Structured products linked to Lehman Brothers

Contributed by Richard Woo

Let us recap the salient points and the parties involved, and issues/questions of relevance that appear vague and for which we need clarification and further information:

[1] Monetary Authority of Singapore [MAS]
MAS is the party at the top of the rung and it was MAS which gave approval, wittingly or unwittingly, for the sale of these toxic products to the public. And since MAS gave approval for their sale, MAS cannot now accuse the distributors for selling them.

The Prime Minister in an interview he gave to journalists on Oct 26 is reported to have said, inter alia, .. "In this case the Lehman Minibond Notes or DBS High Notes or ML Jubilee Notes were clearly not low-risk products." …

If they were not low-risk products, can they be considered as high-risk products, then, or, more appropriately, products with risks of robbing the investor of his capital, risks that were evidently sky-high and inappropriate, and absolutely incompatible with a meager return of a paltry 5% pa coupled with freezing of principal over a long period of five to six years?

MAS, it seems, can only point the finger at any distributor that has "mis-sold" or committed a legal breach. However, ten thousand investors have lost in total about half a billion dollars – and that's a lot of money; some of this money came from their retirement kitty, and for some it was their life-long savings.

In at least one product, there is clear evidence of mis-selling or making misrepresentations of the risks. If a distributor has misrepresented or lied to the investors, then there can be no justice in saying that investors did not enter with their eyes open; it would be an act of prejudice to blame investors by saying they should have invested with their eyes open; caveat emptor can in no way be introduced as a principle of fair play if one party has lied or misrepresented.

It is indeed strange that MAS has had no qualms telling investors poisoned by these toxic products: You were greedy. MAS is still investigating and exploring and that's laudable, but the comment about investors being greedy has no basis in fact and must be openly refuted or repeatedly refuted if necessary. If concerned MAS officials have a conscience, they would do well to examine it.

[2] "Vulnerable" group of investors – question for MAS/distributors
Would MAS or distributors please define the terms "vulnerable" and "non-vulnerable" and provide details of the criteria for distinguishing vulnerable from non-vulnerable?

Questions for MAS:
[a] Is it fair to leave it to each distributor to make the initial decision to compensate or not to compensate?
[b] Would it be fairer to consider, based on availability of evidence including but not limited to, advertising materials, internal procedures, risk-profiling of individual investors, as to whether any distributor was clearly guilty of mis-selling, or misrepresenting the risks involved?
[c] Would it be rational to think that distributors would admit liability to an investor who in their opinion is not among the group classified as "vulnerable"?
[d] Would it be unreasonable to say that if a distributor had mis-sold to Ms A or B it had in all probability also mis-sold to Mr X or Y?
[e] Would it be fairer to hold any distributor fully accountable to all their investors if they have mis-sold or misrepresented?

[3] Risk-profiling or analysis

Questions for distributors:
[a] What was the point of performing a risk-analysis?
[b] Was the risk-analysis performed in an objective manner?
[c] Would you agree that the risk-analysis was never used to determine whether an investor was suitable for the product concerned?
[d] Would you agree that you were selling a highly toxic product?
[e] Would you agree that any claim that you were merely acting as "order-executioner" cannot be meaningfully supported if you were uttering lies with abandon relative to the product, via print advert or otherwise?

[4] RMs
Can any of the RMs selling these structured products be said to be non-bilingual? To find out we need to see their CVs or ask their friends or family members. To be sure, many people in Singapore, especially the younger set, are bi-lingual.

Can it be rational to argue that an investor conversing in Mandarin, or in a vernacular other than English, with the RM is "vulnerable" but another investor discussing in English is not? But the crucial thing is: Did the RMs explain the risks of the product they were selling to the investor? Did they perform the risk-analysis diligently? Did they ask the questions concerning the risk-profile of the investor upfront, at the commencement of the discussion? Did they point out the risks spelt out in the so-called Pricing Statement?

Was a copy of the Pricing Statement handed out to the investor? Some investors have no hesitation making the claim they were not given a copy and that they did not even know what it was all about. According to some investors I spoke to, the RMs who attended to them spoke mainly about the merits of the product, for example, the interest yield, the quarterly interest payment, the link to highly rated financial institutions, the names of these institutions, and misrepresented by saying the investor would get all his/her money back if the investment were to be held to maturity.

Some investors have reviewed the risk-analysis form completed, in a hasty and careless manner, by their RM and noticed that although they were categorized as a low to mid-range risk investor, the RM did not tell them that the product was not suitable for them. I can see from the "tick-marks" completed for two investors that the information given in some areas was inconsistent or contradictory.

How many of the RMs, if any, really understood the contents of the Pricing Statement? It is obvious that people like MM are looking only at a small area of the picture. A complete analysis needs to take into account all the factors involved. Has any distributor or their RMs contravened a legal enactment, for example, the Financial Advisers Act? Any investigator seeking truth cannot avoid looking into this area. In the context of the scenario before us, would MM or MAS consider the use of the term "minibonds" as something innocuous, coincidental, or as something more than that, as part of a carefully hatched-up scheme, a scam perhaps, to fleece members of the public?

[5] Questions for Fidrec:
[a] What are your standards or criteria for making judgment on cases referred to you?
[b] The number of Fidrec staff involved in reviewing each case?

[6] Plausible entry of new swap counterparty to replace Lehman Brothers [Minibonds].
Distributors who have advertised "invest on solid foundations" and/or "invest with peace of mind" ought to take over as the new owner of the investment, with or without the new swap counterparty arrangement. Since they have misrepresented, through print advert and, plausibly, via verbal input from their RMs, they can be seen as having mis-sold or misrepresented, hence they should not shirk from their mistakes or responsibility; they should act honorably by returning investors their principal minus what the investors have received in terms of interest payment.

[7] Statistics – Request to MAS:
For the benefit of the investing public, please publish in the newspapers statistics covering data [in table form] linking information as follows:

Type or name of structured product, Name of Distributor, Total amount invested, Total number of investors, Number of "vulnerable" investors, Number of vulnerable investors if any who have been compensated and Number of "non-vulnerable" investors if any who have been compensated

[8] Future/present
It's all very well to think about the future by talking about revamping the industry, introducing tighter control measures, overhauling sales tactics etc but there is no future when the present is not taken care of. We all need to be mindful of the present; we need to be aware of the dire situation in front of us: an "explosion" has occurred and injured people are lying everywhere. Let's take care of all the injured before planning our next move.

Richard Woo