elderly, and believed that they were buying safe, high-yield investments. "We don't know who to turn to. We are desperate. The bank has ruined my mother's dreams and hopes. We don't know what to do to get the bank to return our money," says Rosa.
Savers like Rosa's mother who thought they were putting their cash on deposit were in fact sold bonds or preference shares in the banks despite the fact that these were normally bought only by professional investors who knew the risks. If a bank were to fail, these products are not covered by the national depositors' compensation scheme.
The terms of the Brussels bailout of Spain's banks are expected to mean that those banks needing a hand-out impose losses of about 30 percent on bondholders. Normally this would mean financial institutions. In Spain, it now also means savers.
Estimates suggest that ordinary savers have been sold bonds and preference shares - which guarantee priority on dividends but have no voting rights - in Spanish banks worth 30 billion euros when they thought they were putting money into straightforward accounts.
The situation is particularly bad for customers of Banco CAM, an Alicante-based savings bank. CAM specialized in property lending and was brought to its knees last year as the Spanish property bubble burst. It was bailed out in 2011 by the government in Madrid and sold for one euro to Spain's Banco Sabadell. But it was discovered that 70,000 customers - about 400 of whom were British expats - had been sold a package including CAM's bonds and preference shares.
A simple cash deposit would earn about 2.5 percent interest, but that shot up to 3.75 percent or more if some of the money was put into the complex packages. Savers were told these could be sold within a few days or weeks if they needed the cash.
But when the bank crashed, there was nobody to buy the bonds and preference shares. Customers, unaware of the true nature of the packages they had bought, found that they couldn't get out what they put in, although some were allowed to convert their deposits into current accounts after paying a steep penalty and forgoing interest.
Sabadell has now offered to exchange the bonds for ordinary shares in the bank. But it will match the value of savers' deposits only if the shares rise to become worth 2.30 euros. The market price is currently around 1.48 euros, meaning savers are looking at an immediate loss of almost 40 percent.
The Ordóñez family's entry into the world of preferential shares came in 2003, when Rosa's father deposited his life savings in a single fund.
The director of the bank offered him a deal "with no drawbacks" that would provide a four-percent interest rate. He also told Ordóñez that he could access his savings at any time, subject to a six-euro penalty.
Rosa says she still does not know what is going on with her bank. "When we ask them about the savings they try to stall us. They haven't come up with a single solution that makes sense. In every scenario that they come up with, we are the losers."
The majority of people who bought preferential shares and other financial products offering high rates of return say that they do not know how to go about recovering their money, and are reluctant to take the banks to court. There is a widespread feeling that the system works in favor of the banks. That said, courts in Murcia, Valencia, Zaragoza, and Mallorca have recently ruled in favor of small savers.
The Ordóñez García family's story is similar to that of Marta, a 66-year-old who this month finally won her battle to get her bank to recover the money she invested in preferential shares. She brought legal action against CAM in September, which has now been forced to return her 45,504 euros.
When Marta was first offered preferential shares she says that she had no idea what they were. On October 26, 2006, she asked one of the staff at her local bank where she should invest some money she had in another account. She was told that she needed a safe, secure product, and the bank suggested preferential shares, with the advantage that she could withdraw her money whenever she needed. Other than that she was given no other information. Three years later, Marta went to withdraw her money but was then told by the bank that the money could not be accessed.
So far, around 20 investors like Marta have used the courts to get their money back from preferential share deals. They all have one thing in common: they are savers with no understanding of the ins and outs of investment, and were not properly informed by their banks about what they were getting themselves into.
"These processes take time. It is important not to give up," says Jaime Navarro García, a lawyer from Valencia, who represented Marta in her fight against the CAM. When Marta decided to take the case to court, she handed over to her lawyer all the relevant documentation. One of the most important is a test known as Mifid, which assesses a potential investor's understanding and knowledge of the markets. When Navarro saw Marta's, he says, "I knew that we had a very good chance of winning, because she clearly had no understanding of finance and economics; not sufficient to buy a product as complex as preferential shares," he says.
Between 1999 and 2004, some 18.3 billion euros worth of preferential shares were sold in Spain, to around 50,000 people, mainly pensioners. After that, when sales fell sharply, many banks instructed their staff to pressure customers to buy. Up to 2011, with the financial crisis biting harder, and banks desperate for cash, 31 billion euros worth of preferential shares were sold. Most of Spain's major banks and savings banks were involved.
Marta's victory in her battle against CAM has given hope to thousands of other small savers who feel that they have been cheated. "It is good news and makes you feel that all is not lost," says Rosa.