Report on the Lehman-related Securities (8)

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


To sum up, the ‘piggybacked structure’ consists of two layers:

(a) The first layer could be a CLN featuring well-known corporations for the purpose of
deceiving the investors into believing that their investment would be safe so long as those
corporations are solvent.

(b) The second layer of synthetic CDO masquerading as ‘collateral’ so as to justify only
very sketchy information is given about it in the prospectuses.


For those readers who are interested in getting a quick grasp of the gist of the scam, they are
recommended to turn to Appendix C where they would find a comparison of the table of
contents of the following two prospectuses:

(a) The above-mentioned HSBC CLN prospectus dated 8th April 2005; and

(b) The issue prospectus of minibond series 19 dated 25th April 2005.


These two prospectuses are meant to describe two very different products – a simple CLN in
one case and an unprecedented contrivance of ‘piggybacked structure’ in the other. Despite
the vast differences, the two prospectuses look astonishingly alike in contents and length. At
this point, the reader should bear in mind that:

(a) Pacific Finance is controlled by HSBC in the sense that HSBC holds all the issued
shared capital of Pacific Finance and provides its employees as directors of the SPE.

(b) The same law firm, the Linklaters, provided legal advice in respect of these two
prospectuses.

As explained above, this outline of the synthetic CDO will be brief as the primary tactic of
the scam is to conceal the importance of it. By playing down its importance, there is hardly
any disclosure about it in the relevant prospectuses – not even the existence of another swap
arrangement between the issuer of ‘security’ and another Lehman-controlled entity. Take the
example of the synthetic portfolio floating rate notes (series 2008-8) issued by Saphir as
example. The notes were purchased by Pacific as ‘security’ of minibond series 12. The value
of the notes is credit-linked to a portfolio of over 100 swap agreements (known as Credit
Default Swap) whose value, individually or collectively, is dependent to a large extent on the
sentiment of the international credit market. Whether, and if so the extent to which, the
investors are able to monitor this financial derivative market is not mentioned in the relevant
prospectuses. What is disclosed is the ‘publicly available information’ about the well-known
corporations at the façade level as if this is all that the investors need to know or to keep
abreast of. Where there is only partial disclosure when full disclosure is mandated, and where
what is not said would render what is said false and misleading; as it happens in the relevant
prospectuses, a case of criminal fraud is capable of being established, at least on a prima facie
basis.

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