Friday, July 24, 2009

SCMP:Minibond decision heartens investors similarly burned

24 July 2009

The watershed decision forcing banks to pay more than HK$6 billion compensation to Lehman minibond victims has given hope to thousands of investors burned in meltdowns of similar structured products.

The Securities and Futures Commission (SFC) ordered 16 banks, including Bank of China (Hong Kong) and Bank of East Asia, to return up to 70 per cent of money invested in minibonds to investors because bank staff sold the complex derivatives as low-risk.

The banking regulator, the Hong Kong Monetary Authority, will now deal with 9,000 other complaints of mis-selling of structured products. These are likely to include gripes about worthless Constellation Notes, sold by DBS Bank, and Octave Notes, sold by 17 banks and designed by Morgan Stanley.

"We will investigate if there is any mis-selling in these complaints. Our target is to complete all the cases by March," HKMA executive director Raymond Li Ling-cheung said.

Democratic Party chairman Albert Ho Chun-yan said: "Octave Notes and Constellation investors now have a stronger case for compensation."

Like minibonds, Constellation Notes were derivative products - financial bets - linked to the financial health of Lehman Brothers. Their buyers wagered that no companies in a group that included Lehman would go bust.

Investors were wiped out when the US bank failed last September.

Out of a series of 18 derivative-based Octave Notes, three required buyers to strike similar bets that Lehman would not fail. Buyers lost everything after the bank's demise.

Many investors who attended meetings organised by the Democratic Party claimed they had no idea they were buying derivatives. Instead, they claimed they were told the notes were comparable to time deposits or simple corporate bonds.

Shelley So, a Constellation investor, said DBS staff told her the notes were "for extra income, because we do not earn very much". In 2006, she and her husband poured US$130,000 into the product. The couple had instructed lawyers to try to get their money back.

DBS declined to comment.

About 4,000 Hong Kong people bought HK$2.4 billion worth of Constellation Notes. Octave Notes were sold to more than 8,000 people, who invested HK$1.8 billion.

Meanwhile, dozens of Lehman minibond investors protested outside the SFC yesterday, saying the new payout proposal was not acceptable and they wanted all of their investment principal back.

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