Report on the Lehman-related Securities (6)

( II. Dissecting the ‘Piggybacked Structure’....... continued)

The CLN issued by HSBC Structured Notes (Cayman) Limited is particularly relevant to this
scam because the directors of this special purpose entity (‘SPE’) are almost the same as the
Pacific International Finance Limited (the ‘Pacific Finance’) – the issuer of the minibond. In
addition to common directorship, there are more sinister signs suggestive of fraud perpetrated
by the HSBC Bank to be detailed below. Suffices it to note at this stage that the CLN sold by
the HSBC-controlled SPE, known as USD Callable Basket Credit Linked Notes (the ‘HSBC
CLN’), does not require the backing of ‘collateral’ because it is guaranteed by the HSBC
Bank. Therefore, the money received by HSBC Bank from investors of the HSBC CLN is
declared in the prospectus as applied by the Bank to its general banking business. As will be
elaborated below, despite the vast differences between the HSBC CLN and the
Lehman-related securities, the prospectuses of the two are almost identical in terms of
organization, contents, and layout. Given the common directorship, Pacific Finance has to be
taken to know its prospectuses are seriously defective as they are definitely inadequate for the
purposes of explaining the intricacies of the products and gravity of the risks involved.

The second component is hidden behind the façade because it is a very risky and complicated
product known as ‘synthetic collateralised debt obligation’ (Synthetic CDO). Any attempt to
provide a simplified explanation of this product runs the risk of misleading instead of
enlightening. However, a brief outline of it will appear after an exposition of the heart of the
scam. One can have a firm grasp of the scam and the complicity of the HKMA and SFC in it
by considering the sales of ‘Mahogany Notes series I and II’ by Mahogany Capital Limited in
Australia. The Mahogany Notes are essentially synthetic CDO-based products and the sales
of them in 2004 and 2006 were controlled by Lehman. To meet the statutory disclosure
requirements then in force in Australia, the Mahogany prospectuses contain detailed diagrams,
tables, charts, analyses, and the like to explain the nature and the risks of the notes.

.....to be continued.
Extract From: "Exposure - the Truth About Lehman-HSBC Fraud"