Tan Kin Lian's Blog: Investigation into potential wrong-doings by financial institutions

Thursday, October 02, 2008

Investigation into potential wrong-doings by financial institutions

Revised (1)

1. Introduction

Many people invested a large sum of money, or their life savings, in the credit linked securities, in the mistaken belief that these securities have low risk and are safe. These securities include the Lehman Minibonds, DBS High Notes, Morgan Stanley Pinnacle Notes and Merill Lynch Jubilee Notes.

These investors lost a large part or all of their investments due to the financial crisis. They were shocked that these structured products had high risk, which they were not properly informed.

I suggest that the Government to investigate if there were any wrong-doing on the part of the financial institutions that created or marketed these structured products.

These wrong doings could be in the form of negligence, dishonesty or fraud.

2. Potential wrong-doings

I suggest that the Government should appoint competent people to look into the following areas:
2.1 Were the products created with the aim of defrauding the investing public? Were the drafting of the prospectus, advertisements and other documents carried out with the intent of hiding the true facts from the investing public?

2.2 Were the financial institutions that marketed the product aware about the real risks of the products? Did they train their front line advisers to hide the true facts? Were they negligent in not understanding the true risk? Did they monitor the conduct of their front line advisers to ensure that the products are sold to the right people, based on their risk profile and preference?

2.3 What were the actual charges taken out of the structured products to pay the distributor and the product creator? Were these charges disclosed in the prospectus? Were the charges at a reasonable level, in comparison with the work that has to be done and the risk taken by the parties?

2.4 Were there conflicts of interest involved in the transactions between the various parties? Were the conflicts of interest adequately disclosed? Were the decisions on the pricing of the products made fairly in the interest of the investors? Was there any arrangement to ensure that the pricing is made based on fair market values?

2.5 Does this arrangement fall under certain laws, such as the Trust Act or more specific laws? Was there any breach of any of the provisions of these laws?

2.6 Does the fund manager break any law, if it takes out money from the structured product that are not authorised by the trust deed?

2.7 Were the financial institutions acting in a negligent or irresponsible manner when they continued to market the structured products after the mortgage market crisis unfolded in the summer of 2007?

2.8 Is there a case of misrepresentation when the financial institutions marketed these products as capital protected or capital guaranteed or as “minibonds” when they were not bonds?

3. Call for action

I hope that the Government look into these areas, to see if there were any wrong doing that led to such large losses among the investing public.

If there were wrong doing, the Government can take the appropriate action to bring the offenders to Court and to seek suitable compensation for the losses suffered by the investors.

I hope that the Government can play an active role to minimise the losses of the investors and ensure that the underlying securities are NOT un-wound at fire sale prices.

9 comments:

Anonymous said...: I'd just like to add, the banks are now coming out to say that these structured notes are HIGH RISK products and that their advisors went through a rigorous assessment process before recommending products to customers.

If the assessment process is so rigorous:

1. how can their advisors recommended these HIGH RISK products to retirees , aunties and uncles ?

2. how come some people who bought these products thought that they were buying bonds ? or thought that their risks were diversified across the basket of entities when in fact it is multiplied many times ? Some don't event have a clue what a credit event is !
Isn't it part of the rigorous process to make sure that customers understand these fully before selling products to them ?; October 02, 2008 11:03 AM
Anonymous said...: When the Banks reommended us the product then, they said it is low risk.

Now that there is a credit event, they said it is high risk.; October 02, 2008 11:52 AM
Anonymous said...: Please google to find the following report:

APPLE DAILY

-- Certain banks are said to have negotiated with customers with Lehman minibond losses and settled by giving investors some of their money back. The government has also invited management from 21 institutions that sold Lehman minibonds to a meeting today to discuss possible solutions for the minibond problem.; October 02, 2008 11:55 AM
Anonymous said...: Dear All,

I know that the hot issue now is about the high-risk financial products perhaps being mis-representated to consumers. I would like to ask if there is a similarity to the case where home-loan borrowers took up a variable-rate package where the bank's own board rate has not been transparent until too many complained in 2007? After taking up the variable-rate package, the interest rate from the bank doubled even while the SIBOR dipped. We all know now they have come up with more transparency in their loan pacakges now, especially since there was pressure from the public writing in to the Straits Times Forum. But what about those interest already paid? It also amounted to thousand of dollars of difference! So, from this example, the banks did do something for new packages for new customers. But for those who have been mis-guided with a board-rate that allows the bank to adjust aupwards with no basis (as they know there is a lock-in period where most customers will not leave),they have no case, and MAS did not step up on the plate. Thus, I can conclide, based on past experiences, MAS will not step up this time round as well, even when the petition is around 500+ signatures, which may represent $50 million (assumme average of $100k each), so do not hope too much. Do turn up at the Speaker's corner for Mr. Tan on 11th Oct, because even you remian hopeless, at least you demonstrate JBJ's fighting spirit.; October 02, 2008 1:02 PM
Anonymous said...: It is so exasperating to read responses from Janet Mohan, VP Customer Feedback and Service Management. She sits at her desk typing these responses saying "High Notes 2 not a low-risk product","..investors are told ..

Obviously, she has not been paying attention to what the investors have been saying! The investor care center set up is staffed with front line personnel from DBS. They are just as clueless and obviously there is a conflict of interest.; October 02, 2008 4:52 PM
GOHCT said...: Dear Sir or Madam,

CREDIT DERIVATIVE TRANSACTION RELATING TO THE JUBILEE SERIES 3 LINKEARNER
NOTES: SGD26,290,000 CREDIT-LINKED NOTES DUE 2014 (THE “SGD NOTES”) AND
USD1,400,000 CREDIT-LINKED NOTES DUE 2014 (THE “USD NOTES”, AND TOGETHER WITH
THE SGD NOTES, THE “NOTES”) - NOTICE OF A CREDIT EVENT

We refer to the Confirmations between Merrill Lynch International and Jubilee Global Finance
Limited with Reference Numbers 07ML61022A; 07ML61023A each dated

1 June 2007 (as amended,
the “Confirmations”) confirming the Transactions between us (the “Transactions”) under the 1992
ISDA Master Agreement and Schedule thereto dated as of 26 January 2007, as amended and
supplemented from time to time (the “Swap Agreement”). The Transactions reference, inter alios,
Lehman Brothers Holding Inc., (the “Affected Reference Entity”) as a Reference Entity thereunder.
Terms not otherwise defined in this letter shall have the meanings set out in the Confirmations or the
Pricing Statement relating to the Notes dated 12 April 2007.
This notice constitutes a Credit Event Notice given pursuant to the Confirmation and shall also be
deemed to be a Notice of Publicly Available Information given pursuant to the Swap Agreement.
1. We hereby give you irrevocable notice pursuant to the Swap Agreement that a Bankruptcy
Credit Event occurred with respect to the Affected Reference Entity on or about 15th
September 2008 when the Affected Reference Entity filed for bankruptcy protection in the
United States. This constitutes a Credit Event under the terms of the Confirmations.

2. Pursuant to the Confirmations, we cite with respect to this Credit Event the Publicly Available
Information attached hereto as Annex A.

3. This notice will be deemed to be effective on the London Business Day it is delivered if it is
delivered prior to 4.00p.m., London time on that Business Day, or on the following London
Business Day if delivered after 4.00p.m., London time.

4. Nothing in this letter shall be construed as a waiver of any rights we may have with respect to
the Transactions.

5. This letter shall be governed by and construed in accordance with English law.

Yours faithfully,
for and on behalf of
MERRILL LYNCH INTERNATIONAL; October 02, 2008 7:52 PM
Anonymous said...: Ask her back:

If they know that High Notes 2 is not a low risk product, why their salesperson (they are not qualified to be called advisor) asked customers to put in a large portion of their net worth into such flawed product?; October 02, 2008 10:49 PM
Anonymous said...: anoynymouses are aplenty and have no guts to put any names, annoy-annoynimouses; October 03, 2008 12:16 AM
Anonymous said...: adego,

I am anoynymous just because I tried several times but failed to register an effective name.

I registered my copmplaint with DBS with my full name, I also registered in Mr. Tan's petition with my real name. I also send my questions to DBS through their feedback page (but none has answer yet). We are just expressing our disappointment with FIs, the truth. Is there anything to scare?; October 04, 2008 9:41 PM