31 Dec 2008
HONG KONG (Dow Jones)--Hong Kong's securities regulator said Wednesday it is investigating all distributors of the structured products, known as minibonds, that were backed by Lehman Brothers Holdings Inc. (LEH).
This is the first mention of an investigation by the Securities and Futures Commission into all distributors of the minibonds. Previously, it said it would investigate distributors of the products that it had received complaints against for mis-selling.
When Lehman filed for bankruptcy protection in September, thousands of Hong Kong investors in the minibonds, who thought their money would be safe, found out they faced huge losses.
A person familiar with the situation said the SFC's investigation now involves more than 20 local financial institutions.
An SFC spokesman, who asked not to be named, declined to comment, saying any comment may prejudice the integrity of the investigation or any action that may follow.
Thursday, January 1, 2009
Buyer beware and seller beware too
Business Times - 01 Jan 2009
By R SIVANITHY
AS A dismal 2008 rolls to a close, it's customary for us to draw up a wish-list for the new year. Last year, our list focused mainly on disclosure, particularly with regard to IPO prospectuses, short-selling positions and structured warrants. Some of these calls have been met - the Singapore Exchange (SGX) recently circulated a discussion paper on short-selling disclosure, and although IPOs were virtually non-existent in 2008, disclosures with particular reference to use of IPO funds have undoubtedly improved.
As for structured warrants, we are optimistic that it can only be a matter of time before SGX turns its attention to improving information dissemination in the segment. Having said that, which other areas could do with disclosure improvements in 2009? Before going into specifics, our preference is for a regulatory framework that not only stresses 'buyer beware' but should now also give equal emphasis to 'seller beware'.
For instance, the fiasco involving various failed structured products such as Lehman Brothers' Minibonds and DBS's High Notes exposed the very real possibility that those who sold these instruments did not adequately disclose the risks involved to hapless retail investors and yet appeared to have avoided accountability. Surely, these parties have to bear some responsibility for their lapses.
In addition, if an instrument is in essence one thing, the disclosure documents should describe that thing accurately and not imply something else - for example, the Lehman Minibond was an insurance policy to protect Lehman from defaults in debt instruments issued by five other banks but the prospectuses were cleverly worded to make it appear as if it was a bond issued by those five banks while Lehman's role was downplayed. This obfuscation started with the very name 'Minibond' which diverted attention from the product's true nature.
Stronger regulatory action would have been welcome but although it wasn't forthcoming, it isn't too late for the authorities to engineer a shift towards sterner penalties for parties that hide behind the fine print or legal disclaimers. In other words, if finance professionals don't call a spade a spade and try to conceal the true nature of a product they are selling, they should be penalised.
Similarly, we'd also like to see better disclosure on 'sell' side research reports, especially of how much risk there is to target prices, the extent of any investment banking relationships between the organisations in question for the past six months or one year and of the credentials and track record of the recommending analyst.
All of the above requires a stronger regulatory stance than what the market has become accustomed to since deregulation 10 years ago, which means that change has to start at the top.
For starters, SGX should scrap its controversial policy of privately censuring listed companies whose disclosures are less than satisfactory; and going public instead with all disciplinary actions. SGX says that it wants to have a range of measures at its disposal to tailor the punishment to fit the crime. Thus, if SGX judges a company's lapse to be minor and not having a material impact on the market and investors' decision-making, then a private censure is warranted, it argues.
But corporate governance advocate Mak Yuen Teen has already described the disadvantages of such a covert, private approach in a letter to this newspaper ('SGX should publicise all its enforcement actions', Nov 11). Suffice to say that the practice of judging what can be privately penalised and what might be publicly disclosed is in effect a step backwards to a merit-based regulatory system, the very system that the exchange sought to scrap when the market deregulated, giving way to a disclosure-based regime.
Perhaps the best suggestion we can make to the SGX and its overseeing body, the Monetary Authority of Singapore, is the same given to all listed firms, namely: a disclosure-based regime relies on full and public disclosure. If there're grey areas, then the correct approach should be 'when in doubt, disclose'.
By R SIVANITHY
AS A dismal 2008 rolls to a close, it's customary for us to draw up a wish-list for the new year. Last year, our list focused mainly on disclosure, particularly with regard to IPO prospectuses, short-selling positions and structured warrants. Some of these calls have been met - the Singapore Exchange (SGX) recently circulated a discussion paper on short-selling disclosure, and although IPOs were virtually non-existent in 2008, disclosures with particular reference to use of IPO funds have undoubtedly improved.
As for structured warrants, we are optimistic that it can only be a matter of time before SGX turns its attention to improving information dissemination in the segment. Having said that, which other areas could do with disclosure improvements in 2009? Before going into specifics, our preference is for a regulatory framework that not only stresses 'buyer beware' but should now also give equal emphasis to 'seller beware'.
For instance, the fiasco involving various failed structured products such as Lehman Brothers' Minibonds and DBS's High Notes exposed the very real possibility that those who sold these instruments did not adequately disclose the risks involved to hapless retail investors and yet appeared to have avoided accountability. Surely, these parties have to bear some responsibility for their lapses.
In addition, if an instrument is in essence one thing, the disclosure documents should describe that thing accurately and not imply something else - for example, the Lehman Minibond was an insurance policy to protect Lehman from defaults in debt instruments issued by five other banks but the prospectuses were cleverly worded to make it appear as if it was a bond issued by those five banks while Lehman's role was downplayed. This obfuscation started with the very name 'Minibond' which diverted attention from the product's true nature.
Stronger regulatory action would have been welcome but although it wasn't forthcoming, it isn't too late for the authorities to engineer a shift towards sterner penalties for parties that hide behind the fine print or legal disclaimers. In other words, if finance professionals don't call a spade a spade and try to conceal the true nature of a product they are selling, they should be penalised.
Similarly, we'd also like to see better disclosure on 'sell' side research reports, especially of how much risk there is to target prices, the extent of any investment banking relationships between the organisations in question for the past six months or one year and of the credentials and track record of the recommending analyst.
All of the above requires a stronger regulatory stance than what the market has become accustomed to since deregulation 10 years ago, which means that change has to start at the top.
For starters, SGX should scrap its controversial policy of privately censuring listed companies whose disclosures are less than satisfactory; and going public instead with all disciplinary actions. SGX says that it wants to have a range of measures at its disposal to tailor the punishment to fit the crime. Thus, if SGX judges a company's lapse to be minor and not having a material impact on the market and investors' decision-making, then a private censure is warranted, it argues.
But corporate governance advocate Mak Yuen Teen has already described the disadvantages of such a covert, private approach in a letter to this newspaper ('SGX should publicise all its enforcement actions', Nov 11). Suffice to say that the practice of judging what can be privately penalised and what might be publicly disclosed is in effect a step backwards to a merit-based regulatory system, the very system that the exchange sought to scrap when the market deregulated, giving way to a disclosure-based regime.
Perhaps the best suggestion we can make to the SGX and its overseeing body, the Monetary Authority of Singapore, is the same given to all listed firms, namely: a disclosure-based regime relies on full and public disclosure. If there're grey areas, then the correct approach should be 'when in doubt, disclose'.
SCMP:Finance chief given report on minibonds saga
http://www.pressdisplay.com/pressdisplay/showlink.aspx?bookmarkid=6Y578OGP5WS5&linkid=88f1302c-d784-4e0d-b5bb-8d062e4593fc&pdaffid=8HM4kDzWViwfc7AqkYlqIQ%3d%3d
1 Jan 2009
Joyce Man
The banking and securities regulators handed a report on the minibonds saga to the financial secretary yesterday, three months after investors started complaining.
The Monetary Authority and the Securities and Futures Commission filed the report, on the lessons learned and issues they identified during an investigation into complaints about the Lehman Brothersissued minibonds, to acting Financial Secretary Chan Ka-keung.
Although there has been speculation that the report would pinpoint a few banks, sources at the regulatory bodies said the securities commission’s investigation had highlighted more than 20 distributors that sold minibonds, including banks and brokers.
The report focused on the misselling of the investment product.
Minibonds are not corporate bonds, but consist of high-risk creditlinked derivatives. They are marketed as proxy investments in well-known companies.
Although the Monetary Authority regulates banks, it has referred all the cases to the commission for further investigation, the sources said.
The government would keep an open mind on any review of the regulatory system and on whether the city needed a single regulator for all investment products, a spokesman for the Financial Services and the Treasury Bureau said.
He said the government would probably publish the report but that the regulators who submitted it had expressed concern that doing so would affect the ongoing investigation and any improvements to the system.
The Monetary Authority and the commission declined to comment on the report.
Meanwhile, two leaders of Singapore’s Lehman investors flew to meet their Hong Kong counterparts yesterday in the hope of finding common ground for a class action in the US.
Both the Singaporeans and Hongkongers said they were considering inviting leaders for similar investors from Taiwan to form a Southeast Asian group to mount the suit on US turf. They would probably meet again soon in Hong Kong, which had greater political freedom than Singapore, they said.
Lung Tze Kuen, a Minibond Victims Group committee member, and Goh Meng Seng, a National Solidarity Party executive council member, met Hong Kong’s Kam Nai-wai– a Democratic Party member – and Peter Chan Kwong-yue, chairman of the Allied Victims of Lehman Products.
The four investors’ leaders hope to go to the US because the legal system there provides for class action, which Hong Kong’s does not.
Mr Lung added that the jury system and contingent fee – where clients do not pay lawyers if they lose their cases – would work in the favour of investors who decided to join the suit.
They attempted to identify commonalities in the products sold in the two cities that would allow them to unite for a class action in the United States.
Mr Chan said: “ The Lehman products are very similar in their basic structures, in issuer, trustee, and even the law firms that drew up their documents.”
In Singapore, about 10,000 people invested S$500 million (HK$2.69 billion) in Lehman-related investment products, of whom 8,000 purchased minibonds, Mr Lung said.
Reply to Ho Yew Kee
Sent to Straits Times on 13 December 2008, but not publised.
Editor
Forum Page
Straits Times
I refer to the letter by Mr. Ho Yew Kee entitled “A mistake to overreact” (ST, 13 Dec 2008).
Mr. Ho said, “It would be imprudent for the stewards of town council funds to play it safe and place their reserves in fixed deposits or government bonds, as the returns would not even offset the inflation rate.” He also said, “Corporate bonds provided a yield of 4 to 6 percent, but the corporate have different credit ratings”.
In my view, it would be prudent for the town councils to invest in corporate bonds, provided that the investments are spread over several corporate bonds to reduce the impact of the failure of some of these bonds.
In fact, over 10,000 people were sold the credit linked notes. They were misled into believing that they were investing in a basket of 5 to 8 of the entities, which were financially strong companies or sovereign governments.
They were told that if one entity should fail, they would only lose their invested sum on a proportionate basis. If 1 of 8 entities failed, their loss would be 12.5%.
They were shocked to learn later that they were actually selling credit insurance against the failure of any of these entities. If any single entity failed, their entire principal would be lost. Instead of spreading the risk proportionately over 8 entities, they were taking 8 times of the risk of any single bond!
In addition, their principal was actually invested in a portfolio of 100 to 150 underlying securities, which could comprise of collateralised debt obligations of lower rating. This has additional risk to the investors.
The combined risk of failure of “toxic” credit-linked notes is very high. This explains why many of these notes have failed totally, compared to bond funds.
The stewards of the town councils, who have access to professional advisers, should explain if they were aware about the nature of the credit-linked notes and if the return of 5% is insufficient to match the risk. If the town councils were also misled about the nature of these products, it is their fiduciary duty to take appropriate action to recover their loss.
Several local government bodies in the UK were also misled into investing in similar high-risk products. They took legal action and were able to obtain a court decision to rescind the contracts. I urge our town councils in Singapore to do the same.
Tan Kin Lian
Editor
Forum Page
Straits Times
I refer to the letter by Mr. Ho Yew Kee entitled “A mistake to overreact” (ST, 13 Dec 2008).
Mr. Ho said, “It would be imprudent for the stewards of town council funds to play it safe and place their reserves in fixed deposits or government bonds, as the returns would not even offset the inflation rate.” He also said, “Corporate bonds provided a yield of 4 to 6 percent, but the corporate have different credit ratings”.
In my view, it would be prudent for the town councils to invest in corporate bonds, provided that the investments are spread over several corporate bonds to reduce the impact of the failure of some of these bonds.
In fact, over 10,000 people were sold the credit linked notes. They were misled into believing that they were investing in a basket of 5 to 8 of the entities, which were financially strong companies or sovereign governments.
They were told that if one entity should fail, they would only lose their invested sum on a proportionate basis. If 1 of 8 entities failed, their loss would be 12.5%.
They were shocked to learn later that they were actually selling credit insurance against the failure of any of these entities. If any single entity failed, their entire principal would be lost. Instead of spreading the risk proportionately over 8 entities, they were taking 8 times of the risk of any single bond!
In addition, their principal was actually invested in a portfolio of 100 to 150 underlying securities, which could comprise of collateralised debt obligations of lower rating. This has additional risk to the investors.
The combined risk of failure of “toxic” credit-linked notes is very high. This explains why many of these notes have failed totally, compared to bond funds.
The stewards of the town councils, who have access to professional advisers, should explain if they were aware about the nature of the credit-linked notes and if the return of 5% is insufficient to match the risk. If the town councils were also misled about the nature of these products, it is their fiduciary duty to take appropriate action to recover their loss.
Several local government bodies in the UK were also misled into investing in similar high-risk products. They took legal action and were able to obtain a court decision to rescind the contracts. I urge our town councils in Singapore to do the same.
Tan Kin Lian
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