Tuesday, April 28, 2009

Hong Kong Banks Sell Lehman Notes to Mentally Ill

Posted on Bloomberg by Nipa Piboontanasawat and Kelvin Wong:

Hong Kong banks sold notes linked to failed Lehman Brothers Holdings Inc. to elderly, poorly educated and mentally ill people, according to a central bank investigation that may fuel demands for better protection of the city’s investors.

The Legislative Council released previously blacked-out sections of a Hong Kong Monetary Authority report showing 102 cases in which “vulnerable” investors were sold the credit- linked notes, which plunged in value after Lehman’s Sept. 15 bankruptcy.

The disclosure was held up after the HKMA sought to keep some of its findings private and follows almost daily street protests by elderly investors who claim that banks had said the securities were low-risk. A total of HK$13.9 billion ($1.8 billion) of the credit-linked notes arranged by a local unit of Lehman were sold to Hong Kong individuals, according to the Securities and Futures Commission.

“If more restrictions are placed on the sale of investment products it could add a lot onto banks’ operating costs,” said Paul Lee, an analyst at Hong Kong-based Tai Fook Securities Ltd. “Customers may also be more reluctant to invest because of all the extra documents they have to go through.”

The central bank identified 102 cases where complex and risky investments were sold by banks to “vulnerable” investors, according to information contained in the blacked-out section of the HKMA report made public at a hearing in the city’s Legislative Council today.

Investor Interest

Some investors have alleged that banks and brokerages misrepresented the potential risks when selling the notes.

“What’s important right now is what the HKMA is preparing to do to help investors get their money back,” said Chim Pui- chung, a legislator representing the financial services industry. “So far they haven’t offered much on this part.”

The central bank had previously refused to disclose parts of its findings, arguing that it would be “against public interest.” It later agreed to reveal in closed meetings deleted parts of the report to legislators.

Sun Hung Kai & Co., the city’s biggest local brokerage by market value, in February agreed to pay back investors in the notes, making it the first vendor to decide to provide a full refund. It didn’t admit to any liability or wrongdoing in selling the products.

BOC Hong Kong Ltd., Bank of East Asia Ltd., Wing Hang Bank Ltd. and Dah Sing Banking Group Ltd. were among the 19 firms that sold the notes, according to the Hong Kong Association of Banks.

Clarina Man, a spokeswoman for BOC Hong Kong, declined to comment on the HKMA report. Vera Lung, a spokeswoman for Bank of East Asia, didn’t immediately return calls from Bloomberg seeking comment.

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