Report on the Lehman-related Securities (3)

(1. Introduction ....... continued)

Briefly, the Lehman-related securities feature a structure that is made up of two components each of which is capable of being, and was, sold as stand-alone product by Lehman Brothers as well as other financial institutions. Lehman put these two components together but described the combined product in the prospectuses as if one is more important than the other.

Apparently, the intent to given prominence to one component in the marketing materials is to induce the investors to believe that it is what the product is all about. But nothing could be further from the truth.

By devoting more than 90% of the coverage in the prospectus to only one component, Lehman and HSBC Bank clearly did not intent the prospective investors to have a correct understanding about the product. No legitimate reason for such intent is conceivable and none is forthcoming despite our enquiries with the regulators and the banks.

Could it be the case that the SFC was not aware of this patent anomaly in the relevant prospectuses? Being a regulator of the local securities market, the SFC should be duty bound to keep itself abreast of what happens in the market including vetting the statutorily required marketing materials for accuracy and comprehensiveness. The performance of these basic duties necessitates a good understanding of the kinds of securities in the market that fall within its jurisdiction. The Lehman-related securities had been actively marketed for six years before the scam was exposed. During this period of time, both the SFC and those behind the marketing of these securities had, on several professional or other occasions, responded to queries regarding the propriety and suitability of selling highly risky and highly complicated derivatives products to the retail investors. Their responses, as reported in the professional publication, suggest that no such complicated product was being sold to the public. At any event, it was said that such sales should be preceded by proper and sufficient education to the retail investors to help them understand the complexity of risks involved. None of these statements is true. The Lehman-related securities are about the most complicated products one could imagine given the ‘piggybacked structure’ mentioned above. During the years when they were sold by deceptive means in Hong Kong, no education of any kind that could have equipped the investors to prepare for what they were about to confront was provided by the SFC, or Lehman and its associates.

In addition to disclosure, the banks in Hong Kong dealing with securities are required to observe specific ‘codes of practice’ governing, among others, the obligation on the banks to assess the suitability of the products for sales by their respective staff and the suitability for particular customers to whom sales of the products are intended.

......to be continued.

Extract From: "Exposure - the Truth About Lehman-HSBC Fraud"