Any CoCo Bond Whistleblowers?

Over the past few days, we’ve seen the “coco bond carnage” (Bloomberg) play out in newspaper articles as “investors are freaking out” (Business Insider) and the “[m]usic stops for buyers of bank coco debt” (Financial Times).

We would be interested in hearing from potential whistleblowers – either insiders who worked at the European banks like Deutsche Bank or investors who bought contingent convertible bonds (aka CoCos) from a bank which made misleading or insufficient disclosures.

The abrupt drop in these bonds harkens back to the credit default swaps during the financial crisis only a few years back. From the sales figures we’ve seen, it looks like a debt instrument that gained significant traction a few years ago, and has quickly fallen in popularity.

CoCo bonds have been described as providing the upside of fixed income to investors while the downside of an equity. For the banks, they are apparently wonderful since they allow them to meet the harsher regulatory capital requirements while being written off entirely if the bank’s capital drops.

It sounds like investors were saddled with a lot of risk. And similar to what happened in the credit default swap market, there are very few buyers and no liquidity right now as prices drop.

We were talking this summer a great deal about bond whistleblowers. Given the substantial speculation of inadequate liquidity in this market previously, we thought it a prime area for potential wrongdoing at financial institutions. We still think this is a problem area. The emergence of the speculation over CoCo bonds over the past few days only seems to confirm it.

We’re not yet sure the extent these were marketed or regulated in the United States, since initial reading indicates that the U.S. used a different form of them. And Deutsche Bank has come out defending its bonds despite the reports that several European banks are reaching problematic capital levels. So it might turn out just to be a rush of fear as investors attempt to flee to safety.

We would be interested in speaking to anyone with information that their were inadequate or misleading disclosures in these financial instruments. They may be worth reporting to the U.S. Securities and Exchange Commission under the Whistleblower program authorized by Dodd-Frank. This program provides financial incentives to individuals reporting potential violations of the federal securities laws.