Investors offered 80% payout for Lehman products

Written by Dennis Eng & Paggie Leung
Thursday, 24 December 2009 16:17

For angry investors, the nightmare triggered by the collapse of US investment giant Lehman Brothers last year may be finally over after two banks offered to pay 80 HK cents for every dollar of their investment.

The deal, which applies to 529 customers who bought a total of HK$264 million of Lehman equity-linked notes from Dah Sing Bank and Mevas Bank, is seen as paving the way for all affected customers to receive the same payout.

The deal also has important implications for investors of other affected investment products, like Constellation Notes sold by DBS Bank, and Octave Notes, sold by 17 banks and designed by Morgan Stanley. So far, only investors of Lehman-related minibonds have been partially compensated.

In a joint statement, the two banks said eligible customers who bought certain equity index-linked fixed coupon principal protected notes issued by Lehman would be offered 80% of their original investment to settle their claims.

This amounts to compensation of HK$211.2 million. Customers who have already settled with the banks will also enjoy the same terms at an estimated "topping-up" cost of HK$72 million. The two banks have already settled with 462, or 87%, of the 529 customers.

In these cases, the payouts ranged between 40% and 85% of their investment, Philip Khan, vice-chairman of the Alliance of Lehman Products Victims, said.

The banks first started selling these notes on Aug 5 last year, six weeks before Lehman went bankrupt. Under the agreement, the banks do not admit any liability.

The settlement offer was reluctantly accepted by many investors. Alison Hui Cho-wai, a housewife who was sold HK$500,000 of the notes by Dah Sing, said the compensation was marginally acceptable.

The bank was remiss in selling the note to her just three weeks before Lehman collapsed and refused to let her cancel her order as rumours swirled of Lehman's demise, she said.

"Selling the note is basically asking people to lend money to Lehman, which I would not do if I knew this was the case. I assumed the note had an underlying asset but the bank never mentioned to me that this was not the case. They just highlighted the point that the note's principal was protected," Hui said.

Such notes allow investors to recoup their original investment after holding it to maturity, with additional returns depending on the performance of certain stocks during the period of time the note is held.

However, since Lehman, which issued the notes, filed for bankruptcy and was unable to repay the principal amount, the notes became worthless.

Other banks that sold the notes stopped short of endorsing the compensation offer. Standard Chartered Bank and Citibank, which sold such notes to more than 3,200 customers, declined to comment on the offer from Dah Sing and Mevas.

"We do not offer across-the-board compensation. We will continue to handle each case on its individual merits, which may include a settlement to affected clients if we find evidence that we fell short of our standards," a Citibank spokesman said.

Citibank said it stopped selling these notes in the middle of June last year, while such products were not available at Standard Chartered by the time Dah Sing and Mevas offered them.

Choi Yiu-kwan, the outgoing deputy chief executive of the Monetary Authority, said the terms agreed with Dah Sing and Mevas did not necessarily mean similar deals would be struck with other banks.

"This deal was brokered with the two banks. You cannot say that all other customers who bought these notes on or after Aug 5 last year will be offered the same terms to settle their claims. The circumstances of every sale by each bank are different," Choi said.

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

Since the unprecedented debacle, disciplinary action has only been taken in one non-minibond case. The Monetary Authority says it has received about 21,800 Lehman-related complaints.

About 16,700 cases have been dealt with or settled. Investigations into the remaining 5,000 or so cases are expected to be completed by March, Choi said.

A total of 765 Lehman-related non-minibond complaints are currently under disciplinary consideration. A total of 334 non-minibond cases have been referred to the Securities and Futures Commission for action. So far, 24,419 of the 24,688 investors have agreed to settle their claims.

The offer by 16 banks to repurchase soured minibonds from about 25,000 investors meant those who accepted the terms would recoup between 60% and 70% of their initial investments. — South China Morning Post