Key Investments blames Czech Position for inability to pay

Prague 6, 10 and 13 should consider insolvency proceedings against issuers of securities Key Investments purchased on their behalf

Zastupitelstvo Prahy 10 (na snímku starosta Milan Richter) řešilo v pondělí zprávu rady o stavu jednání s Key Investments. | na serveru Lidovky.cz | aktuální zprávy Zastupitelstvo Prahy 10 (na snímku starosta Milan Richter) řešilo v pondělí zprávu rady o stavu jednání s Key Investments. | foto: ČTKČeská pozice
Zastupitelstvo Prahy 10 (na snímku starosta Milan Richter) řešilo v pondělí zprávu rady o stavu jednání s Key Investments.

The brokerage Key Investments has blamed Czech Position for causing problems complicating the return of Kč 200 million which the Prague 10 administration entrusted to the firm. On Monday, the assembly of Prague 10 discussed developments, or lack thereof, with district leaders’ attempts to get the public funds back from the nontransparent brokerage.     

Summary: Czech Position has been closely following developments in the Key Investments case in which the administrations of Prague 6, 10 and 13 are trying to retrieve hundreds of millions of crowns from the brokerage, which bought non-liquid securities with dubious face values; the securities were issued by companies with various ties to Key Investments.

The three above-mentioned Prague districts have a total of around Kč 600 million still tied up with the brokerage: All have officially requested the return of the money they invested, but only Prague 13 has received money back (Kč 50 million) and according to the now terminated investment contracts, Key Investments is overdue.

Prague 13, however, has not presented any documentation showing which securities Key investments sold at what price to raise the Kč 50 million returned to the city district. All three districts are now looking for lawyers and advisors to help retrieve the public funds.       

Czech Position is to blame!

On Monday, May 2, the assembly of Prague 10 debated a report presented by the council — the administration’s leadership elected by the assembly and headed by the mayor — on developments in negotiations with Key Investments. Prague 10 has Are we supposed to interpret this as meaning that if the media had not reported on this case Key Investments would have returned all the money by now?demanded that Key Investments return at least Kč 214 million. This figure must be a cynical joke on the part of Key Investments, which is still attempting to reassure Prague 10’s council that the actual value of its portfolio is higher.

According to Prague 10 council’s report, because of a “targeted, biased and scandalous campaign, namely by the [news] server Czech Position,” Key Investments says it is presently unable to liquidize the securities in Prague 10’s portfolio. Are we supposed to interpret this as meaning that if the media had not reported on this case, Key Investments would have returned all the money by now? This is, of course, nonsense; unfortunately, the majority of Prague 10 politicians appear to believe it.

In the report prepared by Prague 10’s deputy mayor Bohumil Zoufalík (Civic Democrats, ODS), the sale of the securities as requested by Prague 10 is not possible within the time limit specified in the contract with Key Investments.

These two revelations from the report are highly significant. What reaction from the media did Key Investments expect after it emerged that on behalf of the three administrations the firm had purchased securities that aren’t traded on any stock exchange or financial market, have no guarantees, the issuers thereof are in various ways linked to Key Investments, whose assets are held by banks and creditors as collateral for previous loans, and which have ridiculously low rates of return, considering the level of risk involved?            

Key Investments and districts refusing to talk

We do not understand how a company can accuse a media outlet of targeted and biased reporting when it categorically refuses to communicate. Therefore, we call upon Key Investments to announce its position on all of its activities and actions that we have reported. In return, we pledge to publish the firm’s position in full.

But it’s not only Key Investments that is ignoring our requests for comment. For a while now, the administrations of Prague 6, 10 and 13 have refused to answer our questions. The worst is Marie Kousalíková (ODS), Mayor of Prague 6, which still has more than Kč 250 million of public funds tied up in Key Investments. Kousalíková has still not answered questions that we sent her on March 8!             

Why is ČNB not taking action?

The debate in the Prague 10 assembly on Monday began with council representatives claiming that so far no loss whatsoever hasConsidering that it was the  ČNB that imposed the considerable fine, one would expect that the same body would verify that the offender has corrected its errors and ended the irregular practices. been incurred as a result of the investment portfolio and that the hundreds of millions were invested through a firm which had all the required licenses. If we ignore the fact that the Prague 10 councilors should have been aware of the fact that in 2008 Key Investments was fined Kč 2 million by the financial regulator for irregular practices in its fund management, this assertion is essentially correct.

Nevertheless, in this case the conduct of the Czech National Bank (ČNB) appears inconsistent to say the least. Considering that it was the regulatory organ of the ČNB that imposed the considerable fine upon the brokerage, one would expect that the same body would verify that the offender has corrected its errors and ended the irregular practices. But Key Investments has basically continued with the same practices for which it was fined by the financial market regulator. The ČNB has, however, done nothing.

The Prague 10 council’s report for the assembly contains other interesting points. In March, the council requested several insurance companies for a policy to cover losses in the eventuality that the issuers of the securities in its portfolio fail to pay the principal upon maturity of bonds. No insurance company was willing to provide such coverage.   

Lessons for the future should be learnt from cases such as this. As Czech Position has stated before, in this case it means that measures should be introduced on the national level to regulate investments by public organs using surplus public funds.     

But the course of action by the affected Prague districts to deal with the situation at hand now is another question, and the Prague 10 council is reportedly preparing legal action against Key Investments. But given that a distrainment order has been in place on part of Key Investment’s property assets for several months now, pending the payment of a claim lodged by the firm ENIC, for just several million, it’s highly doubtful that anybody would be able to extract anything near the hundreds of millions of the Prague districts’ money from the brokerage.   

Hundreds of millions frozen until 2013

Prague 10 council’s report also mentions overdue payments on bonds amounting to around Kč 18 million. If this is indeed the case then Prague 10 now has a valid claim against the issuers of the bonds. Therefore, given theIt may be advisable for Prague 10 to initiate insolvency proceedings against the issuers directly. financial predicament of all the issuers of bonds in Prague 10’s portfolio, it may be advisable for the district to initiate insolvency proceedings against the issuers directly.      

It’s hard to predict how the affair will develop. The Via Chem Group 2010 bonds mature on June 1, 2011, but the three Prague districts have only about Kč 12 million worth of these bonds. This is a minimal amount compared to the overall amount they invested, thus we venture to predict that this sum will be paid, if only to avoid negative reactions by the media.

Each following year, certain bonds in the Prague district’s portfolios mature. And in 2013 the principal of the Via Chem Group 2008 bond becomes due and the districts should receive at least Kč 350 million. If a savior investor does not enter the fray beforehand, this amount of public funds will remain frozen and inaccessible.