Client cannot sell securities from his custody account at the bank as desired due to a restriction resulting from a corporate action and suffers a price loss

Topic: Stock exchange / securities account Case number: 2024/10

The client wanted to sell securities listed on a foreign stock exchange and held in his custody account with the bank. This was not possible because the bank had frozen the securities due to an upcoming corporate action. He immediately informed his bank that this freeze was an error because, according to his inquiries at the foreign stock exchange, the securities were traded normally. Around three weeks after the first attempt to sell, the bank informed the client that the securities had now been unblocked. After the price of the securities had risen, the client tried to sell them for a second time about three weeks after that notification. The second attempt to sell was made at a higher price than the first. The second attempt to sell also failed because the securities had once again been frozen in the meantime. Shortly thereafter, he was finally able to sell the securities, but only at a price lower than in both of his previous attempts to sell them. The client claimed compensation from the bank in the amount of approximately CHF 24,000. The claimant based his calculation on the price of his second attempt at sale and deducted the price actually achieved from it. The bank refused the claimant’s claim for compensation and was only prepared to make a gesture of goodwill in the form of a payment of CHF 5,000. In the Ombudsman proceedings, it increased that offer to CHF 10,000. The client accepted the settlement amount.

In this case, two points were in dispute. First, the question of whether the Bank had made any mistakes at all that would give rise to a claim for compensation, and second, the amount of any such claim for compensation, if any. The bank denied having made any mistake and explained that any loss that might be incurred by it would have to be calculated based on the difference between the price that could be obtained at the first attempt at sale and the actual sales proceeds. As already mentioned, the price that could be obtained at the first attempt to sell was lower than the price that the client could have obtained at the second attempt.

With regard to the question of any possible error in blocking the securities, the bank stated that it had to rely on the notifications of its custodian in such cases. The present case was more complex than usual. The custodian had communicated several blocking dates in connection with the upcoming corporate action. The main reason for this was the issuer’s confusing and contradictory information. In the present case, the bank assumed that the custodian had not made any error.

Furthermore, it stated that, based on the standard terms and conditions of its custody account regulations, it would not be liable for every error made by its custodian. It was customary and necessary to use sub-custodians as agents in the safekeeping of securities. Based on the relevant provisions of the Swiss Code of Obligations, which are reflected in its custody account regulations, it was only liable for the careful selection, instruction and monitoring of the custodian. Under these three criteria, the Bank could not be accused of any breach of duty.

In response to the client’s argument that he had promptly informed the bank that the block was premature and that the securities had been traded normally on the foreign exchange throughout the entire period in question, the bank stated that the fact that securities continued to be traded could not be the sole determining factor for any lifting of a block. The decision that a block could be lifted contrary to the reports of the custodian bank required detailed and time-consuming clarifications involving the bank’s risk units. Such clarifications were not appropriate in light of the overall circumstances of the present case.

With regard to the calculation of the loss claimed by the client, which the bank disputed, it stated that a single investment decision by the client was to be assumed. If the client had been able to sell the securities on his first attempt, they would most likely have been sold at the price obtainable at the time. Only this part could have been relevant for calculating the loss and not the higher price that he could have achieved on the second attempt. The loss would therefore have been only half as high, namely CHF 12,000. Since the bank was interested in a mutually agreed settlement of the dispute and in maintaining an uninterrupted client relationship, it increased its gesture of goodwill to CHF 10,000.

The Ombudsman submitted the bank’s increased settlement offer to the client with a recommendation to accept it. He expressed his understanding that, in a case like the present one, a bank would in principle follow the instructions of its custodian and would only deviate from them cautiously. The bank must decide, based on the overall circumstances of a case, whether or not to take any steps to clarify a client’s indication that a communication from the custodian bank may be erroneous, and if so, which steps to take. The bank must be allowed a certain margin of discretion in this regard. In the Ombudsman’s view, both sides had reasonable arguments for calculating the damage. The settlement offer was very close to the Bank’s calculation of the loss. No further concession was to be expected in the Ombudsman proceedings. The client finally gratefully accepted the increased comparative offer.