22 Oct 2009
SINGAPORE — One of the three defendants in the second class action suit related to botched structured notes has filed its defence against allegations of negligent and fraudulent misrepresentation. The structured notes in question are one of the Minibond Series linked to collapsed United States investment bank Lehman Brothers.
Lehman Brothers Singapore, which was named as the arranger of the now-defunct Minibond Series 2 in a suit backed by 165 investors, refuted claims that the investors were misled by the statements in advertisements, base prospectus and pricing sheets of the notes.
The company is represented by Senior Counsel Andre Yeap and Mr Danny Ong from Rajah & Tann.
The other two defendants are Minibond Ltd, the issuer of the investment, and ABN Amro, one of the nine distributors of the product. They are represented by Shook Lin & Bok and Allen & Gledhill, respectively. The latter is expected to file its defence in about two weeks.
One point of contention in this case is the issue of risks faced by the Minibond investors. Earlier, the plaintiffs alleged that the defendants have perpetuated a “false and misleading” impression that the product’s “primary risk” is with the credit standing of seven companies known as the reference entities (REs).
The reference entities included names like DBS Bank, Standard Chartered Bank and SingTel and these companies form the first layer of the credit-default swaps embedded in the product. This means that the occurrence of default or bankruptcy in any of these seven companies could result in a “credit event” which can potentially cause the Minibonds to become worthless.
However, the plaintiffs — represented by their lawyer Conrad Campos and Company — alleged that the seven REs are, in fact, a “ruse” to induce investors to invest in the Minibonds. The true risk of the product lies with the second layer of underlying securities, made up of collateralised debt obligations, of which there was inadequate disclosure, they claimed.
In its 58-page defence filed on Oct 2, Lehman Singapore maintained that the credit risks related to the REs were indeed the “primary risks” borne by the investors.
In fact, Lehman Singapore claimed that the default or bankruptcy risk of the REs is “at all material times” higher than that of the underlying securities.
If there were indeed misleading representations, Lehman Singapore said that there are documents which had been signed by the plaintiffs which stated that investments were made based on their own independent judgment and appraisal of risks.
Lehman Singapore also alleged that the plaintiffs were negligent on their part such that they contributed partly or wholly to any losses incurred. In response, the plaintiffs said in their filed reply last Friday that returns from Minibond Series 2 were derived from the underlying securities. They also added that this substantiates their claims that these securities carry more risks compared to the seven REs.
As for Lehman Singapore’s point on signed warranties, the plaintiffs countered that the prospectus for the underlying securities was created only after the offer period for the sale of Minibond Series 2 had closed.
Hence, the plaintiffs said that it is “devoid of good faith, common sense and commercial reality” to expect Singapore retail investors to conduct their own investigation and analysis of the underlying securities.
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