Saturday, October 18, 2008

Breach of the law - arguments

983 investors signed a Petition to the Government to carry out a full and independent investigation into whether there was any wrong doing involved in the creation and marketing of the credit linked securities, such as the mini bond, high notes, jubilee notes and pinnacle notes.

In an accompanying letter sent to the Monetary Authority of Singapore, I identified three laws that could have been breached:
1) Securities and Futures Act (section 199)
2) Financial Adviser’s Act (section 27)
3) Trustees Act

Let me explain these points.

Securities and Futures Act
This law requires the seller of a security to provide truthful and reliable information to the buyer. The seller cannot give false or misleading information and cannot withhold any relevant information. Any breach of this law is an offence that can lead to civil or criminal action.

I like to ask MAS to see if the actual nature and risk of the credit linked security has been properly disclosed in the advertisement, sales material or the prospectus.

Are they disclosed in a transparent and clear manner? If not, was the disclosure done in a manner that can be considered to be misleading?

Many investors said that they were misled into thinking that they had invested in the bonds issued by the six or eight reference entities and that all of these entities had to fail before they lose their entire capital

How did this mistaken belief came about?

Financial Advisers Act
This law requires the financial adviser or the representative to understand the needs, risk profile and preference of the investor and to recommend the appropriate products.

Many of the investors wanted to have a safe investment. They are risk adverse.

Did the representative carry out their responsibility properly? Why did they recommend a product that has turned out to be so risky? Did the representative understand the nature and risk of the product?

Trustee Act
This law requires people in a position of trust to look after the best interest of their client. Does this law apply to the trustee and the arranger of the securities?

Did they discharge their duty according to the law? Were the payments made out of the fund in accordance with what has been authorised in the prospectus? Were the dealings made at the correct prices and are fair to the investors? How are conflict of interest resolved?

Should the trustee have to render a full statement of account to the investors?

I hope that the Government looks 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 minimize the losses of the investors and ensure that the underlying securities are NOT un-wound at fire sale prices.


Anonymous said...

Mr Tan, how about those products that were already unwind, and we had been informed the value is ZERO! What should we do?

Anonymous said...

I hope that MAS will also look into the other similar products issued by the various banks (and FI's) and advise them to take a pro-active role to inform their clients of the risks involved. Hopefully this will be done before another "Lehman" goes bottom up.

Anonymous said...

Mr Tan,
We have sent a complaint letter to FIs. Do we still have to write another statement?
How is this statement different from our complaint letter we sent earlier?
Thank you in advance for your valuable advice.

Anonymous said...

As far as High Notes 2 is concerned, I can cite 3 instances which may have breach the Acts:
1. In the pricing statement (page 14), HN2 is described as a "5-year structured first-to-default credit linked notes designed for defensive investors..." This indicates the notes are low-risk investment for risk-averse investors. But it turns up to be very risky.
2. In a sales material which is also printed in the Pricing Statement, the bank says: "Spread your risk with a basket of bank credits, each rated A- or better by Standard & Poor's. The first-to-default clause is omitted here. This leads to investors believing that the risk of HN2 is diversified among the 8 reference entities. However, the truth is that the investors' risk is multiplied when the first-to-default claused is applied.
3. Many investors found too late that their risk is also linked to any credit default of the 100 companies held by Constellation. And 5 defaults in this basket of securities will trigger an early termination that will result in great loss to investor. This is a major risk but is not clearly discussed or explained or illustrated in the pricing statement.

I hope other investors can also share their observation of any likely breach of the law by the bank so that we also can make it known to MAS.

Anonymous said...

As far as High Notes 2 is concerned, I can cite 3 areas that might have breached the Acts:
1. On page 14 of the pricing statement, HN2 is described as "designed for defensive investors. This indicates that the notes are low-risk investment product for risk-averse investors.
2. In its sales material, the bank says : "Spread your risk with a basket of bank credits, each rated A- or better by Standard & Poor's". The first-to-default clause is omitted in this advertisement (perhaps intentionally). As we know now, investors actually face multiple risk when the first-to-default clause is applied to the 8 reference entities.
3. The risk in respect of the default of any of the 100 companies within the basket of securities held by Constellation is not clearly discussed, explained or illustrated in the pricing statement. This why many investors are shocked when the FA informed them that 5 defaults (out of 100 names) in the basket of securities will trigger an early termination of the notes that will result in substantial loss. This non-disclosure of a major risk appears to be a serious breach.
I hope other investors can also share their observations of any possible breach by the bank so we all can bring this to the attention of MAS for further investigation.

Parka said...

Mr Tan,

I bought the Minibond series 2 after listening to a talk held by them OCBC Securities.

Now, their response is they are just the distributor and are just taking orders (army style) from the customers. In one of the comments from creditlinkedsecurities.blogspot, the commenter said that OCBC WILL NOT advise product suitability in relation to its customers' risk appetite. They are actually casting a net during the talk hoping to catch some fat investors, which they did.

If they are going by this argument, then they would have bypassed the three laws you listed.

The question is it actually legal for OCBC to sell financial products like that?

Anonymous said...

Agree with you on HN2, Wilson, particularly on point 3.

I talked with some bankers,including DBS staff, they also think that how the 100 CDOs will affect us investors is not clearly stated. According to the information garnered, for a CDO based product, it should provide a formula about how the number of credit events will erode our principal, and under what condition the Note will be early redeemed.

Based on the DBS VP's comment at ST forum on 24 Sept,they are trying to roundabout this issue by saying that what securities to buy had not determined when the pricing statement was drafted. If this is the case,they should consider taking a series of Notes (as promised in their pricing statement), including asset-backed securities, to ensure the risk is equivalent to our return of 4% per year. However, the fact turned out that DBS is miximizing their own profit, not considering the risks we investors are taking at all.

Furthermore, after determining to buy the CDOs,they should let us know the real fact by mailing us the details of the Reference Notes as it is not a low-risk Notes anymore. DBS said the information is available at the bank. However, they should understand no investors will actually have time to do that especially when they think the product is low-risks, with a fixed coupn, based on bond.

Anonymous said...

Even if the type of securities was not decided at the time of drafting the pricing statement, it is not an excuse not to have the risk explained in the pricing statement. Because they knew that constellation would use the money to buy a basket of securities (that can be decided later as long as AA rated) but they must tell investors that this basket of securities can also pose great risk to investors should some of them default. So this is non-disclosure of a major risk.

Anonymous said...

A bank is given a lesen to manage money. They owes depositors faith and trust. Here came hiring young, qualified and expatriate as CEO, many creative packages were introduced to accelerate bank's turnover. Hiding behind were all the toxic CDOs, invented by those Bastard American Bankers. Lured by high and secret commissions, many local bankers were trapped into the scheme, repackage the CDOs into Bonds and high Notes, and sold it to oldman-ladies years of hard earned saving.
You know when DBS ex-CEO retired back to USA, said he was home sick. I laugh then and wondering how much he had got paid in his swissbank account for introducing so many creative packages into Asean region. Trace the culprits-will you do that? MAS

Blog Archive