The two thousand „small investors” of the Postabank

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„Or else …. The fourteen billion savings of the state by swindling two thousand people!”


In the end of July 1998 the government decided to obtain the direct influence in the Postabank at any price, respectively to place its own men to the management of the bank. I am convinced that they could have executed this will of them on the previously set general meeting on the 9th of August without a hitch, but it did not happen this way. Unusually in the life of economics they rushed into the second biggest commerce bank of the country as an elephant into the china shop. According to the official explanation, the that-time management of the bank endangered the economy of the financial institution with its work. Therefore they could not wait another eight days after the preceding ten years.

The August general meeting did not even start yet when the new bank-leaders asserted it in their statements that the Postabank had probably lost its entire property. Therefore the state will have to consolidate it. But it also means that also the two thousand so-called small investors, who shared about 23% in the forty billion equity capital of the bank that time, had lost their investment the par value of which was nearly ten billion forints. To avoid the imminent scandal they let it be suspected that the benevolence of the state was looking for the possibility for the small investors not to be hit by a total loss. Following the general meeting the elected new director general, Henrik Auth, asserted it in his radio and television statements unambiguously that the losses of the bank outdid its entire property. Therefore the state will have to save the bank by a capital-increase following a total reduction of capital. At the same time he declared that it was neither legal nor moral duty of the state to compensate the two thousand small investors for their ten billion forint investment lost in consequence of the transaction. The state is looking for that solution only because of its „good-will” by which it might partly compensate these investors’ losses.

It is true for the whole media that it was groping about in the dark in connection with the Postabank-case. It was looking for the new power relations and „lapped up” the statements of Henrik Auth and the Ministry of Finances day by day. I did not see any analysis in those weeks which pointed to the responsibility of the state, its legal obligations issuing from mainly its legal and economical steps. Although the official statements and steps violated both the reality and the not even too complicated legal regulations in succession.

It was typically the management of the bank who „leaked” it for the media that one of the small investors, János Palotás, without any moral basis, had set up legal claims against the Hungarian state that it was bound to recompense his loss. That time only the professional dilettantism of the management of the bank surpassed their self-conceit. For several months running the interviewing journalists wanted to ask me only one question. Why do not I accept the risk of investing on the market and that when the state is constrained to a consolidation of several billions then the private investors lost their risked money? What am I up to that I expect the state to compensate those two thousand wealthy investors from the taxpayers’ money who could risk by buying the stocks of a bank and would have ceded nor the profit to others?



What does the law say?



The state certainly tried to cause a fourteen billion forint damage to its two thousand citizens!
The two legal deductions have no relations to each other. They, totally independently from one another, result in the obligation to totally compensate all the „small investors”. This way those have to be particularly indulgent who wish to play down the involved ones’ responsibility by that they did not notice their obligations. Respectively they interpreted the concerning legal regulation differently. Because this is not valid now. These statutes are the same, known and built on the bases of the model of market economy in all countries of the well-developed world. Supposing we thought that the supreme bank and financial management really did not know these principles of regulation then they were professionally ill-qualified for their present positions. If they knew it but they undertook even conscious violation of law for the sake of savings for the state, defrauding its two thousand citizens, then their legal and political inaptitude was proved.


The first reason:

There is a protecting principle of the so-called „rights of the minority shareholders” which is totally independent of a given business corporation. It obliges the investor buying the shares of the joint-stock corporations up to publish it when he obtains significant influence or -like in our case – direct control in the direction of the company.

After the obligatory promulgation the minority investors have sixty days to decide. Whether they accept the new situation or they call upon the majority stockholder to buy their stocks on market value too. The root of this legal regulation is that the operation of the joint-stock corporation essentially changes by the buying up. Earlier one owner could not decide in the name of the corporation, numerous owners’ common will was needed for the decisions of the general meeting. When an investor buys stocks outdoing 75% majority then he will decide in all subjects in himself. This way the other investors will not have any influence on the development of the corporation. They will have passive shares in their investments, meanwhile earlier they could have real effect on their investments by their votes. The law makes an effort to manage the changed situation when it does not let the investor striving after majority end his buys when reaching the optimum majority. He can obtain his influence only if, after this, he also buys the stocks of all those small investors who do not wish to stay in the corporation as passive co-owners. The value, on which the one buying up is bound to offer to buy it in this case, is provided by a statute too, by prescribing the market value. In this case the market value is the average rate of those buys on which the investor obtained his influence in the corporation. These legal regulations must be implemented without exception. Their observation is assured by numerous sanctions too. One of the most important ones is that the corporation, which obtained the influence, cannot exercise its voting power until it does not fulfil the regulation for publishing the buying up! The rules of these laws are clear, their application is corresponding to the content of the international economical acts. And, according to my judgement, the reason for their existence is unquestionable.

So it is indifferent for the legal regulations why the investor buying up is interested in obtaining the influence. And it is also indifferent in what kind of position the bought up corporation is. In the spring and summer of 1998 the Hungarian state had obtained first significant, then majority and finally majority assuring direct control in the Postabank. The state turned the voting ratio to its interest by increasing the capital first, then it „nationalized” the significant share of the Postabank in the social security funds. Finally it reached the majority outdoing 75% by the off-the-floor buys of several billions. All the transactions of the state were between 130% and 140%. Therefore the market value provided by the law has to be determined between these bounds for that time. The value around 140% is fourteen thousand forints in the respect of the par value of the share.

So in the summer of 1998 the state should have published the stronger and stronger being of its influence at all the phases. In the consequence of which they should have made an offer to buy on nearly fourteen thousand forints for all the small shareholders who asked it. And as for till the publishing, the state could not have voted by the obtained shares. But the state disclaimed its legal obligation till the end of December 1998, i.e. it evidently committed a legal default. They crowned it all by that the August general meeting, which made essential changes in the bank, changed the management of the bank by unlawful votes. Because, according to the legal sanctions, the state used unauthorized votes.

In December several investors announced that they would attack all the decisions of the general meeting at court referring to unauthorized votes if the state did not admit its obligation. So the representative of the state admitted the obligation of the state as the overture of the general meeting. True that nor this had discontinued the violation of law. Because the law required promulgation and not an announcement on the general meeting for the voting right. But the small investors trusted the restoration of the lawful behavior of the state. They were mistaken. The state published it only several months later that they had obtained influence. And delaying other months they made their offer to buy only in early summer, on a value of five forints instead of fourteen thousand forints.

The argumentation of the state represented such a low professional level and had broken its own laws so many times that it was unworthy of even detailing. It is generally known in Hungary that they did not keep the above-detailed things. Therefore now several hundred investors addressed the court against their own state. I am convinced that all of them will bring their actions. But who is the loser then? The losers are us all because our security in law had turned out to be shaky. How can it be digested that the state tried to defraud its nearly two thousands citizens with more than ten billion forints? What shall we do with that feeling that the powers are „making a show” of it not for the first time that it has no consequences for them if they do not keep their laws? While they „threaten” the society day by day with unmercifully punishing those who violate the law even accidentally. And also those nearly two thousand small investors are losers who could not afford to assert their rights at the court after their endured investment losses. Because of the lack of their legal preparedness and the significant expenses of the lawsuit.



The other reason:

That deduction differs from what has been written before with all its elements in which the „small investors” can legally claim for the compensation of their investment losses. The point of this thought is that in the case of an investment the investor takes the risk by his investment in view of the future. Accordingly, those statements of the leaders of the Postabank and the state, in which they tried to present the two thousand small investors as ones injured in their investment risk, did not square with the actual legal situation.

The individual assumption of risk really has a significant role in the market economy. At constituting their ventures, making their decisions they trust that as a result of these they will gain in the future. They invest, risk because of the hope of this profit, but its final outcome is certainly often a loss. But it is also an important requirement of making the economy run that these investments happen in a regulated environment. Where the regulation is just for reducing the participants’ risk. For example it has a significant risk-reducing role in the regulation of the securities market that the joint-stock corporations must publish the real details of their economy and financial situation yearly. The details of the published balance sheet must be attested by authorized auditors. In case of financial institutions the State Money and capital Market Supervision Authority plays a particular part. Its constitution was justified just by the depositor and investor protection. Also other statutes protect the participants of the securities market. For example it is statutorily forbidden to deceive the investors in view of the value of the share by money market transactions (for example by intensive buying up, by rate manipulation not supported by real value).

Because the investor can rightly expect to make his decision about his investment on the basis of real information, i.e. to take the risk only in view of the future! Therefore he shall try to prove it if he was deceived by the unreal content of the details he got at the time of his investment. If he can then the obligors of the content of these details are held for damages irrespective of their negligence.

In my opinion the case of the Postabank can be a typical instance of the coming universities. Because almost all of the obligors heavily broke their obligations. This way the investors can almost pick and choose by whom they want to have their damage be compensated. Of course the decision has to be made by the involved ones. I am sure that the court would decide in the small investors’ favor and declare the ones, who are responsible for the details, held for damage in any case. Therefore I suggest to choose that one to be defendant whose responsibility is more easily provable during the suit. I would also consider upon whom it is the easiest to obtain the successful execution.

Going backward, what I would suggest most is the action against the auditor firm certifying the authenticity of the details of the balance sheet. Though it is doubtful to me nor in their case that they could decline their direct responsibility permanently and mainly successfully in a well-prepared judicial procedure. I would gladly watch the course of such a suit also as an economist. It would help a lot in consideration of the future if a legal precedent pointed to that the obligation of auditing is not only a lucrative business for some auditor firms. But they are also liable for their professional obligation. The obligation of auditing which means really significant expenses to the economy. The significant difference between the reports of the same firm, made in the spring of 1998 then – at the new constituent’s „request” – in the fall of 1998, could not issue from the details „hidden” by the previous management of the bank. If the latter shortage is the actual one then they should have noticed it already in the spring of 1998. But the proof is essentially harder in the case of the auditor and also it could not pay fourteen billions for the total damage of the two thousand small investors.

The ÁPTF (State Money and capital Market Supervision Authority) is the next. Being a state institution, its solvency counts sure but the execution would be pretty complicated because the fourteen billions outdoes its budget. Also the declaration of their responsibility would require a more complex proof. But I am sure in the declaration of their responsibility also in this case. It strengthens this argumentation that the concerned one itself have stated it several times that they already noticed the losses in the Postabank before. And they informed the government about it in a letter in 1996. But something is doubly wrong with this statement declining the responsibility. On the one hand, in the case of the Postabank the state is a co-owner in the first place. This way, they informed one of the owners that it should expect significant losses in his property. But meanwhile they informed the two thousand small investors in the television (e.g. at the time of the 1997 bank-panic) that everybody could make himself easy, everything was fine with the bank. It even surpasses the innocent liability. On the other hand, it is the positive duty, and competence in contradiction to the small investors, of the ÁPTF to immediately hold a total inquiry in the bank on case of the possibility of a disorder, be it ever so little. And as for the case of its expert institution, it is professionally impossible to conceal such a big loss. But if they noticed the problem but did not hold an inquiry then their responsibility existed by their default.

The direct liability of the state in the case of the Postabank is interesting also professionally. Interesting but evident, therefore it is definitely recommended as defendant for the investors. In case of its defeat also the execution is relatively simple. Even if it is unusual for the bailiffs to seize the bank accounts of the state. Unusual but not unprecedented any more. This year the Metropolitan Municipality did collect a few billions successfully this way. One of the arguments of the responsibility of the state corresponds to what was written in connection with the ÁPTF. I.e. it is proved already because it is generally known that the state was officially informed about the losses of the bank to be expected. But they kept it back from the other owners and they even definitely deceived those by their statements of contrary content. That argument of responsibility, which occured late in the spring of 1998, totally differed from it. Then the state almost redoubled the equity capital of the bank by a capital-increase on 140 percents. Because this transaction meant it on the money market that, according to the preliminary enquiry of the state and the auditor approving the transaction, the current value of the Postabank-stock was 140%. Because if the real value is lower than this then the state enriched the other owners gratis from the taxpayers’ money. It is just as unlawful as that case if the real value is more than 140%. Because in this case, harming all the two thousand small investors, they obtain an influence in the corporation exceeding the investment value. The effect of the capital-increase by the state immediately appeared on the money market, where the general rate of the began trading of the Postabank-stock was this 140% for months. Also the new government began to buy up on about this rate for the sake of having more than seventy-five percent share in the bank. Accordingly, the used rate really took effect on the market, deceiving it in view of the real value. Also according to the European regulation standards, it substantiates the direct liability of the state.

Finally, the direct liability of the Postabank indisputably exists. The responsibility of the bank was admitted – true that not with this intention – by itself, in a conclusive notarial document. In addition to this, in case of a defeat the – already capitalized – bank is definitely solvent. And also the mode of execution is simple. The director general of the bank, Henrik Auth, admitted it on the general meeting of the bank at the end of 1998 in a verbitim record that in 1998 the bank manipulated the market value of the shares of the bank. And it deceived the investors. In addition to this, on the same general meeting the present management of the bank modified the balance sheet of the bank published in 1997. Namely in such a way, according to which the bank had lost its entire property as early as in 1997. As a reminder, it is that public and authenticated data, what was available for an investor in 1998 to value the risk of the investment. The present Postabank is evidently the successor of its predecessor. It takes no effect on its obligations that the state, as owner with direct control, had totally changed the former general staff of the bank. This way the bank is evidently and directly responsible for the deceit issuing from publishing untrue information. Irrespective of whether the distorting of the information was based on mistake or fraud. My remark: it is today’s official details what seem to be false to me but it is not relevant in the judgement of the present legal situation. In my opinion it is of great importance that the business plans of the bank still do not contain allowances for the expenses of the liability of the bank. Though it significantly outdoes the ten billion forints and several investors called the attention of the management of the bank to it on the general meeting.


A chance extra:

All those „small investors”, who bought their shares between January 1997 and July 1998, can choose another legal course. It is simpler and this way probably concluded faster than the above-detailed legal courses promising to be longer. Because they can rightly claim the seller of the shares to repurchase the previously sold shares with paying a twenty percent interest. The title of the claim is error. Because any investor can rightly assert it that it is evident that he would not have bought Postabank-shares from the seller on a value of 10-14000 forints if he had known it at the purchase that the corporation behind the shares had lost its entire property and the actual value of the share was five forints. It is the two thousand eight hundredth part of the purchase price he paid!

It can be understood without special sense of justice that none of the participants of the market can sell – even bona fide – his valueless assets (shares in this case) to somebody for millions, maybe hundred millions, „transferring” his own losses by this.

It was set forth in detail in the previous point that the investment meant assumption of risk only in view of the future and not the time of the purchase. Also the bona fide seller obliged to repurchase the shares has the possibility of the two above-detailed legal procedures. And he can even rightly claim the Postabank and the other participants to compensate the damages issuing from the innocent deal. But he cannot legally avoid the inconvenience, expenses accompanied with the litigation and financing the shares becoming valueless for the time of the suit. He must repurchase his shares, which had no real value at the time of the sale already, because of mutual error or the buyer’s innocent error.

The following is my addendum which is important and recommended for consideration for the involved ones. It is worth to examine the seller’s financial situation before the action based on error. Because I am almost sure that at the end of the legal proceedings the court will oblige the seller to repurchase the sold shares and to pay interest. But it does not mean it automatically that the seller will be able to fulfil this obligation of him. But the seller’s bankruptcy does not mean the recovery of the damage for the innocent investor. The state, the Postabank and the ones involved in the above-mentioned possibilities are probably permanently solvent. This way, though the legal procedure against them might take more time but in case of a favorable judgement the execution is significantly simpler and surer. Of course, if the seller of the shares is the Postabank, the state or some sole corporation of those then this solution can result in the fastest and most complete recovery of damages.


The outstanding profit:

In case of a favorable judgement there is a further possibility of the small investors in any case. It is to set up a compensation claim for their „outstanding profit” because of the defendants’ unlawful behavior, the long legal proceedings. It is pretty hard to prove that the claimant’s damage outdoes the twenty percent interest adjudged in the original procedure. He has to prove that he could have gained a significantly greater yield by the equivalent of the share if he had been able to dispose of it earlier and freely. And it is pretty hard to prove. In this case he can trust in the effective proof if he had spare capital also during this time and he gained a provably greater profitability by investing it (for example on the exchange).


Remark: The legal representation of my action was conducted by Dr Gábor Hidasi, lawyer, respectively by the Hidasi & Co. Law Office (H-1055 Budapest, Balaton street 16. Tel: +36-1-2693575).

http://www.hidasi.hu