Law360, New York (April 17, 2012, 8:33 PM ET) -- A Spanish construction firm sued The Bank of Nova Scotia and its investment banking arm in New York state court Monday, accusing the bank of providing “seriously flawed” financial advice that caused its consortium to lose out on a multimillion-dollar Chilean toll road project.
Scotiabank and Scotiabank Global Banking and Markets, then known as Scotia Capital Inc., caused SA de Obras y Servicios, COPASA and consortium partner Cointer Chile SA to underbid for the road expansion project in October 2010 by about $1.75 million unidades de fomento, the equivalent of about $75.6 million at the time and $81.1 million in today's dollars, according to the complaint.
The project called for the continued expansion of a section of Ruta 5, “the backbone of Chile's road network,” according to COPASA. The aim was to improve connectivity between the cities of La Serena and Vallenar through the renovation of a 187-kilometer stretch of highway.
The Chilean Ministry of Public Works capped the request for proposals, which asked bidders to estimate the net value of the toll road's expected income, at UF$9.3 million, according to the complaint. The winning bidder would front the money for the project, then recoup its costs and earn a profit by collecting tolls on the renovated road for a specified concession period, after which the toll revenue would go to the government.
The Ministry of Public Works capped the concession period at 35 years.
Each bidder was also required to post a bid bond valued at UF$230,000, COPASA says. As a partner with Cointer Chile, COPASA was responsible for half the bond cost.
The COPASA-Cointer Chile consortium hired Scotiabank as its financial adviser in March 2010. Instead of basing its calculations for the project bid on the provisional project completion date, as instructed by the Ministry of Public Works in its RFP, Scotiabank provided COPASA and Cointer Chile with a grossly defective financial model that used the concession commencement date, COPASA claims.
Based on this model, the companies entered a bid for the project valued at $275.2 million when they should have bid $356.3 million. As a result, the COPASA-Cointer Chile bid came in the equivalent of $92 million lower than the next-highest bidder, COPASA says.
The allegedly flawed bid also supported a concession term of approximately 16 years, where the target should have been 23.8 years.
“After uncovering the model's core flaw, COPASA realized that the sponsors had been awarded a major Chilean road project that was far riskier, shorter, less profitable and more difficult to finance than it had believed when it submitted the bid,” the complaint said.
After consulting with the Ministry of Public Works, COPASA and Cointer Chile had no choice but to withdraw their bid, according to the complaint. When they did so, the companies forfeited the bid bond.
COPASA now seeks to recoup, at minimum, the roughly $75 million in 2010 dollars it would have lost on the project had it carried out the road expansion based on Scotiabank's low-ball bid, as well as the $5 million it lost on the bid bond.
“We will review the filing,” Scotiabank spokeswoman Ann DeRabbie said Tuesday. “The bank will defend itself vigorously.”
COPASA is represented by Jay S. Auslander and Julie Cilia of Wilk Auslander LLP.
Counsel information for the defendants was not immediately available.
The case is SA de Obras y Servicios, COPASA v. The Bank of Nova Scotia and Scotiabank Global Banking and Markets, formerly known as Scotia Capital Inc., case number 651231/2012, in the Supreme Court of the State of New York, County of New York.