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"

Report on the Lehman-related Securities (2)

I. Introduction

This report is for the purpose of exposing why the Hong Kong Monetary Authority (the ‘HKMA’) and the Securities and

Futures Commission (the ‘SFC’) should bear the primary responsibilities for the scam. This is not to say that Lehman Brothers Asia (the ‘Lehman’) and the HSBC Bank, respectively the controller and accomplice of the scam, are any less culpable than the regulators. Rather the total and inexplicable failure of the regulators to do anything during the six years when the

scam was allowed to rampage through our banking system and to deceive the ordinary members of this community raises serious questions about the competence and integrity of these statutory bodies whose raison d'être is to protect the public interests. Protecting the public interests is exactly what the HKMA and SFC failed, and continue refuse, to do. The

following pages set out the grounds why these bodies deserve condemnation.

Since the scam was exposed in September of 2008 in the wake of the collapse of Lehman Brothers, the HKSAR Government and the two regulators have been maintaining that the questionable Lehman-related securities are all about ‘mis-selling’. They want the public and the media to focus solely on the distributor banks, which in turn means, the frontline staff

who would be the ideal scapegoats for the wrongs committed by those who have authority over them in their organizational hierarchy.

Having looked into the scam very closely including literature research and consulting knowledgeable professionals in the industry, we come to the conclusion that the scam could only be implemented as it did with the courtesy of the regulators who dutifully turned a blind eye to it at the behest of the banks. Their subservience is amply exemplified by their persistent refusal, without any reason whatsoever, even to consider that the disclosure about the products in the prospectuses may be problematic.

....to be continued.

Extract From: 'Exposure - the truth about Lehman-HSBC Fraud'

Report on the Lehman-related Securities (1)

Note on English Version

The reader who understands both Chinese and English will notice the differences between the two versions in this Report. There is no more profound reason for it than the fact that the two versions are written by different writers (some of whom are victims of this scam) and they approach the issues with somewhat different emphases that inevitably reflect their diverse educational and research background.

Aside from persona idiosyncrasies, the writers are mindful of the needs of their audiences. Most of the victims with whom they come into contact after the scam was exposed are elderly with no or little education.

This Report aims to help them understand what the banks have done to them so that they could better make informed decisions, whether the scam is to be dealt with properly according to the law or just swept under the carpet as this government is inclined to do in difficult circumstances.

Given its colonial past and its finance-dominated economy, Hong Kong has multifarious ties with the rest of the world. The interest of international audiences is likely to extend beyond the deceitful products and the regulatory failure, to the more deep-rooted causes of global financial malaise of which the Lehman-related securities are symptomatic.

Oftentimes, major financial scams are concocted by international banks and exploited at national level where they are attracted by the existence of regulatory loopholes and regulatory capture.

The English version of this Report aims to set the scam in broader perspective querying if the defeat of rule of law is largely responsible for the current crises.

Legality does not command strong respect in this city and it is defeated internationally when the major developed countries acquiesced to the demands of the banks to leave the derivatives market unregulated. Obviously important lessons are to be learned, and sadly in some cases, re-learned.

......to be continued. Extract From:

'Exposure - the truth about Lehman-HSBC Fraud'

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Letter to Commissioner of Police Mr. Tang King Shing

 Mr. Ian Grenville Cross, SC, JP

Director of Public Prosecutions 
Mr. Ian McWalters, SC 
Deputy Director of Public Prosecutions 
Mr. Lee Ka Chiu, Director of Crime & Security, HKP 
Mr. Chan Yiu Kwok, CSP (Crime Commercial Bureau), HKP 
Sirs, 

The most important message of this letter is to inform you that your inaction and foot-dragging tactic is being exploited by the banks to carry out a second fraud against the victim investors defrauded by them. These victims were deceived by the banks as to the true nature of the Lehman-related securities when they were induced to make the purchase and now, courtesy of your inaction, they are subject to a second round of deception regarding their legal rights. Before you resort to the cliché that the victims should seek their own legal advice, they as well as the wider public are entitled to know what the government generally, and the relevant departments inclusive of yours in particular, have done.

2. What has happened in the last several months is an artificial environment created by you and other officials, with varying degree of intent, indifference, and culpability; to enable the banks to coerce the victims to agree to the so-called settlement. We are informed by some victims that the bank staff has adopted an intimidating attitude to: 
(a) induce the victims to agree to settle on terms dictated by the banks; 
(b) mislead the victims into believing that the terms of settlement would be harsher with the passage of time thereby putting pressure on the victims to surrender their rights to whatever terms offered to them; 
(c) deny the victims the right to be accompanied by relatives or friends in the settlement process; 
(d) deny the victims the right to have a full written record of the terms and conditions of the settlement. 

3. The risk that a majority, if not all, of these settlements are reached under duress is substantial and real. The HKMA and the SFC have the profiles of the victims and they know how many and who are vulnerable to duress or misrepresentation. The senior officials of these two bodies are by far the most culpable for allowing the banks this ‘window of opportunity’ to perpetrate the second fraud. 

4. It is not disputed that the extent to which this second fraud is properly so characterized is dependent on whether the original complaint of fraud is well-grounded in our jurisprudence. It is therefore apposite to recount in summary form what is known and what evidence is at hand. We are only a handful of victims not having legal or financial expertise, nor do we have any privileged right of access to information not available to the public, yet we have been able to unearthed the following within months after the fraud came to light. This convinces us that you undoubtedly are in possession of sufficient evidence, and information that will lead to further evidence, that would satisfy any reasonable police officers and prosecutors that criminal prosecution against the suspects is fully justified. 

5. The evidence we rely on to demand immediate intensification of investigation and prosecution is as follows: 
(a) The prospectuses in pursuance of which the Lehman-related securities were sold (the ‘Lehman prospectuses’) are incapable of describing the nature of the products or explaining the risks inherent therein by a massive margin. 
(b) The Lehman-related securities feature a ‘piggybacked structure’ with a façade, typically a first-to-default credit-linked note (the ‘FTD’) concealing a hidden component varyingly referred to as ‘security’ or ‘collateral’ in the Lehman prospectuses. At least in majority of cases, the ‘hidden component’ is synthetic floating rate notes that are the sine qua non of the Lehman-related securities. This hidden component will be referred to as ‘Security’ below in order to distinguish it from the ‘real collateral’ the existence of which is not disclosed in the Lehman prospectuses.
(c) Structure note resembling the FTD in every material aspect was sold by HSBC Bank in Hong Kong (the ‘HSBC notes’) during the material time when the Lehman-related securities were sold. The issuer of HSBC notes and issuer of ‘minibond’ are almost identical in the sense that the individuals sit on these two boards of directors during the material time are almost the same. If the corporate veil is lifted, both issuers are clearly controlled by the same unit or department within the HSBC group. 
(d) The law firm Linklaters advised the two issuers in respect of the two different products – the relevant Lehman-related securities known as ‘minibond’ and the HSBC notes. Despite the enormous differences between the two – one a ‘piggybacked structure’ while the other is just a FTD, the two prospectuses concerned are almost identical in structure, content and layout. 
(e) Structure notes resembling the ‘Security’ in every material aspect were sold by Lehman Brothers in Australia during the material time through an entity under its control – Mahogany Capital Limited. The Mahogany prospectuses provide a rough but insightful estimate of what and how extensive details about the ‘Security’ were withheld from the Lehman prospectuses. 
(f) Numerous victims defrauded by this fraud have enquired the banks concerned about the training to which the relevant staff involved in the sales of the Lehman-related securities had been given. The responses received all indicate that training for the Lehman-related securities was provided by the Sun Hung Kai Financial (the ‘SHKF’). In the past two months or so, we have repeatedly invited SHKF to admit or deny whether it has anything to do with the training of staff of other distributor banks regarding the sales of the Lehman-related securities. So far, all replies from SHKF have been evasive refusing to address its role over the training issue. 

6. The above points (a) to (f) are factual and they are grounded on documentary evidence and the following are reasonable inferences that we believe also to be factual: 
(a) The façade and the Security are products capable of and are being sold as stand-alone products. They were sold separately by Lehman Brothers. 
(b) The purpose of ‘piggybacking’ a façade on the Security is solely for deception purpose. There is no other economic or legitimate commercial purpose. 
(c) SHKF as coordinating distributor either knew, or recklessly indifferent of, the true nature of the Lehman-related securities. In its training provided to the bank staff responsible for selling the securities, it put emphasis only on the façade as if it is the be all and end all of the products. This is a misrepresentation of the true nature of the Lehman-related securities, but the Lehman prospectuses are designed and organized in such a way to facilitate such misrepresentation. At any event, the Security level of synthetic derivative notes would be too complicated for the bank staff and the prospective investors. 

7. The fraud is commonplace in terms of its modus operandi, namely by means of misstatement of facts. It is unusual in terms of the parties involved and their status, namely almost two dozens of banks and financial institutions ranging from global dominant players to local runners-up are implicated. The amount of money involved is also unprecedented by local history. A further dimension of complexity is that the same ‘piggybacked structured’ financial products marketed by the same modus operandi was adopted by another, or other, major financial institutions. Because the suspects are too powerful and well-connected with the political leadership, the criminal law is halted right at doorstep of the banks. The latent privileges, including potential immunity from the law, enjoyed by the banks and the well-connected (such as the Linklaters) crystallize which turns law enforcement into a consensual matter in so far as these suspects are concerned. 

8. Is there any reason why the police and the DPP are indulging in this wait-and-see trick? Already in their brief should be the following ingredients sufficient for bringing the suspects to court: 
(a) Indictment: fraud contrary to section 16A of the Theft Ordinance (Cap. 210 of the Laws of Hong Kong). 
(b) Defendants: (i) HSBC Bank and its individual employees serving on the boards of directors of the issuers authorizing the issuance of the Lehman-related securities. 
(ii) SHKF and the distributor banks 
(iii) Lehman Brothers Asia Limited and Mr. Leon Hindle. 
(c) Evidence: (i) the Lehman prospectuses; (ii) testimonies of the victim informants who have lodged complaints with the police. 
(d) Points of law that may be disputed: the nature of Lehman-related securities.
The reports produced by the HKMA and SFC contain numerous misstatements of facts, especially in respect of the securities. There are also articles appear in locally based professional periodicals purported to explain the fraud in a misleading way. This is reminiscent of burning the Reichstag by Hitler in 1933. Is it not a concerted effort to whitewash the fact and paint over it with fiction? 

9. In the recently adjudicated case of HKSAR v HO Ka Keung (Criminal Appeal No. 196 of 2007), the defendant, a professional insurance broker, was charged with the same offence as abovesaid. It was held that recklessness suffices to found a conviction and the personal attributes of the defendant were ‘obviously relevant’ to the question of guilt. In paragraph 51 of the judgement, the learned judge endorsed the observation of the trial judge as to the state of knowledge of the defendant. In this connection, the defendant was held at the trial that he ‘knew that commission was to be paid ... at a very attractive level and, quite clearly, he knew that the whole purpose ... was churning through insurance forms without any attempt ... to ensure that they were honest, truthful and complete’. The same description could properly be applied to the distributor banks and the HSBC Bank. The defendant in this case had been found guilty and his appeal was dismissed. If what he did is unlawful, so is the conduct of the suspects identified above. 

10. According to professor Alastair Hudson of Queen Mary, University of London, actionable loss arising from the context of financial derivative products could generally be classified into two categories: ‘failure of model’ and ‘suitability failure’. HSBC Bank and Mr. Hindle knew the model is doomed to disaster for the retail investors but they decided that their personal gains override the concern that the model is fraudulent. The ‘suitability failure’ follows inevitably from it. (See ‘The Law on Financial Derivatives’ 2nd Ed., (Sweet & Maxwell, 1998)). 

11. In our polity, it is the judiciary that decides whether the suspects are guilty. The refusal of the police and the DPP to prosecute this crime rigorously verges perilously on perverting the course of justice. If the refusal of the suspects to cooperate is a reason for delay, the public should be informed of this fact and decide for themselves their best course of action. 

Yours faithfully 
The Alliance of Lehman Brothers Victims in Hong Kong 

From: http://www.lbv.org.hk/content/pages/posts/letter-to-director-of-public-prosecutions2733.php