Do banks’ internal control systems work?
A case recently filed in the Frankfurt District Court may not answer the question, but certainly casts a bright light on it. The plaintiff trader, Armin S., claims specific performance or, alternatively, damages of 163 million Euro from the defendant trading bank, BNP Paribas.
Armin S. alleges that he engaged in an OTC trade with BNP Paribas whereby he bought from the bank 3’000 units of a specified certificate at 108.80 Euro each and the bank confirmed the transaction in writing. Mr. S. further alleges that, 6 days later, he entered an on-market buy order for 2 more such certificates at 108.62 Euro each, but that the stock exchange declined his bid because the price of the corresponding certificate then lay somewhat above 54’000 Euro. Mr. S., by virtue of holding 3’000 such certificates, had apparently become a multimillionaire.
According to Mr. S.’ claim, BNP Paribas could have revoked the OTC trade by giving notice of a mistrade at the latest by 11 am on the next business day. However, the bank first gave notice of a mistrade a full week after the transaction, which presumably was the time when it finally discovered the market value of the certificates. BNP Paribas then purported to revoke the OTC trade and to delete the corresponding holding from Mr. S.’ trading account. Mr. S argues that the bank’s notice of mistrade was ineffective, and hence claims that the bank is irrevocably bound by the contract and must therefore either deliver the 3’000 certificates or else pay 163 million Euro in damages.
The matter was first reported by Focus Magazin in May 2016. The 5 June 2016 update to the original Focus article reports that Mr. S. had then taken legal advice and estimated the costs of litigating that matter at first instance, i.e. before the Frankfurt District Court, to be approximately 900’000 Euro. Even at that time Mr. S. had declared his willingness, if necessary, to carry his case as far as the Federal Court of Justice, reportedly stating that he had found supporters who were ready financially to support the legal effort. According to a report of yesterday's date in the Frankfurter Allgemeine Zeitung, the die is now cast. Mr. S. reportedly says that he is prepared for an Odyssian legal voyage which could last for 7 years and consume about 4 million Euro in costs.
FAZ reports that BNP Paribas and also its lawyers, Linklaters, declined to comment on the case. The bank has reportedly sought an extension of the time allowed to file a response on the grounds that all the documents must first be translated into French, and that colleagues and business partners whose input is required are presently away on summer holiday.
According to FAZ, Mr. S. has meanwhile approached both the German Federal Financial Supervisory Authority, BaFin, and the ECB, in each case with the remark: “If the bank failed to notice that a trading error amounting to 163 million Euro had occurred, then its control systems do not workâ€. Those remarks are no doubt intended to place BNP Paribas between a rock and a hard place. Presumably it would be cheaper for the bank to reach a settlement with Mr. S. than to endure an investigation by BaFin.