Court Filing (abstract)

Case 1:10-cv-00017-WHP, Filed 08/09/10

UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK
USDC SDNYDOCUMENTELECTRONICALLYFILED
DOC #:
DATE FILED:~$ ~(C)

KA KIN WONG, et al.,10 Civ. 0096 (WHP)Appeal from Bankruptcy
Plaintiffs/Appellants,Case No. 08-13555 (JMP)
-against-
HSBC USA, INC., et al.,Defendants/Appellees.

WILLIAM H. PAULEY III, District Judge:

Plaintiffs/Appellants Ka Kin Wong and six other noteholders appeal from twoorders of the United States Bankruptcy Court for the Southern District of New York (Peck,Bankr. J.)(the "Bankruptcy Court") dated November 23, 2009 and December 3, 2009 dismissingtheir Class Action Complaint (the "Complaint") with prejudice. While the events giving rise tothis adversary proceeding are complicated, two discrete issues are presented on appeal: (1)whether Plaintiffs have standing to sue, and (2) whether amendment of the Complaint would befutile.For the following reasons, this Court affirms in part, reverses in part, and vacates in part the Bankruptcy Court's orders.

BACKGROUND

1.Parties on Appeal

Plaintiffs seek to represent a class of purchasers of structured finance notes-alsoknown as "Minibonds"between June 16, 2003 and September 15, 2008. (Appellants'Designation of Contents of the Record Designation Number ("DN") 1: Complaint against HSBC,USA, et al. dated Mar. 12, 2009 ("Compl.") ¶ 1.) Plaintiffs brought claims against PacificInternational Finance Limited ("Pacific Finance" or the "Issuer"), the issuer of the Minibonds, aswell as several other entities and individuals. (Compl. ¶¶ 27-38.) The underlying transactionsand relationships among the various entities are opaque.

On appeal, Plaintiffs pursue their claims against only two entities: HSBC BankUSA, N.A. ("HSBC Bank" or the "Trustee"), and Lehman Brothers Special Financing, Inc.("LBSF"). HSBC Bank is the trustee of collateral securing Pacific Finance's paymentobligations to the Minibonds holders and LBSF. In the Complaint, Plaintiffs mistakenly namedHSBC Bank's predecessor as trustee, (DN 6 Ex. 2: Affidavit of Song Qun Sworn, ProgrammeProspectus dated Mar. 12, 2007 at 7), and now appeal the Bankruptcy Court's denial of leave toamend the Complaint to name HSBC Bank. Defendant LSBF is a bankrupt Delawarecorporation and a debtor in the underlying bankruptcy proceedings, which involve severalLehman entities (the "Lehman Bankruptcy"). (Compl.IT38, 67.)


II.The Minibonds Program

Plaintiffs seek damages and injunctive relief relating to $1.6 billion in Minibonds issued by Pacific Finance in separate, but virtually identical, series. (Compl. ¶ 45.) PacificFinance sold the Minibonds to retail investors located primarily in Hong Kong, and marketedthem as "credit-linked" to financially stable companies and backed by AAA-rated collateral.(Compl. ¶¶ 45, 47, 51.) As a consequence of Lehman Brothers Holdings, Inc.'s ("LehmanBrothers") collapse, the Minibonds are now worthless. (Compl.T~67-69, 101-04.)

While the Minibonds were issued by Pacific Finance, Lehman Brothers and otherLehman entities designed the Minibonds program. (Compl. ¶¶ 46, 48, 50, 82.) The details ofLehman Brothers' involvement emerged during an inquiry conducted by Hong Kong regulatoryauthorities. In that proceeding, officers of HSBC Holdings Plc ("HSBC Holdings"), thecompany at the top of the HSBC pyramid, testified that Lehman Brothers appointed HSBC Bankas trustee of the Minibonds collateral.'(Compl. ¶ 82.) Lehman Brothers also compiled theprospectus for each Minibonds series. (Compl. ¶ 82.) Pacific Finance existed only "to issue the[Minibonds]. It [was for] all intents and purposes a creature of Lehman's design .... [PacificFinance was] not an active company ... and HSBC's role as a Director [was] not an active role.. . ." (Compl. 182.) Indeed, the Complaint alleges that Lehman Brothers and LBSF, not the Issuer, "selected the collateral" for the Minibonds. (Compl. ¶ 50.)

Pacific Finance secured its obligation to pay interest to the Minibonds holdersthrough two related transactions.'First, Pacific Finance purchased notes from Saphir FinancePublic Limited Company (the "Saphir Notes"). (DN 9 Ex.1, Ex. B: Tenth Supplemental Trust

1 The Hong Kong testimony in the Complaint does not distinguish among the various HSBC andLehman entities. At times, it is difficult to discern the specific entity referenced in the testimony.

Deed ("Tenth Deed") at 1.) The Saphir Notes were placed in trust with HSBC Bank as Trustee.(Tenth Deed at 1.) Pacific Finance also executed a credit default swap agreement with LBSF.(Tenth Deed at 1; Compl. 154.) Under the credit default swap, LBSF agreed to pay PacificFinance a sum equal to what Pacific Finance owed the Minibonds holders in exchange for theinterest earned by Pacific Finance on the Saphir Notes. (Tenth Deed at 15-16.) Because LehmanBrothers and LBSF exercised control over the Minibonds program, Plaintiffs assert that LBSF"negotiate[d] with itself over the essential terms of the swap agreements." (Compl. 150.)

The Saphir Notes are governed by a principal trust deed and a supplemental trustdeed issued for each series of Minibonds. (Compl.IT84-85.) These trust deeds and theprospectuses advertising the Minibonds sale set forth the "duties and obligations" of the Trusteeand the Issuer. (Compl.~T84-87.) The trust deeds contain,inter alia,provisions governing thepriority of payment in the event the Saphir Notes are liquidated. (Compl.IT84, 90.) The partiesdisagree about the operation of these provisions and who has priority to the Saphir Notes.Choice of law provisions in the trust deeds provide that they are to be construed under Englishlaw. (DN 9 Ex. 1: Principal Trust Deed ("Principal Trust Deed"), Sec. 17(a).) The prospectusesrepresented that "neither Lehman Brothers Holdings, Inc. nor any of its subsidiaries or affiliateshas any equity interest in, or any control over, us [Pacific Finance/HSBC]." (Compl. ¶¶ 84, 87.)

According to the Complaint, Pacific Finance is controlled by HSBC Bank(Cayman) Limited ("HSBC Cayman"). (Compl. 129.) In turn, HSBC Cayman is controlled byHSBC Holdings. (Compl. ¶ 31.) HSBC Holdings also controls the Trustee's predecessor,

2 Plaintiffs brought claims against other entities and individuals alleging rights to collateralpurchased as part of additional transactions. (Compl.118,32-37, 110, 118.) Because Plaintiffsdo not appeal the Bankruptcy Court's dismissal of these claims, that collateral is not at issue.

HSBC Bank USA.3(Compl. 13 1.)
Another HSBC entity---HSBC Bank Plc-filed a claim for $234 million in theLehman Bankruptcy. (DN 30 Ex. 6: Amended Schedule of Assets and Liabilities for LehmanBrothers at 3.) In addition, a Lehman Bankruptcy Examiner's report published after the orderson appeal discloses that HSBC Holdings and Lehman Brothers cooperated extensively duringLehman's collapse to ensure that Lehman Brothers satisfied its obligations to HSBC Holdings.(Report of Anton R. Valukas, Examiner, dated Mar. 11, 2010 at 1321-26.)

III.Procedural History

On October 3, 2008, LBSF filed for bankruptcy. (Counter-Designation of ItemsTo Be Included In Record On Appeal ("C-DN") 10: Supplement to Proof of Claim in Chapter 11Case of LBSF ¶ 10; Compl. ¶ 67.) Thereafter, LBSF's counsel informed HSBC Bank that anyattempt to liquidate the Saphir Notes may be subject to the automatic stay provisions of theUnited States Bankruptcy Code and demanded the Trustee cease all further action. (DN 30 Ex.5: Pls.' Opp'n to Def. [LBSF's] Mot. to Dismiss the Compl., Letter dated Nov. 25, 2008.)HSBC Bank complied.

On March 12, 2009, Plaintiffs filed an adversary proceeding in the BankruptcyCourt. Count One of the Complaint seeks a declaratory judgment that the Minibonds collateral isthe property of the Minibonds holders, not the bankruptcy estate, based on breaches of contractand fiduciary duty by the Issuer and Trustee. (Compl. ¶¶ 97-108.) Count Two seeks to enjoin LBSF and the Trustee from impairing the Minibonds collateral and requests transfer of the

3 This Court presumes that an amended complaint would include the same allegation.

collateral to the Minibonds holders. (Compl.IT109-13.) Count Three seeks a resulting orconstructive trust on the Minibonds collateral for the benefit of the Minibonds purchasers.(Compl. ¶¶ 114-21.) Finally, the remaining counts of the Complaint-Counts Four throughThirteen-assert damages claims for breach of contract, breach of fiduciary duty, negligence,unjust enrichment, and aiding and abetting against the Trustee, the Issuer, and the Issuer'sdirectors and parent company. (Compl. ¶¶ 122-89.)

On May 27, 2009, LBSF and HSBC Bank USA each moved to dismiss theComplaint. (DN 5: Notice of HSBC USA, Inc.'s Mot. to Dismiss the [Complaint], Abstain orStay the Adversary Proceeding; DN 9: Notice of Mot. of [LBSF] for an Order Dismissing theAdversary Compl.)

In a ruling from the bench, Bankruptcy Judge Peck dismissed the Complaint. TheBankruptcy Court dismissed Counts One through Three for lack of standing on three principalgrounds. First, relying on the trust deeds and English law, the Bankruptcy Court held thatPlaintiffs lack standing to bring a direct claim against Defendants. The relevant provisions of thetrust deeds state that "[a] person who is not a party to [the deed] has no right under the Contracts(Rights of Third Parties) Act 1999 [("Contracts Act of 1999")] to enforce any term of [the deed]except and to the extent (if any) that [the deed] expressly provides for such Act to apply to any ofits terms." (Principal Trust Deed at 3; Tenth Deed at 3). The Bankruptcy Court held that"[t]hese provisions fit squarely within the tenets of governing English law," which "provides thatit is a trustee and not a beneficiary of a trust that is the appropriate party to bring an action onbehalf of the trust beneficiaries." (Tr. of Nov. 18, 2009 Hr'g (the "Bankr. Ct. Ruling") at 25.)

Second, the Bankruptcy Court held that it would be futile to allow Plaintiffs to amend the Complaint to bring a derivative claim on behalf of the Trustee. (Bankr. Ct. Ruling at26.) Construing English law, the Bankruptcy Court concluded that a trust beneficiary may stepinto the shoes of the Trustee and sue on its behalf only in special circumstances. (Bankr. Ct.Ruling at 26.) Applying this standard, the Bankruptcy Court reasoned that (i) the "mere fact thatthe trustee has not filed a lawsuit [seeking to enforce Plaintiffs' right to the Minibonds collateral]is not a sufficient `special circumstance;"' and (ii) the fact that an HSBC affiliate filed a proof ofclaim in the Lehman Bankruptcy does not establish that the Trustee is conflicted because "thereis no allegation of any actual conflict." (Bankr. Ct. Ruling at 26.)

Third, the Bankruptcy Court concluded that it would be futile to allowamendment of the Complaint to name the proper trustee-HSBC Bank-"for the reasons setforth in this ruling." (Bankr. Ct. Ruling at 22.) However, it is not apparent from the transcript ofthe ruling what those reasons were.

The Bankruptcy Court also dismissed Counts Four through Thirteen because theywere "not related to the debtors' proceedings." (Bankr. Ct. Ruling at 29.) The Bankruptcy Courtstated that an adversary proceeding is considered related to a bankruptcy case "if the outcomemight have a conceivable [e]ffect on the estate." (Bankr. Ct. Ruling at 28.) After noting thatCounts Four through Thirteen "involve tort, breach of contract and breach of fiduciary dutyclaims against various defendants, none of whom are debtors" in the Lehman Bankruptcy,(Bankr. Ct. Ruling at 27), the Bankruptcy Court held that "[i]nasmuch as Counts [Four] through[Thirteen] comprise actions governed by foreign law between two or more non-debtors, suchclaims, regardless of the outcome, will not affect the debtor's bankruptcy cases.... Resolutionof these claims will have no [e]ffect on the rights of debtors or creditors in the debtors' bankruptcy cases, nor will it have any [e]ffect on the debtors' estates." (Bankr. Ct. Ruling at 29.)DISCUSSION

1.Standard of Review

A district court reviews a bankruptcy court's findings of fact for clear error and itslegal conclusionsde novo.Fed. R. Bankr. P. 8013;In re Vouzianas,259 F.3d 103, 107 (2d Cir.2001);In re Bennett Funding Grp., Inc.,146 F.3d 136, 138 (2d Cir. 1998). The dismissal of acomplaint is a legal conclusion which is subject tode novoreview.Selevan v. N.Y. ThruwayAuth.,584 F.3d 82, 88 (2d Cir. 2009) ("We reviewde novoa district court's dismissal of acomplaint for lack of standing.");see alsoRaine v. Lorimar Prods., Inc.,71 B.R. 450, 452(S.D.N.Y. 1987) (`Because this is an appeal from [a Bankruptcy Court's] decision on a motionto dismiss for failure to state a claim, purely legal considerations are involved, and thus thiscourt's review must bedenovo.").When reviewing such a dismissal, a court "accept[s] allfactual allegations in the complaint and draw[s] all reasonable inferences in the plaintiff's favor."ATSI Commcn's, Inc. v. Shaar Fund, Ltd.,493 F.3d 87, 98 (2d Cir. 2007).

Generally, "[a] bankruptcy court's denial of a request to amend [the complaint] isreviewed for abuse of discretion."In re Calpine Corp.,406 B.R. 463, 472 (S.D.N.Y. 2009)(citingIn re Enron Corp.,419 F.3d 115, 124 (2d Cir. 2005)). However, "[i]f that denial wasbased on an interpretation of law," such as the determination that an amendment would be futile,a court employsde novoreview. SeeDougherty v. Town of N. Hempstead Bd. of ZoningAppeals,282 F.3d 83, 87 (2d Cir. 2002);see alsoRicciuti v. N.Y. City Transit Auth.,941 F.2d119, 122-24 (2d Cir. 1991) (reviewingde novothe lower court's determination that amendment would be futile).

A court "should freely give leave [to amend the Complaint] when justice sorequires." Fed. R. Civ. P. 15(a)(2). Particularly where a court grants a motion to dismiss, "theusual practice is to grant leave to amend."Hayden v. Cnty. of Nassau,180 F.3d 42, 53 (2d Cir.1999).A court may deny leave to amend as futile only "if the proposed claim could notwithstand a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6)."Lucente v. Int'l Bus. Mach.Corp.,310 F.3d 243, 258 (2d Cir. 2002). Indeed, futility means that it is "beyond doubt that theplaintiff can prove no set of facts in support of his amended claims."Pangburn v. Culbertson,200 F.3d 65, 70 (2d Cir. 1999) (quotations and citations omitted).

II.Claims Against LBSF: Counts One & Two

Plaintiffs appeal the dismissal of their direct claims against LBSF and the denialof leave to replead those claims derivatively. This Court addresses Count Three of theComplaint separately for the reasons articulated in Section IV,infra.

a. Direct Claim Against LBSF

Plaintiffs appeal the Bankruptcy Court's dismissal of their direct claims againstLBSF on two principal grounds: (1) Plaintiffs have standing under English law to sue LBSFdirectly because LBSF is a co-beneficiary under the trust; and (2) the Bankruptcy Court'sreliance on the provisions of the trust deeds prohibiting non-parties from enforcing the deeds'terms was misplaced. Because Plaintiffs lack standing under English law to bring a direct claimagainst LBSF, this Court need not address Plaintiffs' second contention.

Under English law, a trustee generally has "a duty to protect and preserve the trust estate for the benefit of the beneficiaries ...."Alsop Wilkinson v. Neary,[ 1996] 1 W.L.R.1220, 1224 (Ch.). As such, "[n]ormally [it is] the trustee who has a right of action [and] is theproper person to enforce [the trust]."Hayim v. Citibank NA,[1987] A.C. 730, 733 (P.C.); seealsoAlsop,1W.L.R. at 1224 ("Trustees have a duty to ... represent the trust in a third partydispute."). Plaintiffs seek to circumvent this general principle by invoking the so-called"beneficiaries dispute" theory.Under that theory, "where the dispute is between rival claimantsto a beneficial interest in the subject matter of the trust.... the duty of the trustee is to remainneutral and ... leav[e] it to the rivals to fight their battles."Alsop,1W.L.R. at 1225.

Plaintiffsargue this theory applies here because LBSF persuaded the Bankruptcy Court that it is abeneficiary rather than a third party under the trust.

As a threshold matter, Plaintiffs mischaracterize the Bankruptcy Court's ruling.The Bankruptcy Court did not describe LBSF as a trust beneficiary. Instead, relying onGregsonv. HAE Trs. Ltd.,[2008] EWHC 1006 (Ch.), the Bankruptcy Court found that the Trustee wasthe appropriate party to bring an action on behalf of the trust beneficiaries, InGregson,a trustbeneficiary brought suit against the director of a corporate trustee for impairment of trustproperty. The beneficiary argued that a corporate trustee's claims against its directors are heldfor the trust's beneficiaries, thereby empowering them to sue directly.Gregson,EWHC 1006 at119,22.TheGreszsoncourt rejected this notion and described the general rule that "a director ofa trustee company does not owe a fiduciary duty to the beneficiary of the trust," and absent thatduty, a trust beneficiary has no direct claim against the director.Gregson,EWHC 1006 atIT44,56, 69.

As the Gregsonanalysis illustrates, the core inquiry is whether the potentially liable third party owed a duty to the trust's beneficiaries. SeeGregson,EWHC 1006 at¶T44,46, 57-58 (stating that if a direct claim against the directors was valid, it would "circumvent theclear and established principle that no direct duty is owed by the directors to the beneficiaries");see alsoRoberts v. Gill & Co,[2010] UKSC 22, ¶¶ 46, 110 (S.C.) (beneficiary sought to amendto bring a derivative claim where it was "accepted that a claim that the [third parties] owed aduty of care to the beneficiaries would be difficult to sustain").While LBSF is a party to thetrust deeds, Plaintiffs do not allege the existence of any fiduciary relationship betweenthemselves and LBSF, Accordingly, the Bankruptcy Court properly held that Plaintiffs lackstanding under English law to sue LBSF directly.

b.Derivative Claims Against LBSF

The Bankruptcy Court also concluded that re-pleading derivative claims againstLBSF would be futile because Plaintiffs cannot allege the existence of special circumstances. Inmaking this determination, the Bankruptcy Court considered Plaintiffs' allegations that theTrustee failed to bring suit against LBSF and that an HSBC entity filed a proof of claim in theLehman Bankruptcy.

Under English law, a trust beneficiary may bring a derivative suit against a thirdparty when "special circumstances" are present. The "special circumstances"rule, articulated inHayim v. Citibank NA,provides:

[A] beneficiary has no cause of action against a third party save inspecial circumstanceswhich embrace a failure, excusable orinexcusable, by the trustees to the beneficiary to protect the trustestate or to protect the interests of the beneficiary in the trustestate.Hayim,A.C. 730 at 748. The Supreme Court of the United Kingdom recently addressed the "special circumstances" rule and summarized the relevant authorities as follows:
The special circumstances which were identified in the earliestauthorities as justifying a beneficiary's action were fraud on thepart of the trustee, or collusion between the trustee and the thirdparty, or the insolvency of the trustee, but it has always been clearthat these are merely examples of special circumstances, and thatthe underlying question is whether the circumstancesaresufficiently special to make it iust for the beneficiary to have theremedy.Roberts,UKSC 22 at746, 114 (emphasis added). The Supreme Court of the United Kingdomnoted that a court has "wide latitude in evaluating ... special circumstances," taking into account"all [of] the relevant circumstances."Roberts,UKSC 22 at ¶¶ 76, 78, 114.

Through the prism of these English law principles, this Court concludes that the Bankruptcy Court erred in finding that Plaintiffs cannot allege special circumstances. Despite representations in the Minibonds prospectuses that neither Lehman Brothers nor any of itssubsidiaries exercised control over the Issuer, Lehman Brothers designed the Minibonds programand directed the Issuer's activities.As a party to the trust deeds, LSBF was substantiallyinvolved in that process. The Issuer then created a trust that, in certain circumstances, distributesits only collateral to aLehmanentity, rather than the trust'ssolebeneficiary. Juxtaposed againstthe promise that the Minibonds would be secured by highly-rated collateral, this is an odd result.SeeRoyal Brunei Airlines Sdn Bhd v. Tan,[1995] 2 A.C. 378, 386-87 (P.C.) ("If, for his ownpurposes, a third party deliberately interferes in that relationship by assisting the trustee indepriving the beneficiary of the property held for him by the trustee, the beneficiary should beable to look for recompense to the third party as well as the trustee.");see alsoRoberts,UKSC22 at ¶¶ 46, 114 ("[T]he underlying question is whether the circumstances are sufficiently specialto make it just for the beneficiary to have the remedy.");In re Field,[ 1971 ] 1 W.L.R. 555, 561

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(Ch.)(holding that special circumstances existed and "justice require[d] that the plaintiff, who isthe only other person interested [in the property], should be allowed to have [his claim] properlytried before a court"), Furthermore, the recently released Examiner's report reveals cooperationbetween HSBC and Lehman Brothers at the highest levels during Lehman Brothers' collapse.

Given the totality of these circumstances, this Court cannot find that it is "beyond doubt that theplaintiff[s] can prove no set of facts in support of [their] amended claims."Pangburn v.Culbertson,200 F.3d 65, 70 (2d Cir. 1999).

On appeal, the parties advance arguments concerning the operation of the trustdeeds' payment priority provisions and potential class certification problems caused by asettlement arranged by Hong Kong regulatory authorities.While interesting, these arguments areextraneous to the issue of standing; they concern the merits of Plaintiffs' claims and are notbefore this Court on appeal. At this stage of the litigation, Plaintiffs should be permitted toreplead Counts One and Two as derivative claims against LBSF. The Bankruptcy Court's denialof leave to replead is reversed.

III.Claims Against the Trustee: Counts One & Two

Plaintiffs also contend that the Bankruptcy Court erred in denying leave to amendthe Complaint to name HSBC Bank as the Trustee. The Bankruptcy Court held that amendingthe Complaint would be futile for the reasons set forth in its ruling, but did not articulate thosereasons.

As an initial matter, the Bankruptcy Court's analysis of English case law ignoredthe differences between Plaintiffs' relationship with the Trustee and Plaintiffs' relationship with LBSF and the other dismissed entities. Under English law, "the basic right of a beneficiary is tohave the trust duly administered in accordance with the provisions of the trust instrument ... andthe general law."Target Holdings Ltd. v. Redferns,[1996] 1 AC 421, 434 (H.L.).When atrustee unlawfully administers the trust, a trust beneficiary may sue the trustee directly. SeeHayim,A.C. at 735 ("The beneficiaries have a right to enforce the trust directly against the ...trustee.");Bartlett v. Barclays Bank Trust Co. Ltd.,[1980] 2 W.L.R. 430, 444, 452 (Ch.)(holding a trustee liable to the trust beneficiaries for willful "breach of trust");see alsoTargetHoldings,1AC at 437 ("A trustee who wrongly pays away trust money ... commits a breach oftrust and comes under an immediate duty to remedy such breach.").

The Bankruptcy Court heldthat the trustee is the proper party to bring suit on behalf of a trust beneficiary.While that mayexplain Plaintiffs' lack of standing to sue LBSF directly, it does not resolve the issue of whethera beneficiary has standing to sue his trustee. Indeed, Counts One and Two are premised onalleged breaches of contract and fiduciary duty by the Trustee for failing to distribute the SaphirNotes to Plaintiffs.

The standing provisions of the trust deeds provide that a non-party to the trust hasno right under the Contracts Act of 1999 to enforce any of the deeds' terms.While theBankruptcy Court held that these provisions fit squarely within English law, it merely quoted theprovisions without analyzing their language or the statute on which they rely. Notably, theContracts Act of 1999 allows a non-party to a contract to enforce the contract's terms if they"purport[] to confer a benefit on him," Contracts Act of 1999, c. 31, § 1 (U.K.), but expresslystates that it does not "affect any right or remedy of a third party that exists or is available apartfrom th[e] Act." Contracts Act of 1999, c. 31, § 7. Thus, while the trust deeds deprive Plaintiffs of rights derived from the Contracts Act of 1999, Plaintiffs may hold rights outside of the Act, anissue the Bankruptcy Court did not consider.

Finally, the Bankruptcy Court's rationale for dismissing Counts Four throughThirteen fails to render futile an amended complaint naming the correct trustee. The BankruptcyCourt reasoned that these counts involve questions of foreign law which will have no effect onthe rights of debtors or creditors in the underlying bankruptcy. The applicable rule is that "[a]proceeding is `related to' a [bankruptcy] case ... if the outcome might have a `conceivableeffect' on the estate."In re New 118th LLC,396 B.R. 885, 890 (Bankr. S.D.N.Y. 2008) (citingIn re Cuyahoga Equip. Corp.,980 F.2d 110, 114 (2d Cir. 1992)). A conceivable effect is onewhich "could alter the debtor's rights, liabilities, options, or freedom of action (either positivelyor negatively) and which in any way impacts upon the handling and administration of thebankrupt estate."In re New 118th LLC,396 B.R. at 890 (citingIn re Pacor, Inc.,743 F.2d 984,994 (3d Cir. 1984),overruled on other grounds byThings Remembered, Inc. v. Petrarca,516U.S. 124, 134-35 (1995)). In this case, Plaintiffs seek to prevent the transfer of the SaphirNotes-worth $1.6 billion-to the bankruptcy estate. The effect of $1.6 billion on thebankruptcy estate is self-evident.Moreover, by instructing the Trustee to postpone distributionof the Saphir Notes, LBSF-not Plaintiffs-tethered the Saphir Notes to the LehmanBankruptcy. Accordingly, the Bankruptcy Court's denial of leave to replead Counts One andTwo against the Trustee is reversed.

IV.Constructive & Resulting Trust Claims: Count Three

In Count Three of the Complaint, Plaintiffs seek to impose a constructive or resulting trust on the Mimbonds collateral.While the Bankruptcy Court made a passingreference to these claims, it provided no analysis in its ruling. Understandably, the BankruptcyJudge was juggling a host of complex and urgent issues. Nonetheless, this Court cannot discernwhy the constructive and resulting trust claims were dismissed. SeeIn re Gucci,309 B.R. 679,685 (S.D.N.Y. 2004) ("This Court ... has no way of knowing whether and to what extent thedefense or elements thereof were rejected as a matter of law, [and] the reasons for any suchrejection ....").A constructive trust relies on equitable, as opposed to contractual and formaltrust, principles.See, e.g.,Counihan v. Allstate Ins. Co„194 F.3d 357, 361 (2d Cir. 1999) ("Aconstructive trust is an equitable remedy ... [whose] purpose is to prevent unjust enrichment.").Without some analysis of why standing principles derived from the trust deeds' and English lawapply to claims for a constructive or resulting trust, denial of leave to replead Count Threeagainst both the Trustee and LBSF was inappropriate. SeePanaburn,200 F.3d at 70 (denial ofleave to replead is warranted only when it is "beyond doubt that the plaintiff can prove no set offacts in support of [the] amended claims").Moreover, it is not evident whether these claims aregoverned by English law, an issue the Bankruptcy Court did not address. Accordingly, the Bankruptcy Court's dismissal of Count Three is vacated and remanded for further consideration.

CONCLUSION

For the foregoing reasons, the Bankruptcy Court's dismissal of Counts One andTwo against LBSF is affirmed, and its denial of leave to replead those claims derivatively against LBSF is reversed. The Bankruptcy Court's denial of leave to replead Counts One and Twoagainst the Trustee is reversed. The Bankruptcy Court's dismissal of Count Three is vacated.This action is remanded to the Bankruptcy Court for further proceedings consistent with thisMemorandum and Order.

Dated: August 9, 2010
New York, New York

SO ORDERED:

WILLIAM H. PAULEY IIIU.S.D.J.

Counsel of Record:

Jason C. Davis, Esq.
Robbins Geller Rudman & Dowd LLP100 Pine Street, Suite 2600
San Francisco, CA 94111

Counsel for Appellants

Howard Grant Sloane, Esq.Cahill Gordon & Reindel LLP80 Pine Street
New York, NY 10005

Counsel for the HSBC Appellees

Richard W. Slack, Esq.
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, NY 10153

Counsel for Appellee Lehman Brothers Special Financing, Inc.

David S. Cohen, Esq.
Milbank, Tweed, Hadley & McCloy LLP
1850 K Street, NW
Washington, DC 20006

Counsel for Intervenor Official
Committee of Unsecured Creditors of Lehman Brothers HoldingsInc. et al.

The former Lehman Asia Pacific CDO & Structured Credit Team

Who was the creator of the Minibond ?
The product was created by the CDO & Structured Credit Asia Pacific of Lehman Brothers.

Who is Leon Hindle ?
Loen Hindle was Managing Director and Head of CDO & Structured Credit, Asia Pacific, Lehman Brothers.
According to "Derivatives Week" (Dec.8,2008), Leon Hindle oversaw Lehman's origination and distribution of all structured credit in the Asia-Pacific, including the strucuring of CDOS linked to its controversial minibond series.

Related blogs on Leon Hindle: "Why did Lehman Asia head of structure division Leon Hindle Lie"
http://minibondvictim.blogspot.com/2009/06/lehman-asia-head-of-structure-division.html

Other Senior members in the Lehman Brothers Asia Pacific for CDO & Structured Credit products related may include:

George Sun: is Managing Director and Head of Global Credit Products Sales for Lehman Brothers in Asia ex-Japan. Mr. Sun heads up a team that is responsible for the distribution of all credit products including money markets, high grade credit, high yield credit, loans, private placements, structured credit, CDOs, and emerging market assets.

Ian Croft: is a senior vice president and is responsible for corporate credit securitisation opportunities in Asia ex-Japan, as well marketing and distribution of structured credit products in Singapore and South East Asia.

Patrick Kaye is a Senior Vice President, responsible for Lehman Brothers’ Principal and Structured Finance practice in non-Japan Asia. He and the group arrange securitization financings on behalf of clients as well as asset-based principal investments on behalf of the Firm.

Tay Teck How is a Vice President, in the CDO & Structured Credit, Asia Pacific, Lehman Brothers.

Steve Baker is a Senior Vice President in the CLO Banking group at Lehman Brothers US. Steve is focused on origination, structuring and placement of corporate credit securitizations, CLOs and related products.

THE VALUE OF MINIBOND ? 85%-99% ?

ARE HKMA and SFC trying to hide the true value of Minibond from Hong Kong retail investors?

ARE BANKS in Hong Kong trying to rip off their clients again from the minibond buyback plan?


On 14 December 2009, the value of Australia Mahogany Notes (a minibond alike product, arranged by Lehman Aaia) ,was announced in the ASX announcement:
Minibond-like Credit-Linked Notes sold in Australia (Mahogany Notes I & II by Lehman Asia) are worth $99 and $85. The notes/series that would mature at a later stage (2016) is worth $85. The notes/series that would mature much earlier in 2010 hence it is worth $99, is worth $99.

WHEN will Hong Kong retail investors get any updates on the value of the Minibond?

The banks buyback was only 60-70% of the issued value.

Who is losing more money?
Who is making profit from the Minibond sales & Minibond buyback?
The bank or the small investor?

In the ASX announcement as of 14 December 2009, it stated that for
"Mahogany Capital Limited – A$75 million Notes Series I and A$50 million Notes Series II ", the "Structured Credit Research has estimated a value for:
AUD 75MM ANZ Floating Rate Note maturing 10 Dec 2011 (XS0208078732) of $99 as of 30 November 2009 (the ultimate Collateral for Mahogany Notes Series I),
and a value for:
AUD 50MM RBS Floating Rate Note maturing 17 Mar 2016 (XS0247983058) of $85 as of 30 November 2009 (the ultimate Collateral for Mahogany Notes Series II). (...) These valuations represent the highest valuations received since the bankruptcy of Lehman Brothers in September 2008."


[ full text of the ASX announcement on the value of Australia Mahogany Notes:
https://www.macquarie.com.au/edge/static/eclipse/Hidden/Company%20Announcements/ISSUED%20CAPITAL/2009-12/010222460.pdf ]

Australia Mahogany Notes (by Lehman Brother Asia) related information::

1. Summary Information:
It is credit-linked to 100-150 reference entities which are explained in the 2-page product summary. The interest rate (of the notes) and the principal loss are affected by the number of default events which are clearly outlined in the 2-page product summary.
同樣由雷曼亞洲一手安排的在澳洲銷售的信貸掛鈎票據 Mahogany Notes 清晰地介紹了
- 該信貸掛鈎票據之本金跟100個公司信貸掛鈎，（7個破產就會失去100％本金），
- 該票據之利息跟150個公司信貸掛鈎（破產事件跟票據利息之關係）
- 該票據所有信貸掛鈎主體之評級（AA 到 BBB- 及 低於 BBB- 之公司數目，等）和公司之業界類別等信息。
該票據明確指出其資金不是投入於任何信貸掛鈎主體（公司）。

2-page summary from the issuer: "Mahogany Notes II - a CDO defence",
http://www.mahoganycapital.com.au/mahogany/PageAttachmentServlet?PageID=4764

2. Prospectus
All the reference entities related information, the impact of default event(s) to the interest rate, the impact of default event(s) to the principal loss are clearly outlined in the prospectus.

http://www.mahoganycapital.com.au/mahogany/PageAttachmentServlet?PageID=4762

3. Related Analysis:
http://minibondvictim.blogspot.com/2009/01/austalia-mahogany-notes-prospectus.html
and
http://minibondvictim.blogspot.com/2009/01/how-was-mahogany-notes-ii-being-briefed.html

Goldman CEO Apologizes for Role in Financial Crisis

NEW YORK (Reuters) - Goldman Sachs Group Inc chief executive Lloyd Blankfein said his firm "participated in things that were clearly wrong" in the lead-up to the financial crisis, Bloomberg News reported on Tuesday.

Lloyd Blankfein, told a corporate conference in New York that the bank regretted taking part in the cheap credit boom that had fuelled the pre-crisis bubble. “We participated in things that were clearly wrong and have reason to regret,” said Mr Blankfein. “We apologise.”

Mr Blankfein also told the conference he wished he had not told the UK’s Sunday Times newspaper that Goldman did “God’s work” – a remark that was seized upon by the bank’s critics – and said it had been meant as a joke.

As a result of the crisis, Goldman Sachs (NYSE: GS - news) and competitors received billions of dollars in bailouts from taxpayers.


Related Links:
1. http://seekingalpha.com/news/market_currents/post/36688
2. http://uk.finance.yahoo.com/news/goldman-ceo-apologizes-for-role-in-crisis-report-reuters_molt-059f53cecd70.html?x=0
3. http://www.ft.com/cms/s/0/782afd66-d3bd-11de-8caf-00144feabdc0.html?nclick_check=1

Bloomberg: London Suicide Connects Lehman Lesson Missed by Hong Kong Woman

Sept. 10 (Bloomberg) -- Yu Lia Chun, a retired hospital orderly in Hong Kong, never heard of Lehman Brothers Holdings Inc. before she got a call last September from her banker.

“He said, ‘Did you hear the news? Something has happened to Lehman,’” Yu, 66, recalled in an interview in June. “I didn’t get it.”

Yu, who has a sixth-grade education, said she thought her money was in a savings account. She didn’t know she had lent it to a bankrupt American securities firm. Eventually, she found out that her HK$1.2 million ($155,000) nest egg was gone. Her children lost another HK$3.8 million because Yu had persuaded them to make similar investments.

“There is no way a person like me could understand any of this,” Yu said, dabbing her eyes with a tissue in a coffee shop in Hong Kong’s financial district. “Sometimes I feel like jumping off a building.”

What hit Yu and her family was a tidal wave triggered halfway around the world by the biggest bankruptcy in U.S. history. The Sept. 15, 2008, collapse of Lehman, with $613 billion in liabilities, had unforeseen and far-flung consequences that devastated those, like Yu, who didn’t know their fates were tied to the New York-based investment bank.

‘Quicker This Time’

The chief operating officer of a private-equity firm in London jumped in front of a commuter train because he blamed himself for leaving the company’s money in a Lehman account, according to a coroner’s report. The Israeli managers of a hotel construction project on the island of West Caicos, northeast of Cuba, were taken hostage by Chinese workers when an anticipated Lehman loan didn’t materialize and wages weren’t paid. In Hong Kong, Yu and thousands of others who had invested in Lehman products camped out in the rain, thumping drums and chanting, “Give us our money back.”

The realization that a U.S. securities firm so woven into the financial system couldn’t pay its debts radiated out from New York, panicking investors around the world. It was a doomsday scenario that former International Monetary Fund chief economist Simon H. Johnson likened to Kurt Vonnegut Jr.’s 1963 novel “Cat’s Cradle,” in which a single crystal of the fictitious substance ice-nine hardens all of the planet’s water.

What differentiated Lehman from previous financial crises was how fast the panic spread, said Richard Sylla, an economic and financial historian at New York University’s Leonard N. Stern School of Business in New York.

“Communications made things happen faster,” Sylla said, describing how it took six months for the 1931 failure of Austria’s Creditanstalt bank to put stress on the British financial system. “The news of everything got spread around much quicker this time.”

Goldman Sachs Debt

The freezing of global credit markets following Lehman’s demise began with professionals who traded commercial paper in New York. They were the first to feel the chill when the Reserve Primary Fund, the oldest money market fund, was inundated with requests for redemptions and seized up hours after the bankruptcy filing. The $785 million that Reserve had lent to Lehman was deemed worthless by 4 p.m. the next day.

Fear that more banks and financial firms might fail meant most investors stopped lending to anyone other than the government. Even New York-based Goldman Sachs Group Inc., which earned $11.6 billion in 2007, more than any U.S. securities firm in history, wasn’t immune. The average annual cost of insuring $10 million of Goldman Sachs debt for five years soared to a record $545,000 from $182,557 in the three days after Lehman failed, according to data compiled by Bloomberg.

Plummeting Prices

Lehman’s demise triggered a panic. Money fund managers were forced to raise cash to pay off investors. They tried selling what securities they held and couldn’t. The market was flooded, and prices were plummeting -- if prices could be obtained at all. The Standard & Poor’s 500 Index suffered its worst decline in six years. Mistrust leaked into the corporate bond market.

The most widely traded 30-year bond of General Electric Capital Corp., the world’s biggest issuer of commercial paper, dropped by as much as 30 cents on the dollar to 62 cents by Sept. 18 because of doubts that GE would be able to persuade money funds to renew its short-term notes.

At that price, the three-day loss for owners of the issue was more than $1.9 billion, according to prices provided by Trace, the bond-trade reporting system of the Financial Industry Regulatory Authority.

The U.S. responded within a week to guarantee money markets and bank-to-bank lending. Within a month, Congress agreed to spend $700 billion to prop up banks under the Troubled Asset Relief Program, the Federal Deposit Insurance Corp. guaranteed new bank debt, and Federal Reserve lending to financial institutions ballooned by $1 trillion.

Lehman Minibonds

Those programs, which succeeded in stemming the panic, remain in place today. What they didn’t do was save Yu and thousands of other investors in Hong Kong, Singapore, Taiwan and elsewhere who had bought equity-linked notes or so-called minibonds connected to Lehman.

Equity-linked notes combine attributes of both bonds and stock by investing part of the proceeds in share options and the remainder in fixed income. Minibonds are custom-made securities linked to the creditworthiness of companies, backed by collateralized-debt obligations and sold in denominations of $5,000. They functioned like credit-default swaps in reverse, where the investor stands to lose his principal when the firm named in the note can’t pay its debts.

‘Information Asymmetry’

Yu, a mother of six who emigrated from mainland China in 1962, didn’t have a chance, according to Joseph Stiglitz, a Columbia University economics professor who won a Nobel Prize for his work on the effect of unequal access to information on buyers and sellers in financial markets.

“As securities got more complex, the opportunities for gaming, to the disadvantage of ordinary people, increased,” Stiglitz said. “Complexity opened up new venues for information asymmetry, which banks exploited.”

Asia became Lehman’s highest growth region in 2007, taking in more than $3.1 billion in revenue, or 16 percent of the firm’s business. Revenue was up more than 41 percent from 2005 in Asia, while it climbed 3 percent in the U.S. in the same period, according to Bloomberg data.

Yu said she went to an export trade show in Hong Kong two years ago and met Chow Chi Chung, a salesman for Amsterdam-based ABN Amro Holding NV. He offered her a better return on her savings if she switched banks, she said. So she did.

Two-thirds of Yu’s money, about $100,000, came from a settlement with her employer after an elevator fell half a floor, injuring her pelvis, according to Yu, who still drags her right leg when she walks.

Didn’t Read Prospectus

A month after their meeting, Yu said Chow called her to say he had a new product that could return as much as 20 percent a year because it was linked to the stock performance of three large Chinese companies -- China Communications Construction Co.,China Merchants Bank Co. and Ping An Insurance Co.

Yu said she didn’t read the fine print, trusting Chow when he told her she couldn’t lose her principal. Had she looked at the prospectus and understood it she would have discovered that she had essentially bought three call options -- contracts that would capture gains if the shares of the three companies rose by a certain amount -- coupled with the equivalent of a Lehman corporate bond. If Lehman defaulted, her money would be gone.

Cash Bonus

ABN Amro, now part of Edinburgh-based Royal Bank of Scotland Group Plc, also recruited Yu to sell the same product to her family, giving her a cash bonus of about $155 for each person who signed up, she said.

Yuk Min Hui, a Hong Kong-based spokeswoman for RBS, declined to comment about Yu’s case. She said in an e-mail that if the bank determined that “sales processes and guidelines were not properly followed,” it would offer “appropriate remedies.” Only a small number of investors fall in this category, she said.

Chow couldn’t be located.

There are 873 issues of such Lehman equity-linked structured notes outstanding with a combined face value of about $8.7 billion, all now in default, according to data compiled by Bloomberg. Bonds were denominated in pounds, Swiss francs and Hungarian forint, as well as Australian and Hong Kong dollars.

Banks also sold $1.8 billion of Lehman minibonds to an estimated 43,000 investors in Hong Kong, where the notes were first marketed in 2003, according to the Hong Kong Monetary Authority. The biggest seller was BOC Hong Kong (Holdings) Ltd., a unit of Beijing-based Bank of China Ltd.

Financial Dumplings

The minibonds were all issued by a Cayman Islands-based entity called Pacific International Finance Ltd., set up by Lehman with trustees from London-based HSBC Holdings Plc. The notes were financial dumplings -- derivatives contracts tied to the creditworthiness of major companies wrapped inside Lehman corporate bonds. Series 19 notes, for instance, were linked to securities dealers including Citigroup Inc. and Goldman Sachs. If any of those businesses or Lehman defaulted, the investor wouldn’t get paid.

In effect, investors in Series 19 notes bought the losing end of credit-default swaps, or insurance policies pegged to the survival of financial institutions. If any of those companies failed, the noteholders were the ones responsible for paying off the principal on the derivative.

Lehman took payments from investors in exchange for a guaranteed yield, then placed the cash in a Lehman-managed money market fund and issued commercial paper to borrow more money. Those funds were in turn used to invest in CDOs sold by Lehman off-balance-sheet entities in places such as Ireland and the Cayman Islands.

‘Blood and Sweat’

Sun Kwan, a 58-year-old retired parks worker, was among those who bought Lehman minibonds. He stood outside the I.M. Pei-designed Hong Kong headquarters of the Bank of China on June 15, along with Yu and 51 other protesters, banging a chipped red drum with a stick every two seconds. Raindrops beaded on the brim of his blue cap. A sign around his neck, hand-lettered in Chinese characters, read: “The Bank of China is a hooker. Give me back my money earned with blood and sweat.”

Sun, who has a high school education, invested about $285,000 in Lehman Minibond Series 12 notes, sold to him by BOC Hong Kong, which paid about 4 percent interest a year.

He said he thought he was putting his money into a certificate of deposit. Instead, as the prospectus explained, the notes were a bet against the default of the Chinese government and five companies, including Hutchison Whampoa Ltd., which operates ports and telecommunications services, Chinese state-owned oil producer CNOOC Ltd. and Lehman.

As an incentive, he was given $26 in supermarket coupons.

Rhinos, Whales

Sun also purchased $40,000 worth of Octave Series 10 notes, a similarly structured product created by Morgan Stanley, in which the investor would lose all of his money if Lehman or any of six other companies defaulted. He said he never heard of Lehman and thought the notes were backed by the People’s Republic of China because most of the businesses were state- owned.

Nick Footitt, a spokesman for Morgan Stanley in Hong Kong, declined to comment.

Each minibond series was custom-made, so their characteristics differed. Packagers skipped using some numbers, including 4, which is considered unlucky in Chinese culture and would make the bond difficult to market. Investors got prizes, including video cameras and flat-screen televisions, according to newspaper advertisements and fliers handed out at banks. The ads, in both Chinese and English, featured rhinoceroses, whales and other symbols of potency, luck or profit.

‘Rotten Deal’

“It’s all gone,” Sun said in an interview conducted through a Chinese translator at the demonstration. “I almost wanted to kill myself. I’ve been crying for months, even though I am a man.”

He said he hadn’t yet told his 25-year-old son, Sun Chi Yan, what had happened to his nest egg, most of which came from a settlement when the government bought his family’s land.

Sun and Yu were among investors who staged protests almost every business day for nine months, sparking a Hong Kong legislative investigation and calls for more protection for retail customers. The raucous demonstrations in the city’s financial district, including a tent encampment and bullhorns connected to an iPod that blared the looped chant “Rotten Deal -- Money Back,” became an embarrassment to the banks.

In a city of 7 million, where only 30 percent of workers had pensions before 2001, the Lehman protesters struck a chord, according to Audrey Eu, one of 60 members of Hong Kong’s Legislative Council.

Bank Offer

“A lot of them lost their life savings,” Eu said in an interview in June. “They’re all crying. They work as cleaners, and $50,000 is a lot of money to them.”

Angel Yip, a spokeswoman for BOC Hong Kong, said in an e- mail that “we understand and sympathize with customers” who lost money as a result of the Lehman collapse. She said advertisements and prospectuses distributed by the bank “contained a detailed description of the structure and risks” of the investments.

In July, 16 retail banks, including BOC Hong Kong, offered to repay minibond investors at least 60 cents on the dollar, a deal brokered by the city’s securities regulator that would amount to $813 million. About two-thirds of eligible noteholders accepted the offer, the Hong Kong Monetary Authority said in a statement on Sept. 4. Sun said he hadn’t yet made up his mind.

“The compensation offer is totally unfair and based on groundless calculations,” Sun said. “If we have to accept it eventually, it’ll be because we’ve exhausted all other means.”

‘Grotesquely Wrong’

While investors in Hong Kong have the right to sue banks, there are no class-action laws or contingency fees, making it difficult to find lawyers willing to take cases.

Patrick Daniels, a lawyer with Coughlin Stoia Geller Rudman & Robbins LLP in San Diego, has filed a class-action suit against Lehman in federal court in New York on behalf of minibond holders like Sun in Hong Kong, Taiwan and Singapore seeking $1.6 billion from Bank of New York Mellon Corp. The money, mostly shares in Lehman’s Institutional Money Market Fund, is being held by the bank as collateral to secure the minibonds, Daniels said. Other Lehman creditors are trying to get the same funds from the Bank of New York Mellon, which isn’t accused of wrongdoing. The case is pending.

“Something is grotesquely wrong here,” Daniels said in an interview in July. “These people were just flat-out lied to and stolen from.”

Neither the lawsuit nor the settlement applies to Yu or other holders of equity-linked notes from Houston to Singapore.

London Suicide

Hong Kong retirees weren’t the only victims. Even professional investors were stuck with Lehman losses.

The stocks and bonds of Lehman’s London brokerage customers, used as collateral to borrow more money, were frozen on Sept. 15. About 3,500 clients, including 700 hedge funds, couldn’t get access to an estimated $65 billion of assets. PricewaterhouseCoopers, Lehman’s U.K. bankruptcy administrator, is still sorting out who should get paid and how much. Some firms have closed, and others may have to wait as long as a decade to get their assets back, Tony Lomas, the PwC partner in charge of the U.K. administration, said in August.

It took only 10 days for the ice-nine to get to Kirk Stephenson, chief operating officer of Olivant Ltd., a London private-equity firm run by former UBS AG Chairman Luqman Arnold. On Sept. 25, Stephenson, 47, jumped in front of a train going 125 mph at a station in Taplow, 28 miles (45 kilometers) west of London.

The coroner’s office for the county of Buckinghamshire ruled the death a suicide. Stephenson, a native of New Zealand, was despondent about the financial crisis and talked about killing himself one week after Lehman’s demise, according to a statement from his wife read at the coroner’s inquest.

U.K. Lock-Up

Lehman Brothers International (Europe) was Olivant’s prime broker. It held the firm’s 2.78 percent stake in UBS, Switzerland’s largest bank by assets, according to a statement from Olivant on Oct. 1. The shares were worth 1.6 billion francs ($1.44 billion) at the time.

The hedge fund lock-up led the U.K. to reconsider its procedures when firms fail. While Lehman’s broker-dealer in the U.S. stayed out of bankruptcy long enough to process many of its trades, the business seized up in the U.K.

“In the U.S., everything was wrapped in cotton wool for four days,” said PwC’s Lomas. In the U.K., “everything failed come 7:56 a.m. that Monday morning.”

‘Black Hole’

The U.K. had an advantage in attracting hedge fund assets before the Lehman bankruptcy. While U.S. prime brokers face limits on how much they can loan hedge funds, those rules could be circumvented with overseas units like Lehman’s in London. Some U.S. clients didn’t know they were customers of Lehman Brothers International (Europe).

“If you didn’t pay attention to what you were signing, you would have missed it,” said Michael Romanek, principal at Rise Partners Ltd., which arranges financing for funds from London. “It was called enhanced prime brokerage, where they could be more accommodating with more leverage or loans. It just took signing some extra papers in New York. Most people didn’t realize it.”

Some fund managers with frozen assets say they’ve gone from extreme anger to resignation that they’ll have to wait a long time to see any return.

“I still don’t know if I’ll ever get any money back,” said Edward Chin, whose Hong Kong-based Pride Revelation Fund used Lehman as its sole prime broker. “We’re in a black hole.”

$30 Billion Gap

The ice-nine also halted construction projects from Wall Street to the Turks and Caicos Islands.

Lehman borrowed against property investments that couldn’t easily be sold, such as construction loans. So when the property market turned sour and creditors demanded more collateral for the loans or their money back, the investment bank was stuck.

The property portfolio doomed Lehman when a rescue still seemed possible. On Saturday, Sept. 13, 2008, Timothy Geithner, then president of the Federal Reserve Bank of New York and now U.S. Treasury secretary, asked a team of the world’s top bankers to evaluate Lehman’s real estate holdings as part of an effort to facilitate a sale of the investment bank to London-based Barclays Plc.

The team, including representatives from Goldman Sachs and Credit Suisse Group AG, determined that Lehman had overvalued its real estate investments by $20 billion to $30 billion, according to people who attended meetings at the New York Fed last September.

Watergate Hotel

When Barclays pulled out of an agreement to buy the firm, Lehman was forced to file for bankruptcy. Only then did Barclays buy Lehman’s U.S. securities business, including its headquarters in Manhattan’s Times Square.

The bankruptcy deprived the international real estate market of a major source of financing. The bank was known for doing deals nobody else would touch, according to a former Lehman executive.

The Watergate Hotel, made famous by the 1972 break-in that led to the resignation of President Richard Nixon, was sold at auction in August for $25 million after its owner, Washington- based Monument Realty LLC, defaulted on its mortgage. Monument was financed by Lehman.

A condo conversion at 25 Broad St. in Manhattan, two blocks from Goldman Sachs’s headquarters, was suspended by developers. It too was financed by Lehman.

SunCal, Depfa

Irvine, California-based SunCal Cos., a closely held developer, said it had $1.6 billion in financing from Lehman. Since the bank’s failure, 19 projects, all in California, have filed for bankruptcy, SunCal said. Work has stopped on all of them, including the 248-acre Marblehead Coastal community in San Clemente, which was supposed to feature 69 single-family homes, 244 other residences, a movie theater, parks and hiking trails.

Munich-based Hypo Real Estate Holding AG received 102 billion euros ($143 billion) in debt guarantees and credit lines from the German government after its Depfa unit was stuck without short-term funding following Lehman’s bankruptcy. Like Lehman, Hypo funded long-term real estate assets with short-term loans such as commercial paper.

German Finance Minister Peer Steinbrueck defended the bailout of the lender because the global financial system was just “millimeters from the abyss.”

Molasses Reef

On West Caicos, an otherwise uninhabited island 250 miles northeast of Cuba, work stopped on the Molasses Reef Ritz- Carlton Hotel and Residences, slated to include a cluster of $6.5 million cottages. About 400 Chinese employees of Tel Aviv- based construction firm Ashtrom Properties Ltd. didn’t get paid when Lehman funding dried up, according to Jonathan Siegel, New York-based managing director of Logwood Hotel Development Co.

About 60 electrical workers rebelled, taking a dozen managers hostage and refusing to let them leave the island.

“We had 400 to 500 unhappy men, and we were concerned violence would erupt,” Siegel said. “The Turks and Caicos government was very unhappy with the situation. There was a limited supply of food and water.”

Ashtrom ended the standoff after a week by paying what it considered “a ransom,” Siegel said. The project, about 70 percent completed, is still on hold, said Verona Carter, Ritz- Carlton Hotel Co.’s director of public relations for the Caribbean area.

Financial Leadership

The vulnerability of the global financial system revealed by Lehman’s bankruptcy -- from ordinary investors like Sun and Yu to London hedge funds and German lenders -- makes it all the harder to regulate.

“The difficulty you have in getting control is that you need a global alliance,” said former World Bank President James D. Wolfensohn in an e-mail. “You need all the finance ministers to come together, because if a transaction can’t be done here, it can be done in Lichtenstein or France or the Far East.”

Lehman’s bankruptcy also poses a challenge to America’s financial leadership.

Wall Street profited by arranging financing that allowed other countries to tap global capital markets to build offices, factories, resorts and housing. What’s broken now is the trust the rest of the world had in U.S. banks, said Phillip Yin, a native of Seattle who is managing director of Asia Investors Partners Ltd., a Hong Kong-based research firm.

“All that has happened since -- the job losses, the slump, everything -- is tied to one thing and one event,” Yin said. “And that’s Lehman.”

(Lehman’s Lessons: Next, Too Big to Fail)

To contact the reporters on this story: Mark Pittman in New York at mpittman@bloomberg.net; Bob Ivry in New York at bivry@bloomberg.net.



from http://www.bloomberg.com/apps/news?pid=20601109&sid=aNFuVRL73wJc

Lehman Minibond Series 6 解读迷债系列6

解读迷债系列6，
因为系列6是2003－2004两年间提供最高利息的迷债系列（跟系列5 或系列7－10相比），却是销售量最低的系列（低于5百万美金），其表面挂钩公司也跟其它系列不同：跟多达150个公司信贷挂钩。

Series 6 was issued in Sep.2003, and matured in Sep.2005, but was extended (by issuer) to Mar.2009.

Why Series 6?

It would be interesting to learn how the early Minibond Series was introduced. For Series 6, there was only a "PROSPECTUS". For Series 10 and later, Program Prospectus and Issue Prospectus are offered.

Because Series 6 showed us how Minibond's upfront facade / marketing selling point had been evolved over years, It also showed us how the disclosure level of Underlying Securities related information had gone from LESS to the LEAST, while the prospectus was expanded into Program Prospectus and Issue Prospectus . Similar reduction in disclosure is also observed in the DBS Constellation Notes, if one compares the much polished prospectus for Constellation Series 59 versus the Constellation Series 34-37. The Prospectus for Minibond Series 6 also showed us what banks knew at the early stage about the true features and material risks of Minibond.

Summary of Minibond Series 6.
1. Maturity Term.
Series 6 was issued in Sep.2003, with initial Maturity date in Sep.2005.
Upon maturity, the issuer has the right to extend the maturity date to Mar.2009.

2. It is credit-linked to 150 reference companies ("referecne portfolio") .
The Prospectus listed the 150 reference companies name, and their rating.

3. Prospectus listed the impact to the interest-rate with the number of default event of the 150 reference entities.
- For Sep.2003 - Sep.2005:
0 default => Minibond (Series 6)'s Interest Rate is 5%:
1 default => Minibond (Series 6)'s Interest Rate is 4.15%: ........
5 default => Minibond (Series 6)'s Interest Rate is 0.80%:
6 or more default => Minibond (Series 6)'s Interest Rate is 0:

- For extended Sep.2005 - Mar.2009:
0 default => Minibond (Series 6)'s Interest Rate is 8 %:
1 default => Minibond (Series 6)'s Interest Rate is 6.65%: ........
5 default => Minibond (Series 6)'s Interest Rate is 1.30%:
6 or more default => Minibond (Series 6)'s Interest Rate is 0:


4. Where did the Minibond Money go?
According to Prospectus, it would be used on purchasing "Underlying Securities" with maturity date at Mar.2009.
The Underlying Securities in fact was another structured products.
My Comments:
Prospectus did not use the term 'collateral', the document used 'Underlying Securities'.

5. It claimed to be principal protected. but it also said that if something happened to the Underlying Securities, the principal will be at loss (or total loss).

6. Procedures and Information related to the 'underlying securities' in the Prospectus.

(a) page 53: "APPLICATION PROCEDURES"
(...)
Relevant Dealers will inform prospective investors that copies of the documents listed under paragraph 10 in the section headed "General Information" are available for inspection at the office of the Arranger specified herein ."

(b) in Page 95, "General Information" ,
"10. (...) copies of the following documents will be available .....and the Initial Dealers " (i.e. the distributing banks).

(c) page 96: "(xii): Information Memorandum and all other relevant programme documentation relating to the Underlying Securities Issuer's US $18,000,000,000 EUR Medium-Term Notes Program guaranteed (...)"

(d) page 96: "(xiii) Pricing Supplement relating to the Underlying Securities which supplements the master terms and conditions of the Underlying Securrities set out in the Information Memorandum referered to in (xii) above to form the terms and conditiosn of the Underlying Securities"

My comment:
- The "(xiii)" , i.e. (d) above, refers to the crucial Underlying Securities information document.
- The Underlying Securities Information Documents were available at selling agent (distributor banks) office.
- The "APPLICATION PROCEDDURE" and "General Information" were in fact requiring selling-agent /distributors
(i) to inform clients/potential minibond-buyers all the document information including Underlying Securities Information Document,
(ii) to let clients/potential minibond-buyers inspect all the document information including Underlying Securities Information Document, at selling-agent's office (i.e. at banks if the distributor is a bank). => Both Program Prospectus and Issue Prospectus for later Minibond Series never invited clients to inspect such information/documents at selling agents / distributors office any more.
- Similar requirements for inviting clients to inspect the Underlying Securities Information Documents were also found in the prospectus of Constellation Series 34-37 (in the name of "Charged Asset Information" ), but NOT in the prospectus of Constellation Series 59.

- Did selling agents/distributors inform and give clients Underlying Securities Information Document?
- Did selling agents/distributors read through Underlying Securities Information Document which were available at their site?
* What did they learn about the Underlying Securities' true feature and risks?
* How did the Underlying Securities Information affect Banks' understanding on the Minibond's true features and risks?
* How did the Underlying Securities Information affect Banks' understanding on the Minibond's material risk and material information?
- Is there a connection between such information with the Questions regarding to disclaimers in Wing Hang Bank's Minibond Purchaser Confirmation Form?
Questions: in http://minibondvictim.blogspot.com/2009/08/question-regarding-wing-hang-banks.html


(e) page 96: "Copies of the (...) refered to in (...) (xii), (xiii) and (xiv), will be avialable for inspection as aforesaid with effect from the Issue Date. (...)"

My Comment:
- The Prospectus disclosed that some information (e.g. Underlying Securities Information Document) will be available from the Issue Date, i.e. not available before the Sale-offer closed.
- Similar information on the availability of "Charged Asset Information" (i.e. Underlying Securities equivalent) was also found in the Constellation Series 34-37, but was not found in the prospectus for later Constellation Series (e.g. Constellation Series 59).
- Similar information (disclosure) was dropped forever in the Program Prospectus & Issue Prospectus for Minibond series 10 and later. The Program Prospectus and Issue Prospects never mentioned about the availability of Underlying Securities Information Document.
In the later series (of Minibond and Constellation notes), not only there was no mentioning of the availability of Underlying Securities (collateral) Information document, the well polished Program Prospectus and Issue Prospectus never invited clients to inspect such information/documents at selling-agents/distributors office any more.
WHY?
Because such information did not carry material information and was not relevant material information for understanding the true features and risks of Minibond / Constellation notes ?



7. Distributors of Minibond Series 6:
Dah Sing Bank,
ICBC (Asia),
Mervas Bank,
Shanghai Commercial Bank,
Sun Hung Kai Investment Services Limited,
Wing Hang Bank,
WIng Lung Bank;

8. Sales of Early Minibond Series (based on data from HSBC USA Trustee).
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Series 5: $10.6 million USD; Reference Entities: 1 ; Interest Rate at 3.8%; Jun.2003- Jul.2010;
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Series 6: $4.75 million USD; Reference Entities: 150 ; Interest Rate at 5% for year 1-2, 8% from 3rd year-maturity, pending on number of default event; Sep.2003 - Mar.2009;
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Series 7A: $15.2 million USD; Reference Entities: 6 ; Interest Rate at 4.2%: Nov.2003 - Dec.2008;
Series 7B: $32 million USD ($250 million HKD); Reference Entities: 6 ; Interest Rate at 4.2%:
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Series 9A: $22 million USD; Reference Entities: 6 ; Interest Rate at 3.7% year 1-3, 4.3% year 4-maturity: Mar.2004 - Sep.2009;
Series 9B: $353 million USD; Reference Entities: 6 ; Interest Rate at 3.5% year 1-3, 4.1% year 4-maturity:
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Series 10: $44.6 million USD; Reference Entities: 7 + Additional 125 undisclosed reference entities hidden in CDO Collateral ; USD Interest Rate at 4.25% year 1-3, 4.75% year 4-maturity: May 2004 - Nov.2009;
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Series 11: $42 million USD; Reference Entities: 1 + Additional 125 undisclosed reference entities hidden in CDO Collateral ; fixed + Libor linked float Interest Rate: Jun.2004 - Jun.2010;
------------------------------------------------------------


My Comment:
- Series 6 was offering a higher interest rate comparing to other series because Series 6 has 150 reference entities at up front.
- Series 6 Sales was the lowest amongst all the Minibond Series.
- Comparing the Interest Rate (and sales results) offered for Series 6 versus Series 10:
Both are credit linked to over 100 reference entities. But Series 6 listed 150 reference entities at up front, Series 10 listed 1 reference entities at up front and addded another 125 reference entities in the never disclosed CDO.




参考1: Series 6 Prospectus:
http://www.sfc.hk/sfcCOPro/EN/displayFileServlet?refno=0550&fname=Minibond%20Series%206_Prospectus_ENG2.pdf

参考2: 從 迷債系列 6 看 雷曼迷你債券騙局手段之 完美完善過程
http://minibondvictim.blogspot.com/2009/09/6_4956.html
.
.

Open Letter to Commissioner of Police Regarding to Police Abuse of Powers

（轉載）
An Open letter to the Commissioner of Police regarding to the latest episode of Police Abuse of Powers

Mr. TANG King Shing

Commissioner of Police , Police Headquarters,

Sirs,

I write on behalf of Ms. Tracy Ho as well as the Alliance of Lehman Brothers Victims in Hong Kong to complain against your officers who authorise the ‘dawn raid’ against Ms. Ho for reason that she is suspected of having committed an act of common assault.
The alleged assault takes place at about 1625 hours on 21st May 2009 outside the Bank of China Building, which is situate at no. 1 Garden Road, Central. In addition to the gross disproportion between police action and the nature of the allegation, there are numerous dubious acts on the part of your officers during the process that could only be explained as intending to maximize the harassment and distress inflicted on Ms. Ho and her family.

The Dawn Raid

2. At about 07:30 hours on 19th August 2009 five detectives (three male and two female) in plain clothes claiming to be attached to the Central Police District or Division knocked on the door of Ms. Ho’s Residence in Choi Hung. The visit is a total surprise and when Ms. Ho answered the door your officers insisted that they wanted to enter the premises before they would reveal the purpose of their visit.

3. With utmost reluctance and distress of her family, Ms. allowed the officers into her home. One of the officers then produced a photograph to Ms. Ho and asked if she is the person in it. Although the photograph does not show her face, Ms. Ho recalled the scene which is the protest outside the Bank of China Building mentioned above.

4. When Ms. Ho was about to admit that she is the lady on the photograph, one of the officer threatened her to immediately produce the clothes and shoes she worn that day or else they would search for the items themselves. Perplexed by the sudden police interest in the event that happened months ago and pressured by the threatening language, Ms. Ho complied with the demand and produced the items accordingly. She was then asked to follow the officers to the police station for further enquiries but before leaving the premises she was asked to sign on the notebook of one of the officers that it was not an arrest and she was not therefore handcuffed.

A Trivial Offence

5. Ms. Ho arrived at the Central Police Station at Arsenal Street at about 0930 hours after having been taken to and asked to wait at the Ngau Tau Kok Police Station for some time during which your officers were presumably completing some formalities to record their action in another police area.

6. In the Central Police Station, Ms. Ho was shown a video footage lasting for about 10 to 15 seconds in which her right foot seemed to have a momentary contact with the buttock of a bank staff. Apparently the footage was shot in a commotion where attempt was made by the bank staff to forcibly remove the protesters. It is understandable that in such circumstances people were jostling against each another and what Ms. Ho was doing then is crucial in establishing the plausibility of the allegation against her.

7. Ms. Ho has a flair for electronic video and audio devices and she has been responsible for filming the public activities of the Alliance almost since the creation of it. When the assault was allegedly taken place, Ms. Ho was actually holding her video device filming the forcible removal of the protesters by the bank staff. Her attention was on the action in front of her and the display screen of her video. It is, to say the least, very unlikely that a person would in the circumstances feel like joining the fray.

8. There is another factor that discounts the truthfulness of the allegation. Ms. Ho is a small, slim young lady whose weight would not be much more than 90 lbs. Could a person with that physique be inclined to provoke a fight? And could a lady like Ms. Ho who has taken part in so many protests relating to the fraud of Lehman Brothers and has always behaved properly, suddenly and without any provocation whatsoever, acted contrary to her personality and disposition? The allegation is so preposterous that no person in his right mind would seriously entertain it. Yet your officers have concluded that the offence is so grave that it justifies a deployment of five officers to carry out a dawn raid for an allegation of common assault where the supposed victim does not seem to have suffered any visible or detectable injury and does not complain for months after the event.

Assault on Law by Abuses of Powers

9. How should the public comprehend a dawn raid by five detectives against a young lady suspected of common assault? Does it not indicate the new low of the state of policing in this city under your watch?
But that is not all in so far as the outrageous police conduct is concerned. For almost one year now Ms. Ho has been the contact person between the police and the Alliance on many occasions especially in respect of application for approval to assemble and conduct procession. Your officers at the Police Community Relations Office in Central District know Ms. Ho well and it would take only a phone call to get Ms. Ho to the Central Police Station to view the video footage and to assist police investigation into the allegation. The differences between asking Ms. Ho to the police station and the dawn raid are that only the latter could inflict the distress, sudden sense of fear, and helplessness on Ms. Ho and her family.

10. The connection between the decision to harass Ms. Ho and another assault complaint against the bank staff at the scene of protest is clear. As mentioned above, the moment when Ms. Ho was accused of committing assault on the anonymous bank staff, she was filming an assault in progress by the bank staff against a protester.
It is hardly surprising that the protester would sustain injury given the way she was man-handled by the bank staff. As it was, she was taken to hospital, and stayed there for days for medical treatment. We also learn that a complaint of assault was lodged with the police by her or subsequently with the medical findings of the injury she sustained. Despite the evidence, no action has been taken against the bank or the assailant by the police, just like other crimes related to the Lehman Brothers fraud.

11. In the circumstances, it is an irresistible inference that the police harassment against Ms. Ho is motivated by the desire to please certain influential individuals affiliated with the bank.

12. The allegation against Ms. Ho is so trivial that she is granted a police bail of HKD100. Against an allegation of common assault that could, technically speaking, be committed by everyone in this crowded community, the police deployed five detectives to conduct a dawn raid on the basis of the flimsiest evidence which comes into being in a commotion caused largely by the bank itself. The commotion would not have happened had the police had the courage and sense of decency to enforce the law. Against the banks for fraud that is proven by documentary evidence that no government official would dare to dispute, not a single officer of yours has the courage to follow your own orders to classify the complaints after almost one year of their lodgments with the Commercial Crime Bureau. Insofar as the Lehman Brothers fraud is concerned, the victims have been deprived of any legal rights and remedies. Would any of the government officials to whom this complaint is addressed care to respond to this latest episode of police abuse of powers?

c.c.
Mr. TANG Ying Yen, Henry, Chief Secretary for Administration
Mr. Wong Yan Lung, Secretary for Justice
Mr. Ian Grenville Cross, Director of Public Prosecutions
Mr. Ian McWalters, Deputy Director of Public Prosecutions
Mr. Lee Ka Chiu, Director of Crime & Security, HKP

======================================================
From: An Open letter to the Commissioner of Police regarding to the latest episode of police abuse of powers

Is HK now a Heaven for Banking Crooks ?

What have HK Police / Justice department done regarding all the financial fraud related complaints by Minibond / Constellation / Octave victims /other-products, since 15 sept. 2008?
(a) act upon banks' request & demand: Arrested and raided some minibond / constellation victims who participated in protesting banks' over 5 years' fraudulent act;
(b) Taking photos of those who participated in the demonstrations ...
(c) What ELSE ????????

While HK Police have been busy with responding to banks' request & demand: searching & raiding Minibond/Constellation victims because of their involvement in protest against Banks' cheating behavior on Minibond / Constellation / Octave,
What have the financial center New York's legal system done so far?


In the recent news:

1. "New York Attorney General sues Charles Schwab over securities sales" (Aug.17)
NEW YORK - New York Attorney General Andrew Cuomo filed a lawsuit Monday against the brokerage unit of Charles Schwab Corp., claiming the firm misled customers about the safety of auction-rate securities.
Cuomo's office has been at the forefront of pushing brokers and underwriters of auction-rate securities to repurchase them from investors who were left with steep losses after the market for the investments collapsed in early 2008.
The suit against Schwab is aimed at forcing the retail brokerage firm to repurchase the securities at face value from investors.
...
Last month, Cuomo's office notified San Francisco-based Charles Schwab that it was planning to file the suit against the retail brokerage firm for claiming the securities were safe investments while selling them to customers.
In a statement Monday, Cuomo said: "Charles Schwab owed its customers a duty to properly understand and make accurate representations concerning auction-rate securities. Today we commenced a lawsuit to remedy Schwab's repeated breach of that duty."
...
related link: http://www.cnbc.com/id/32447041

2. "Credit Suisse broker convicted of fraud" (Aug.17)
A former Credit Suisse broker was on Monday convicted by a jury of fraudulently selling risky auction-rate securities in one of the first criminal prosecutions to emerge from the two-year-long credit crisis.

The guilty verdict against Eric Butler, 36, comes after a three-week trial in which prosecutors accused him and his former colleague, Julian Tzolov, of scheming to generate higher sales commissions by lying to clients about what kind of securities they were being sold.

“The defendant’s fraudulent misrepresentations saddled investors with unknown risks they did not bargain for,” said Benton Campbell, US attorney for the eastern district of New York.

“This case shows that those who engage in such schemes will be held to account for their criminal activity.”
related links:
- http://www.reuters.com/article/domesticNews/idUSTRE57G4HK20090817?feedType=RSS&feedName=domesticNews (reuters)
- http://newyork.fbi.gov/dojpressrel/pressrel09/nyfo081709a.htm (FBI press release)

3. 2008-News:
US Regulators alleged that brokerages misled investors into believing that auction rate securities were safe, cash-equivalent products, when in fact they faced increasing liquidity risk. Major financial companies Goldman Sachs, Morgan Stanley,UBS, Citigroup, Merrill Lynch, Wachovia Corp.,and others that sold auction-rate securities have reached 100% buy-back settlements.

SCMP:Watchdog accused over Lehman probe decision

4 August 2009

Lawmakers criticised the financial regulator for suspending an investigation over the selling of non-minibond products after banks agreed a HK$6.3 billion deal to repay Lehman Brothers minibonds buyers.

Securities and Futures Commission chief executive Martin Wheatley said the commission had not only ended its top-down inquiry into minibonds, but also suspended investigation of other products from the 16 banks under the agreement.

He was speaking at a hearing of the subcommittee on the debacle surrounding the sale of Lehman Brothers financial products.

Democrat James To Kun-sun told the five-hour meeting: "It's about the minibonds agreement with the banks, but you {hellip} voluntarily suspended your statutory duty to investigate the systematic failure [over the selling] of non-minibonds products."

Another democrat, Kam Nai-wai, asked Mr Wheatley if he thought the interests of other buyers who bought Constellation Notes, a derivative similar to minibonds also issued by Lehman Brothers, or equity-linked notes had been sacrificed.

Lehman Brothers minibonds holders will receive letters before Monday from the banks who will repay them at least 60 per cent of the value of their initial investment.

Mr Wheatley said the investigation into non-minibonds products, involving about 500 cases, had been suspended because the latest deal required the banks to immediately implement improved complaints-handling procedures to resolve all complaints they received.

He said the investigation of three other banks, which were not included in the payout deal because they sold Lehman-related products apart from minibonds, continued. Investors should first turn to banks if they had complaints, and then the Hong Kong Monetary Authority.

Subcommittee chairman Raymond Ho Chung-tai said it would ask the commission to submit an original copy of the agreement, investigation findings of the 16 minibond-selling banks, as well as e-mail exchanges the commission had with the Monetary Authority and financial officials before it reached the deal.

Minibonds are not corporate bonds, but consist of high-risk credit-linked derivatives, and are marketed as a proxy investment in well-known companies. Hong Kong investors lost billions of dollars on minibonds guaranteed by Lehman Brothers when the US investment bank went bankrupt last September

From SCMP:Watchdog accused over Lehman probe decision

Repeating History after Ignoring It - Lehman's mini-bonds scandal ends with a whimper

[Article from Asia Sentinel]

Hong Kong's Lehman mini-bonds saga, in which outraged investors lost millions with the collapse of what was once thought to be an impregnable American financial institution, appears to be finally coming to an end, potentially drawing the curtain on a 10-month nightmare for both investors and regulators, given what the Securities and Futures Commission reportedly described as a 'good compromise."

But before crediting the SFC for putting an end to the misery of the 30,000 beleaguered investors, or before the regulator champions itself for its masterstrokes, be forewarned that the impact of the Lehman mini-bonds saga could have been minimized, if not prevented, if the SFC had acted decisively three years ago in a similar case involving Clerical Medical Insurance, a unit of Halifax Bank of Scotland. But from its inception, the SFC has been a largely toothless watchdog, occasionally gumming on some luckless small offenders and largely leaving the heavyweights alone.

Under the terms of the Lehman settlement, announced July 23, 16 banks agreed to return US$807 million - about 60 cents on the dollar -- to investors, with BOC Hong Kong Holdings agreeing to stump up nearly half of that, at US$401 million. The 16 banks sold an estimated US$1.8 billion of the so-called mini-bonds, which fell sharply in value after the US investment bank Lehman Brothers Holdings was forced into bankruptcy last September.

Just as with Lehman, the CMI case involved gross mis-selling of financial investment products - larger in scale in dollar terms but less well known.


The SFC could have punished the wrongdoers to send out the right message, restructured the regulatory landscape to prevent any similar episodes and seized the opportunity to demonstrate its seriousness in dealing with misconduct of financial institutions.

No, thank you. The SFC did none of the above. What it eventually did - investigate the case but take no action - was to splash out television advertisements to forewarn investors to be alert and ask the right questions when making investment decisions, without tackling the core of the problem. The timing was critical: had the SFC taken the right measures then, it would have been between 2005-2006 when the Lehman minibonds were flowing into the Hong Kong market.

Obviously those splashy TV ads didn't work but the SFC has once again resorted to an even larger scale commercial campaign to accompany its new television advertisements following the Lehman case.

The earlier case refers to a product generally known as "offshore with-profits" (OWP) funds, sold in Hong Kong via several carriers but largely through market leader Clerical Medical Insurance (CMI) which alone has reportedly over 7,000 wealthy investors, mostly expatriates, with what many said amounted to some billions of US dollars invested - CMI was part of HBOS (Halifax Bank of Scotland), the largest mortgage and savings provider in the United Kingdom, which was bought by Lloyd's early this year and subsequently bailed out by the British government.

The OWP products were never sold directly by CMI but through many independent financial advisers , or IFAs, acting as intermediaries. Potential investors were encouraged to gear up to three times their own investment to maximize gains, given the supposedly good track records of these funds. These investors later said their advisers, motivated by extra commissions, only emphasized the upside but never forewarned them of the potential downside risks involved with gearing. The IFAs in turn claimed the marketing materials they used originated from CMI - whose products were approved by the SFC - though the company denied it ever promoted gearing.

The investors who geared up not only lost most of their principal but had to repay part of their loans when the value of their fund holdings pledged as collateral fell sharply, after the OWP funds performed badly following market shocks in the aftermath of the September 11 attacks in 2001, when CMI found itself on the wrong sides of the equation in the investment markets.

While not all investors were geared, all who tried to get out of the funds were subject to exit penalties, known as "market value adjusters" (MVAs), which reached more than 25 percent at some stage - neither did CMI nor the IFAs explain much about these MVAs or mentioned how high the MVA rates would reach in their sales pitch, according to many angry investors.

Either way, these investors found themselves stuck with huge losses and some are still pursuing lawsuits today to fight their cause.

Much like the Lehman mini-bonds case, the CMI matter was one of gross mis-selling to potential and unwary investors - in the latter, mostly highly educated professionals. Just like the Lehman case, the CMI products were approved by the SFC.

And like the Lehman case, the CMI products were sold through a retail distribution channel with frontline sales staff carrying approved brochures. More importantly, both cases featured gross mis-selling with commission-driven sales staff allegedly more eager to secure signatures than to explain in detail the complexity of the financial products, if they understood them at all, on the table.

With such parallels, and perhaps sadly on hindsight, one may be tempted to blame the SFC for not doing enough to protect the interest of the public.

One may also argue that the SFC did the right thing in both the Lehman and CMI cases: that investors took their risk, informed or ill-informed, calculated or speculative, even though the products were approved and by that token the SFC can only resort to public education via commercial advertisements.

Granted, but the reality is the public placed trust in the regulators to have the house in order with little or hopefully no room for any propensity to mislead potential investors, rich or poor alike. The regulators of today's ever increasingly complex financial markets are also expected to have an iron grip on the conduct of its players and act swiftly to correct any disequilibrium.

But in the Hong Kong context, there is much more the SFC could have done over the years to build a more efficient and better regulated financial market to protect the public - and thus prevent the resulting bad press from the Lehman mini-bonds saga.

For starters, one may question if the frontline sales staff of financial products, including professional independent financial advisers, are properly qualified. After all, much like doctors and surgeons whom we count upon for life or death, the men on the street rely on these financial intermediaries for their financial well-being - the Lehman case in particular has thrown this issue into the spotlight given the highly complex financial instruments involved.

Regulators and related supervisory trade bodies in Hong Kong will be quick to point out the Continuing Professional Development (CPD) program, found in several professional industries as a well managed way to update its members and also renew licenses.

Sounds good? But what good can there be if the IFAs (with a considerable number of non-Chinese speaking Western expatriates) cannot understand a word in some of these Cantonese-only classes? This was the situation faced by some insurance professionals and IFAs, according to sources, and all they need is to find ways to kill time and mark their attendance at the end of the courses to gain the necessary credits.

"They do not even check if you are fluent in the language in which the course is given," said a practicing insurance broker. "Most attendants just sit in the venue for 2 hours playing games on their mobile phones, or by catching up with sleep. The quality of the speakers, most of the time staff of law firms eager to advertise their firm's name and they work free of charge, as I understand, is poor to very poor."

Certainly not the best way to update on the latest financial literature.

With the blurring of lines in the modern financial sectors, cross-selling has become commonplace, thus we find insurance companies selling investment-type products and banks selling insurance-related products. Consequently, insurance professionals and IFAs need the appropriate licenses to sell complex financial investment products. In Hong Kong, insurance professionals with the appropriate license from any of the two respective insurance brokers associations earned the license to sell while those who gained a license from the SFC, being the IFAs, have the license to advise on investment-type products, industry sources say.

The implications may not be obvious to casual observers, according to some market professionals. A person with only a license to sell means he cannot offer any advice on the products he tried to push to his potential client. Consider the client may (inevitably) ask questions about the products. What can the financial intermediary say? "Sorry, I can only sell you these and not licensed to offer advice. So just pick one and sign"?

Sorry, that is not how the real world works.

Perhaps the regulators should get rid of the license to sell and offer just the license to advise requirement so as to better protect the public interest?

The one other troubling issue that remains: commissions. In both the Lehman and CMI cases, the financial intermediaries were allegedly motivated by commissions earned from the sales transacted. How else do you suppose salesmen work - thus we cannot possibly remove commissions out of the equation, can we?

Hence, the SFC took the right stance that investors take their own risks given the best information they can gather - ie, market risk. However, if the financial markets are not properly regulated, giving way to mis-selling, investors are exposed to further (non-market) risks.

Sadly, Hong Kong investors have short memories, especially when faced with lucrative offers. With the Lehman mini-bonds saga soon to be behind us, one can only hope that the SFC took cues and promptly put things in order before another similar episode surfaces.

From Asia Sentinel: "http://asiasentinel.com/index.php?option=com_content&task=view&id=1984&Itemid=224

Why banks can't answer queries regarding the "Fund" (Minibond collateral)?

作為受過良好教育，有包括CDS/CDO和各類信貸掛鈎產品在內的投資經驗的專業人員和管理層的銀行，作為銷售了迷債4－6年的迷債分銷商，
- 銀行為甚麼不能回答以下關於關於抵押品之疑問？
- 銀行的協約精神和對客戶的Duty of Care 職責去了哪裡了呢？

Enquiry on the"NOTICE OF REIVESTMENT OF COLLATERAL FOR UNDERLYING SECURITIES” (letter from HSBC USA and Bank of New York). The following questions are addressed to BANKS who sold minibond to us.

The "Fund" below refers to the Fund mentioned in the "NOTICE OF REIVESTMENT OF COLLATERAL FOR UNDERLYING SECURITIES” (dated 18 March 2009). Use Minibond Series #27 as an example:

(a) Where can I find out the role and functions of Bank of New York in respect of the Minibond Series 27?

(b) Can BANKS please clarify the relationship between the Series 27 and the Fund ?
Because I have looked at the prospectuses but could not find any mention of the Fund. (c) Can you please advise where in the prospectuses for Series 27 the Fund is mentioned?

(c) Can BANKS please advise where in the prospectuses for Series 27 the Fund is mentioned?

Banks are regulated financial institutions. Banks' responsibility as minibond-distributors is NOT confined to passing on the enquiries from the note-holders to the trustee and replies from the trustee to the note-holders, regardless if the enquiries concern matter within banks' knowledge or the replies given by the trustee do not really answers the queries raised. Banks are not no-asking & no-telling & commission-collection middle-man only. Banks are bound by SFC Code of Conduct!