Financial crisis

The Wolf of Wall Street — Lebanese style: Small-scale depositors say banks duped them into buying preferred shares

The Wolf of Wall Street — Lebanese style: Small-scale depositors say banks duped them into buying preferred shares

Protesters demonstrate against corruption in the banking sector in front of BDL on Oct. 24, 2019. (Credit: Mahmoud Zayyat/AFP)

BEIRUT — Sleiman had saved $200,000 over a 15-year career working as a small business owner in Sur. In late 2015, Sleiman said, the manager at his local Fransabank branch promised him a “risk-free” investment for his savings that would be “just like another form of deposit.”

The account in which Sleiman placed his $200,000 had a five-year maturity and paid yearly dividends, similar to a fixed-term deposit that earns interest. However, what Sleiman was sold was actually a complicated financial instrument aimed at professional investors: preferred shares.

Preferred shares fall under a bank’s equity while deposits fall under its liabilities. What some bankers allegedly failed to disclose during the sale of such shares is that depositors are protected during a bank restructuring, while shareholders, including those of preferred shares, are not.

“My manager actually told me that preferred shares are paid out before deposits,” Tony, an SGBL client, told L’Orient Today. Tony, like Sleiman, and other bank clients interviewed for this article, asked that his surname be withheld to protect his privacy.

Sleiman said he was offered 7 percent interest instead of 3.5 percent and thought “that the biggest risk was that the money is blocked for five years.” He added that until 2019 he was living off the yearly dividends that were being paid out.

It was only as the banking crisis gained traction in late 2019 that Sleiman said he realized that his entire life savings had been placed in preferred shares: a perpetual, non-cumulative and high-risk investment.

“In essence, bankers told people that they’re [preferred shares] just as safe as deposits, but with higher interest,” financial expert Dan Azzi told L’Orient Today, instead of “fully disclosing to them as a consumer the risks … for them to understand them and make an informed decision.”

“Perpetual means infinity. This means that they never have to pay your money. Non-cumulative means they don’t have to pay you promised interest, say, last year, and if they don’t, they never have to pay it again,” Azzi explained.

That has been the case since 2019 when Sleiman, like other holders of preferred shares, stopped receiving his annual dividends while banks extended the maturity year-on-year as a result of the banking crisis.

Some $4 billion worth of preferred shares are currently held by thousands of clients across Lebanon, according to banking sector experts. As part of the banking sector restructuring, the latest government-proposed plan wants to implement a full bail-in of existing bank shareholders and preferred shareholders that represents a LL31 trillion capital write-off.

Sleiman now stands to lose the entirety of his life savings after, he alleged, the branch manager convinced him “to put all the money in preferred shares.”

“Banks have lost their equity, in theory, the value of these shares is zero,” a former senior banker told L’Orient Today on condition of anonymity.

Sleiman closed his shop — where he used to sell a variety of products imported from China — after the economy collapsed and imports became prohibitively expensive. He now works in a variety of jobs just to make ends meet.

With the capital now worthless and dividends withheld, his investment has vanished into thin air.

Regulations: Late to the party and disregarded

The Capital Markets Authority, the body tasked with regulating, supervising, licensing and monitoring the activities of the Lebanese capital markets, in 2014 put in place regulations aimed at avoiding the mis-selling of investment banking products.

“First off, banks started selling preferred shares back in around 2005 without any sort of regulations,” the former senior banker said. “But to make matters worse, the regulations put in place in 2014 were completely disregarded and the CMA didn’t enforce them.”

According to the CMA’s bylaws, banks must ensure that clients understand the nature of the risks while establishing that employees and agents are qualified, suitable and trained to comply with regulatory requirements.

Regulations also stipulate that the seller must be “clear, fair and not misleading,” and ensure that any direct communication made by an individual on the bank's behalf “does not include any false or misleading statements” while “making clear the purpose of the securities advertisement.”

Banks must also conduct a suitability check and classify clients as professional or non-professional investors while taking note of their investment experience, knowledge, objective and risk tolerance as part of their know-your-client information. Clients who spoke to L’Orient Today about their purchase of preferred shares said that their banks did not ask them questions related to these requirements.

“The contracts are drafted in a way that protects banks from liability even though preferred shares should have been restricted to professional investors and not sold to small depositors,” the former senior banker said.

A now-retired branch manager at Bank of Beirut told L’Orient Today on condition of anonymity that “it was a free-for-all. Everyone from tellers to managers was selling these preferred shares.” 

He described a lack of compliance, negligence and staff sometimes knowingly selling inappropriate products to customers who may have lacked the knowledge and ability to bear the risk they were taking with these investments.

“Ninety percent of people didn’t read the contract, as it was based on trust,” he said, adding that commissions enticed “employees to sell more and more, even if they knew that clients weren’t financially proficient or professional clients.”

“Neither the person selling nor the one buying understood the product — it got out of control,” he said, likening the operation to the Hollywood blockbuster “The Wolf of Wall Street.”

Employees with “limited knowledge” explained the investment, telling “clients that it’s a form of deposit,” he said.

When contacted by L’Orient Today regarding the issues raised by the retired branch manager, a spokeswoman for Bank of Beirut responded, “Our clients’ investments in preferred shares were done in full transparency, in line with all prevailing regulatory texts and did not include any misleading or false statements.”

She added that “all employees who were in charge of selling preferred shares were fully aware of their features and required to clearly explain the same to the clients.”

Another bank manager, who did not want to name his employer because he still works for the bank, described similar mis-selling.

“Management didn’t check if all the employees were qualified, all they cared about was raising capital,” he said, with “old clients representing an easy target.”

“Employees had to meet sales targets by signing customers up for unnecessary financial products, whether preferred shares or other instruments,” he said.

Christine, another Fransabank client, said she fell prey to such behavior after her 66-year-old father was sold $150,000 worth of preferred shares. “My father, with the power of attorney, had access to my bank account as I live and work in Qatar as a dentist,” she said.

Christine claimed that after a routine visit to the bank in 2017, the branch manager “talked my father into the purchase,” allegedly falsely labeling the preferred shares as a product called “bank treasury bonds.”

“He had no idea what that product was,” she said, adding that her father told her that the branch manager assured him “that the money will be blocked for three years and can be withdrawn at any time.”

Presented with these claims, the head of the marketing and corporate communications department at Fransabank, Dania Kassar, said that “these shares were offered to our interested customers with the same information as is in their term sheets and offering circular, being preferred shares that pay non-cumulative dividends — and not interest — and are paid only when the bank register sufficient distributable profits.” She added that staff are “trained and given the necessary tools to sell the product.”

The CMA could not be reached for comment on banks’ alleged mis-selling of preferred shares.

However, according to a former member of the Banking Control Commission of Lebanon, “some of the operations were definitely illegal if you look at the CMA regulations.”

Meanwhile, another banking sector source who asked to remain anonymous said, “There are 65 banks in Lebanon, some banks followed the regulations strictly and others didn't.” He added that some banks “wanted to confiscate deposits.”

L’Orient Today also spoke to clients who bought preferred shares at Bank of Beirut, Bank Audi and Bankmed. They recounted similar experiences, alleging that they were misinformed about the product. When contacted, Bank of Beirut, Bank Audi and SGBL denied any untoward conduct related to the matter. Bankmed could not be reached for comment.

“What’s most egregious about it is that they convinced them to put 50, 60, sometimes even 100 percent of their money in these products,” the former senior banker said, alleging that the banks disregarded the basic notion of diversification.

In some cases, bank managers or CEOs were selected to represent holders of preferred shares during general meetings of the banks after clients signed over a power of attorney, according to documents seen by L’Orient Today.

“Most of them don’t have voting rights, but those that do are represented by bank insiders in certain cases,” the former Bank of Beirut branch manager said.

According to the former senior banker, “good governance would imply that bank managers, who are also shareholders, do not represent holders of preferred shares.” 

This suggests an “apparent conflict of interest,” as the designated representative is “morally responsible for representing them at arm’s length,” according to another banker.

This falls on Lebanon’s regulators, he said, who “failed to stipulate that an independent trustee be tasked with such roles.”

With every bank issuing multiple series of preferred shares, they succeeded in “raising their capital using depositors’ money to fund their expansion,” he added.

Conflict of interest between regulators

The problem can be pinpointed to a simple conflict of interest between Lebanon’s different regulatory bodies, the former senior banker told L’Orient Today.

The CMA, tasked with overseeing capital market transactions, is chaired by central bank governor Riad Salameh. Salameh also chairs BDL’s Special Investigation Commission, which is ostensibly responsible for investigating suspicious transactions and fighting against money laundering.

Salameh also heads BDL’s Higher Banking Commission, which is tasked with regulating banks and financial institutions. Meanwhile, Maya Dabbagh, the chairwoman of the BCCL, also sits on the board of the CMA.

“On one hand, BDL and the Banking Control Commission care about the soundness of banks and their capital, and on the other, the CMA is focused on investor protection,” the former senior banker told L’Orient Today.

“Unfortunately, the same people sit on the boards of these institutions,” he said, adding that “total segregation is needed to avoid future conflicts of interest.”

To instill the concept of checks and balances, reforms in the financial sector should target these different regulatory bodies, he added.

“The CMA was either ignorant of these violations or lax because it was aware of the need to increase banks’ capital,” he said.

In a circular issued in December 2020, BDL seemingly acknowledged the mis-selling of preferred shares, calling on banks to pay out dividends for the year 2019 to “individuals that were sold preferred shares on the basis that dividends are guaranteed.”

Despite the circular, banks did not execute the order. The banks that L'Orient Today contacted said that the order did not apply to them.

“BDL issued a circular as a way to protect holders of preferred shares,” Halim Berti, a spokesman for the central bank said, adding that “banks should abide by this circular and if they don’t then it’s the role of the CMA to follow up on the matter.”

Editor’s note: This article has been amended from its originally published version to remove the identity of the banking sector source cited above. The source says he spoke to the newspaper in a non-official capacity.

BEIRUT — Sleiman had saved $200,000 over a 15-year career working as a small business owner in Sur. In late 2015, Sleiman said, the manager at his local Fransabank branch promised him a “risk-free” investment for his savings that would be “just like another form of deposit.”The account in which Sleiman placed his $200,000 had a five-year maturity and paid yearly dividends, similar to a...