Caveat emptor: A licence to cheat

Definition by Tan Kin Lian: Caveat emptor (let the buyer's beware): A licence for the financial expert to cheat the unsavvy consumers.

Comment posted in my blog
Dear all ,

Please read this article ( published in BT dated 15 Oct ) titled 'Times to make sellers beware, not just buyers'.

I quote the followings : " ... Here we have essentially an insurance policy taken out by Lehman Brothers via its own special-purpose vehicle named Minibond to protect its exposure to six prominent banks known as 'reference entities' or REs. The money invested by the Singapore and Hong Kong public formed the insurance payout should any of the six have failed over the period in question, and in return for use of the public's money, Lehman paid the public an attractive annual coupon of 5 per cent which was, in effect, an insurance premium.

It was brilliant in its conception, simplicity and execution: Lehman transferred its risk of loss from any RE failure to the public but structured the deal and its sale documents to give the impression this was a desirable arrangement.

If caveat emptor is to be reasonably used as a defence (or a criticism of the retail investing public for not reading or understanding the offer documents), then the cover of the prospectus should have had a description of the exact nature of the product as an insurance policy, the fact that Minibond was Lehman, the financial standing of Lehman, Lehman's reasons for needing the insurance and that the risk of loss was not limited to one of six banks failing but, in fact, seven.

Since this was not the case, there must surely be grounds for claims that disclosure was poor, possibly even misleading and that a defence of caveat emptor is not good enough. If buyers were to beware, then there should have been full and proper disclosure of all essential elements in the proper fashion....."