'O for Old, D for Dumb' How German Seniors Lost Nest Eggs in Lehman Collapse

Bankers called them "OD customers" -- "old and dumb" investors who let their advisors talk them into buying Lehman Brothers securities last year. They lost their savings in the financial storm, but now the injured parties are fighting back, with help from an experienced fighter.

They arrive like a flock of birds, a few minutes ahead of schedule. They laugh and hug each other, presumably pleased not to have to deal with their anger alone anymore. They wear stocking caps to ward off cold and carry signs to protest the indifference of society. The signs include slogans like "Phony Advice -- Total Loss" or "No More Money -- No More Confidence." They've come together to hold a vigil in downtown Frankfurt, and for many it's the first time they have ever demonstrated.

Housewives, retirees, teachers and plumbers have gathered on this cold February afternoon in the city's Bornheim neighborhood. They include small investors, ordinary savers, women who watch the popular "Tagesschau" TV news program. They are not speculators. They wanted their money managed conservatively. They didn't want to have to worry about their savings. They just wanted to watch their assets grow.

As conservative investors, they bought securities their bank advisors had recommended -- supposedly safe proucts with relatively low yields, issued by US investment bank Lehman Brothers. But last September, far away in New York, Lehman declared bankruptcy and suddenly these German investors were part of the crisis. The certificates their banks had sold them were nothing but gambles.

Some people lost only a few thousand euros, perhaps money they had set aside for their funerals. Others lost anywhere from €10,000 ($12,800) to €50,000 ($64,000) on these speculative investments. Many of the protesters in Frankfurt are between 65 and 75 years old. A relatively young man is standing in the cold on behalf of his 89-year-old mother. She lost her savings because her investment advisor had placed her into "Risk Group 4," which is defined as "speculative."

Some bought the securities in late 2007, some in February or March 2008, and some in June, when many Lehman employees had a hunch that the bank would not survive 2008 as an independent firm. Did the German investors know the securities were certificates, and that they were subject to issuer risk? No.

Did they know what a certificate was? No.

Did they know they could lose their money? No, they say, outraged. "If I had known," says one of the protestors, "I would never have done this." Three banks have branches on this square in Frankfurt-Bornheim: Citibank, Dresdner Bank and Frankfurter Sparkasse, the three institutions that were especially zealous about selling Lehman securities in Germany. Frankfurter Sparkasse has admitted that it sold Lehman securities to 5,000 of its customers, for a total of about €75 million ($96 million) -- securities it touted as "absolutely safe," which are absolutely worthless today.

The people picketing on this Frankfurt square know that Lehman is now being run by a bankruptcy administrator. They have read that deposits with Lehman's German subsidiary are covered by the deposit guarantee fund of the Association of German Banks (BdB), but they also know that this makes no difference in their cases, because Lehman only had institutional investors in Germany. Those investors will get their money back, but small investors will not, because the certificates they purchased were issued by the parent company in the United States.

"I went to my investment advisor," says an old man. "I'd invested €50,000 ($64,000). It was everything I had. The advisor looked at his screen and said, 'Your account has been set to zero.'"

In one case a bank advisor in the northern port city of Bremerhaven sold his customer a Lehman certificate for about €93,000 ($119,000) as late as Aug. 21. According to a flyer the advisor brought to the meeting, Lehman was rated A+. But by then Standard & Poor's had downgraded Lehman to an A rating, "outlook negative."

When I'm 64

One of the Lehman casualties in Frankfurt holds a sign that reads, "A safe capital investment??? Never again!" Another sign reads, "Advised and sold by bank experts." Yet another, "Investors in the tank, robbers in the bank."

That evening about 60 investors who lost their money as a result of the Lehman bankruptcy convene in Sachsenhausen, another part of Frankfurt. They've invited an attorney, Matthias Schröder, of the law firm Leonhardt Spänle Schröder, experts in investment fraud. They ask Schröder how to get their money back. He is a tall, slim, matter-of-fact man. During a bank traineeship he once worked for a few months as a customer advisor; the program included a stint in the legal department at Commerzbank, where he learned how to ward off claims for damages. Schröder understands banks.

The Lehman bankruptcy has brought him hundreds of new clients. He's established himself as one of the clean-up men in this mess. His job is to examine the wreckage and make sure small investors are not lost in the fray.

According to Schröder, the average Lehman casualty is 64. Schröder will be 40 in June. The people who come to see him in his office are old enough to be his parents. They feel betrayed and ashamed, and they want to show the banks that they are not about to take this sort of treatment lying down.

Of the roughly 300 clients he now has, no more than 15 are still working, says Schröder. The overwhelming majority are retirees who spent their lives saving for old age. Most were customers of the same bank for decades. They knew and trusted their advisors, which made them attractive targets for the banks' sales strategists. Two received calls from their advisors in a retirement home, says Schröder. One thought Schröder, who visited him later, was from his bank, "because you too are such a nice man."

Schröder's oldest client will celebrate his 100th birthday in May. He "survived both world wars and the Turnip Winter (1916-17, when a frost destroyed harvests)," he told Schröder, "and now Frankfurter Sparkasse is burning up the last of my money."

Investment advisors referred to agreeable elderly customers as "flexible Lehman grandmas." These were people they would call when it was time to show sales results and fulfill quotas, or when they were short on time. Bankers called them "OD customers" -- O for old, D for dumb (or "AD" in German, for alt und doof). "These were conditions you would normally expect only in a gray market," says Schröder.

He says there are two ways to win a lawsuit against Frankfurter Sparkasse, Dresdner Bank or Citibank. A customer can prove in court either that his bank gave him erroneous advice, or that his advisor concealed hidden commissions.

Schröder has brought a file containing documents from bank employees he knows in Frankfurt. Some are confidential, marked "for internal use only," and some are evidence. He produces an email written by a bank advisor three months before the Lehman collapse. In the message, the advisor promises "hedging of the invested capital with 100 percent protection of capital on the maturity date." The prospects for winning this particular case are good, says Schröder.

Most of the customers were unaware that certificates, unlike investment funds, carry an issuer risk. If the issuer goes under, a certificate automatically becomes worthless. There is no such thing as "100 percent protection of capital," as the Lehman investors have since learned.

Schröder holds up the folder and tells his audience that every issuer is required to file a detailed prospectus with the German Federal Financial Services Authority, or BaFin.

"The bonds are not subject to any capital protection," is written in bold lettering on page 1 of the prospectus. "A partial or total loss of invested capital is possible." Further back, the prospectus notes that buyers of certificates should have experience with derivatives, options and warrants, and that before buying these instruments investors should "consult with their own legal and tax advisors, accountants or other advisors." A murmuring sound passes through the room.

The flyer handed to some of the Lehman casualties by their advisors makes no mention of risks.

For Schröder, the methods used by banks to unload these Lehman securities on long-standing customers were nothing short of "perverse" and "unscrupulous." The sole purpose of certificates, he explains, is to let a bank make a killing without its customers noticing. "These are standard gaga products," says Schröder. "As an investor, you simply cannot make money with them, because you are betting against top professionals." His goal is to prove "that the sale of certificates in Germany was a huge scam," Schröder says in his Frankfurt office. "And I am not the least bit concerned that we will not succeed."

Translated from the German by Christopher Sultan
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