Credit Linked Securities - Wrong doings?

Draft. Please identify additional areas that can be covered in this letter to the Government. Are there points that can strengthen this letter?

1. Introduction

Many people invested a large sum of money, or their life savings, in the credit linked securities, in the mistaken belief that these securities have low risk and are safe. These securities include the Lehman Minibonds, DBS High Notes, Morgan Stanley Pinnacle Notes and Merill Lynch Jubilee Notes.

These investors lost a large part or all of their investments due to the financial crisis. They were shocked that these structured products had high risk, which they were not properly informed.

The Petition to the Singapore Government ask the Government to see if there were any wrong-doing on the part of the financial institutions that created or marketed these structured products.

These wrong doings could be in the form of negligence, dishonesty or fraud.

2. Wrong-doings

I suggest that the Government should appoint competent people to look into the following areas:

2.1 Was there any fraudulent intent in the creation of these products? Were the products created with the aim of defrauding the investing public? Were the drafting of the prospectus, advertisements and other documents carried out with the intent of hiding the true facts from the investing public? Were the lawyers and other professionals involved in this activity?

2.2 Were the financial institutions that marketed the product aware about the real risks of the products? Did they train their front line advisers to hide the true facts? Were they negligent in not understanding the true risk? Did they monitor the conduct of their front line advisers to ensure that the products are sold to the right people, based on their risk profile and preference?

2.3 What were the actual charges taken out of the structured products to pay the distributor and the product creator? Were these charges disclosed in the prospectus? Were the charges at a reasonable level, in comparison with the work that has to be done and the risk taken by the parties?

2.4 Were there conflicts of interest involved in the transactions between the various parties? Were the conflicts of interest adequately disclosed? Were the decisions on the pricing of the products made fairly in the interest of the investors? Was there any arrangement to ensure that the pricing is made based on fair market values?

2.5 Does this arrangement fall under certain laws, such as the Trust Act or more specific laws? Were there any breach of any of the provisions of these laws?

2.6 Does the fund manager break any law, if it takes out money from the fund that are not authorised by the trust deed?

3. Call for action

I hope that the Government look 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.

Tan Kin Lian

Taiwan senator requests bank to buy back Minibond

Link: http://news.chinatimes.com/2007Cti/2007Cti-News/2007Cti-News-Content/0,4521,130502+132008092400983,00.htmlOriginal

Source: www.chinatimes.com
Country: Taiwan
Date: 24 Sept 2008

Summary:
1. A Senator reported the French Bank is willing to buy back the Minibond from investor
after the senator appear.
2. Reason: Taiwan is not a mature financial market suitable for sale of mature product such as mini-bond.
3. Many retirees thought Minibond is a bond and invest whole of life saving.
4. Senator call for Taiwan Monetary Authority to urge all local Taiwan banks to buy back minibond from retail investors.
5. Taiwan Monetary Authority will revise its regulation to protect retail investor.
6. Total Number of Investors: 51,000
7. Total Amount Invested with Lehman: NT 40 billion (SGD 1.8 billion)

If you find any mistake in the translation, please send a message to me at kinlian@gmail.com

Diary of a Singapore mind - article on structured products

Read this article:
http://singaporemind.blogspot.com/2008/09/structured-products-minister-pay-and.html

Article: Corruption in financial sector is the killer

Here is an article in Xinhua newspaper:
http://news.xinhuanet.com/theory/2008-09/26/content_10113134.htm

A friend made a summary of the paper as follows:

Topic: Corruption in Financial Sector is the Killer
Author: Professor Chang Qing
Director of Commodity & Derivative Research Center
University of Agriculture, PRC

Summary:
1. Derivative and CDO are NOT new products.
2. They are designed by elite (i.e. the financial experts?)
3. Their ultimate objective is make money for the banker and salesman
4. The product has only one feature - that is cheat investor's money, resign and enjoy life within a short time.
5. "New financial product" is a smoke. Corrupt practice is the reality.
6.1 Company structure must not allow the CEO has absolute power to control money.
6.2 A company structure must be able to stop CEO from profit and resign within a short period.
6.3 Public scrutinization is of utmost important to check CDO with complicated mathematical
fomula. Media and economist must have a say.

I hope that this translation is accurate and that the statement is not defamatory. If there are any mistakes, please email to me at kinlian@gmail.com.

Experience of investor (3)

Dear all

I would like to share with you all what I have done so far on this issue:

I have written an email to ABN AMRO (now known as RBS) last Thursday to file my complaint, attaching the email from my RM to back up my claims for misrepresentation. There were quite a few misleading facts in his email. I also cc the email I wrote to ABN to FIDReC (Financial Industry Dispute Resolution Centre), email: info@Fidrec.com.sg.

Almost immediately, RBS replied that they will take some time to reply me while the officer at FIDReC also replied to my email, advising me to hear from the bank first before filing my case with FIDReC. Since my amount is $100,000 (more than the $50,000 limit that FIDReC is allowed to adjudicate), they will refer my dispute to Adjudication only where the Financial Institute has agreed to submit to adjudication for the higher claim amount and/or if I agree to limit my claim to the sums stated.

Please note that I did not state any monetary claims in my email to RBS. I want to hear the response from the bank on their proposed actions first, if any, before deciding what to do next.

You may want to file a complaint in writing to your bank quickly and cc info@Fidrec.com.sg since MAS had given instructions for banks and FIDReC to attend to complaints quickly and effectively. If there is any documentary evidence (like emails from your RM on the selling points of the product), these should be attached to your email too. Otherwise, just state the facts communicated to you by the RM. Even though FIDReC advised to write to bank first, it is still good to cc FIDReC in your email to the bank so that FIDReC has a feel on the number of complaints on the issue.

The following question pertains to minibond holders only: If the issuer (Minibond Limited) is able to find another swap counterparty to replace Lehmen Brothers Special Financing (LBSF) to take over all the swap agreements or if LBSF continue its obligations (possible since it is taken over by Barclays) so that minibonds do not default, are you still willing to hold the bonds till maturity or do you want out?

With Warm Regards
KK

Template: Letter to Member of Parliament

I suggest that each investor should send this letter to your Member of Parliament. If you know of a few other investors living in the same constituency, you can get together and see your Member of Parliament in the weekly "Meet the People" session. If you see the MP personally, you can convey how you were misled into investing in the structured product and the extent of your financial loss.

To: , Member of Parliament,

1. I write to petition that you, as my Member of Parliament, lobby the Government, particularly the Commercial Affairs Department (Singapore Police Force) and/or the Monetary Authority of Singapore, to conduct a full and independent inquiry in relation to structured products sold by various financial institutions in Singapore. These structured products include the Lehman Minibonds, DBS High Notes, Morgan Stanley Pinnacle Notes and Merrill Lynch Jubilee Notes.

2. I lost my hard-earned savings by investing in one such financial product. The product clearly did not suit my risk profile. I was not made aware of the high risks involved in the financial product when buying the product. I became an innocent victim of misrepresentation by the financial institution that sold me the structured product.

3. I now wish to be assured that I have not been a victim of negligent and/or dishonest conduct and/or fraud by this financial institution. If the inquiry reveals I have, I hope the Attorney-General of Singapore will take action against the financial institution and its management.

4. I also seek your assistance in helping to secure suitable legal representation so that I can get fair and adequate compensation for the injustice I have suffered. The financial institutions are able to afford large and powerful law firms, which I cannot. I hope you can persuade the Government to assist me in seeking legal redress from the Court.

5. Please help me.

Name:
Address:
Contact number:

Name of product bought:
Name of financial institution involved:

Investor contemplate legal action

Dear all,
After seeing these facts, it is clear that in many cases there was some level of "misrepresentation" and agressive selling to clients with a very low risk profile.

I guess we will await what happens with MAS (and maybe HSBC as the trustee for Minibonds) but it may be a good idea to be prepared on taking the "legal route" in addition to the petition which was an excellent move.

Mr. Tan Kin Lian,
With your tremendous experience coupled with the spirit to help, we will very much appreciate your advice and recommendations. Speaking for myself, I am prepared to pool in my time and resources .

Thanking you in anticipation, Regards

REPLY
I hope that MAS will help the investors in this matter.

If MAS does not help, the investors will have to take collective legal action. I will try to look for a lawyer who is willing to act for the investors. Most of the large legal firms have existing connections with banks and are not able to act for the investors. This is a sad state of affairs.

Sent to 940 Investors in Credit Linked Securities

Please read my blog for the latest information about the actions that are being planned and also to read the experiences of other investors.http://www.tankinlian.blogspot.com/

There is a formal Petition to the Singaporve Government. If you agree with the Petition, you can sign it.http://www.petitiononline.com/PSGCLS01/petition.html

Due to the large numbers of investors, I am not able to reply to each of your questions individually, especially if they are specific to your personal situation. If you send questions to me of a general nature, I will reply to them and put into my blog. Please read my blog to see if the question has already been answered previously.

Will MAS help the investors?

Hi Peter and Mr. Tan,
I appreciate your efforts to put all these in place so that we can start our discussion from hereon!
One important question is always on my mind, how far can we go to seek help from the relevant authorities? And what can they do or willing to do??

Firstly, I have contacted the FI (Hong Leong finance), basically they just say that actions have been taken and need to await the reply HSBC (the trustee). As HSBC has informed of the notice of occurrence of potential event of default. And given 15 days, should no payment been received from Minibonds Limited, the trustee will obtain valuations of the securities and determine the appropriate course of action.

I have also contacted MAS, thus they too asked me to file a complain to FI and should it not reach any resolution, then escalate to FIDREC. However, FIDREC has their own limitation too, that their jurisdiction in adjudicating disputes between banks/ finance companies and consumers is only up to $50,000! And the whole process would propably take more than 1~2 mths!

Basically, the FI also told me that these bonds-like products have been approved by MAS.

Which I told them that investors have been probably misled into purchasing these products. They are trying to tell me that it seems nothing can be done, as these products were already structured to protect the banks' interest from day 1!

So what can we do? I am not too sure what firm actions MAS are willing to take to help us, but so far, it seems in the media that they are only trying to speak to all FIs to expedite all investors queries properly and telling them not to mislead the investors thru' the marketing & advertising tools.

It seems that all these are going round & round in circles but not resulting in any firm course of action!

We, investors can speak up, but to what degree do we need to make our voices heard so that the authorities can decide what to do ?

REPLY
The investors can sign the Petition that has been put up in my blog. The Petition call on the Signapore Government to investigate if there has been any wrong-doing by the financial institutions and to assist the investors in getting compensation.

Some investors have suggested a collective legal action. I shall try to organise it at a later stage, if it becomes necessary. At that time, the investors have to decide if they are willing to bear the cost of the legal action.

Hope for investors in Lehman Minibonds ?

An investor sent this link to me. I wish to share it with you:

http://finance.thestandard.com.hk/en/business_news_view.asp?aid=72231

Unfair exchange rate

A bank customer converted currency from GBP to NZD. He was charged a spread of more than 2% for the conversion, or more than $1,000 for the transaction. He asked the bank for their method of calculation, but the bank refused to disclose it. The customer asked my advice on how to deal with this matter.

My advice is:
1. I suggest that you bring this lodge a complaint to the CEO of OCBC Bank on your transaction. Your complaint should address the unfair conversion rate that you have been given.
2. If this matter is not resolved, you can lodge a complaint with Financial Industry Dispute Resolution Center, FiDREC (fidrec.com.sg).
3. You can also consider to get the assistance of the Consumer Assocation, CASE:

Experience of investor (2)

Hello Mr Tan:

Please find the attachments that bank X sent to me when they sold me the Minibonds Series 2 and 3. I note the following:

1. These investments are For defensive investors seeking exposure to high grade assets that provide steady & enhanced yields
2. Product Summary - 100% money back at maturity
3. Benefits of MiniBonds - Low risk and easy to understand
4. Benefits of MiniBonds - High quality and low risk entities have been selected
5. Risk to Investor - Investors are at risk where one of the selected entities experiences a Credit Event. No mention was made on risk of the issuer Lehman Brothers. I was also not told Lehman Brothers swap the fund with another counterparty to exchange the risk of the underlying stocks, and that if Lehman are bankrupt, they can default on the swap payment.

Clearly the above is misrepresentation by the bank! Based on these supporting documents, can I go after the bank for my money? After all, they promised 100% money back!! Your advice will be appreciated, thank you!

REPLY
You can lodge a complaint with the CEO of the Bank and take it later to FiDREC (www.fidrec.com.sg).

Focus list of investors

I will be sending out a separate focus list investors who bought the same product from the same distributor (financial institution). This list will contain the name, telephone number and postal code. It will be taken from the signatories of the Petition to the Singapore Government. This list is expected to be ready later this week.

I hope that the new list will be helpful to get the investors to get together to discuss how to approach the distributor, and even to approach the Member of Parliament.

Opinion of an investor

Dear All,
http://biz.yahoo.com/ap/080928/as_hong_kong_lehman_protest.html

Please read about Hong Kong Investors' protest. I reckon that if we are not united and serious about getting our money back, the banks will just 'try their best' to recover whatever they can for us.

Believe all of us didn't know nor understand the complexity of the credit swap derivatives and we thought we have invested in bond-like products. In the money market, risk matches return. Frankly, for a 5% /yr return, why should we be subjected to such high risk? Equity market is said to be most risky, but even if we anyhow invest in the stock market, our money will not be zeroised, right?

I have met up with DBS' product team and expressed my disappointment in their callousness in handling our trust and money. The products were structured to protect the bank's interest. We were made to sign forms we didn't read carefully because we were too trusting. However, if all investors went into the products have the same understanding and experience that we were not well informed, then the intention to deceive is there since day one.

I am not sure about the rest, but DBS' RMs did not take initiatives to call, I called mine. Until Jun or July, we received a letter of assurance that so long as we hold on to the product till maturity, our capital will be in tact. At that point, the DBS HN5 was still valued at 43%.

See, we are no expert in investment, but surely senior management in the banks would have the expertise to read the market situation and forewarn us of the possibility of a credit event. We could have done something.

Understand that in Hongkong, the lawmaker may take the lead to sue the banks. Our equivalent law maker here is MAS. They do have some responsible as to why Credit Swap Derivatives are allowed. Actually Credit Swap Derivatives are complex instruments to allow banks like Lehman Bros to hedge their risk. What does it mean? We investors become the insurers involuntarily. When banks accept premiums on our behalf, they expose us naked to the risk of any downfall of the institutions listed in the reference list.

We will need strong leaders to pull us together really.

Best regards,

KT

Purpose of Petition

A journalist asked,

"Mr. Tan, MAS is already setting up a mechanism to handle the complaints of the investors. They can approach an independent body appointed by the financial institution. Why is it still necessary to organise the Petition? How is the Petition different?"

My reply is:
I encourage the investors to file their complaint of mis-selling to the financial institution. I have given them a template on the key points to be contained in their complaint. Most of them have not been properly advised and have been recommended a product that is not suitable for their risk profile.

It is important for the investors to pursue this step, as recommended by MAS.

The purpose of the Petition is to ask the Government to make an independent investigation to examine if there were negligent or dishonest acts by the financial institutions or if there were any wrong-doing. This is necessary as several thousand people are affected by this situation and have lost their life savings.

If there were wrong doing, it is better for some guidelines to be agreed on how the compensation is to be determined.

I believe that the Petition is a separate step and is still necessary, in the light of the circumstances. We need to approach this matter on two prongs.

What is a fair compensation for mis-selling?

I asked a question, "If the distributor offer to compensate 50% of your loss, will you accept it?"

About 20 investors replied to my email account and to this blog. Most expect compensation of 80% to 100% compensation. A few replied that 50% is fair.

I hope that the investors will take the following points into account:

1. The advertisement did highlight that under a credit event, the investor can lose up to 100% of the principal.
2. The investor did sign a lot of documents (and they may be unaware of what they signed) which will cover the distributor against liability.

We can argue that the distributor has a sense of duty to make sure that the recommended product is suitable for the investor. But the investor has to bear some responsibility as well. This point is highlighted in a e-mail sent to me by MS. A few investors commented that the chance of getting compensation is small.

I hope that the expectation of the investors can be moderated.

Template: Letter to financial institution (distributor)

To CEO of (financial institution)

Name of product bought:

1. The above structured product was sold to me by your financial representative, (name), to me on (date). I invested (amount) in the product based on the recommendation of your financial representative.

2. The circumstances in which the above product was sold to me are described below:

(give details)

3. I have been a conservative, risk adverse investor. I have notified your financial representative on my situation, as described below:

(give details).

4. My investment was made on the assurance given by your financial representative that the above product was low risk, safe and suitable for me. I understand that your representative is required under Section 27 of the Financial Advisers Act to ensure that investment products are appropriate for the people that they are recommended to.

5. I lost my hard-earned savings by investing in the recommended financial product. The product clearly did not suit my risk profile. I was not made aware of the high risks involved in the financial product and was misled by your financial representative.

6. I seek fair and adequate compensaton from you for my losses.

Name:
Address:
Contact number:

7. I hope to receive your decision on my request soon.

cc. FIDREC