CASE HISTORY

Rita Maria Sanchez de Hernandez, Et Al V. Bank of Nova Scotia aka Scotiabank, a complaint filed in the Supreme Court of the State of New York, County of New York, in 2006, alleges that Scotiabank manipulated a takeover of Banco Inverlat and its parent company Grupo Financiero Inverlat (GFI), one of the largest financial institutions in Mexico, and in so doing deprived the plaintiffs, who were some of the largest original investors in GFI, of hundreds of millions of dollars.

The story of how this happened is tied to the financial upheaval that rocked Mexico in the mid-1990s, an upheaval known as the Peso Crisis. That crisis began in late December 1994. Two years earlier, in 1992, the plaintiffs along with other shareholders in GFI had purchased a bank from the Mexican government for approximately $1 billion. That bank, then known as Multibanco Comermex, was later renamed Banco Inverlat. That same year, GFI and some of the plaintiffs entered into various agreements with the Bank of Nova Scotia, a Canadian bank headquartered in Toronto, to help them manage Banco Inverlat. Pursuant to the agreements, approximately 5 percent of GFI’s stock was sold to the Bank of Novia Scotia, which is also known as Scotiabank.

Thereafter, the Peso Crisis caused economic turmoil that negatively impacted all of Mexico's banks. In some cases the Mexican government took control of individual banks, and in others the government entered into private agreements to support the banks without having to physically take control of their operations.

In the case of Banco Inverlat, the Mexican authorities, former GFI shareholders, and Scotiabank entered into agreements in July 1996 that resulted in the government assuming liability for the bank’s losses through mid-2000. As part of the agreements, the former GFI shareholders ceded management and control to Scotiabank. In return, Scotiabank agreed to invest approximately $175 million for the right to acquire 55% of GFI’s equity. Scotiabank also agreed to clean up Banco Inverlat financially by, among other things, collecting on loans that had gone bad as a result of the Peso Crisis. The amount collected on those bad loans would dictate how much of their original equity interest the former GFI shareholders received. Provided their own loans with Banco Inverlat were in order, the shareholders were guaranteed to receive a minimum of 9% and up to a total of 45% of the Grupo, depending on the success of Scotiabank’s clean-up efforts.

In their complaint, the Plaintiffs allege that Scotiabank falsified information about its collections of troubled loans, misled the Mexican government about its success in collecting the troubled loans and allowed the Mexican government to act on that false information so as to deprive the former shareholders of the equity that was contractually owed to them in 2004.

Discovery in the case indicates that while managing Banco Inverlat between 1996 and the summer of 2000, Scotiabank actually collected significantly more on the bad loans than it claims was collected. An expert retained by the plaintiffs has testified that if the actual collections had been counted, the former shareholders would have been entitled to approximately 35% of GFI’s equity rather than the 9% they actually received.

With an enterprise value of approximately $5 billion, the value of the 26% that Scotiabank allegedly deprived the former eligible shareholders of obtaining is well in excess of $1 billion, according to the plaintiffs’ expert.

Since the plaintiffs only make up approximately 40% of the former shareholders, they do not claim they are entitled to the entire 26% of the Grupo, but instead just to the equity they would have received but for Scotiabank’s alleged wrongful conduct. The plaintiffs contend they should have received that additional equity in 2004 when the 9% was delivered.

For more details on the plaintiffs’ allegations, see the Second Amended Complaint and the Opposition to the Motion to Dismiss.