Open letter to SFC

Open letter to SFC - Investigation into Foreign Banks selling Equity linked notes(ELN) -- Philip Khan

June 28, 2009.

To: Securities and Futures Commission Hong Kong.
Attn.: Chief Executive Officer, Mr. Martin WHEATLEY, JP.

c.c. : Hong Kong Monetary Authority –
Chief Executive, Mr. Joseph YAM Chi-Kwong, GBS, JP
Executive Director, Mr. Raymond Li

Dear Sir,

INVESTIGATION INTO FOREIGN BANKS
SELLING LEHMAN EQUITY LINKED NOTES

I represent a group of Bank customers having purchased the EQUITY LINKED NOTES (ELN).

During our meeting last Friday on June 26, 2009 at IFC basement with HKMA, Mr. Raymond Li, Executive Director of Hong Kong Monetary Authority, we have expressed our concerns to HKMA that they have not referred sufficient cases of ELN to SFC for further investigation and follow up.

Mr. Raymond Li confirmed that they may have referred sample cases to SFC which should provide sufficient grounds for SFC to initiate investigations into Banks. Mr. Raymond Li reconfirmed that those cases should include ELN, PPN, CLN, Constellation and mini-bonds.

Mr. Raymond Li also confirmed that the 667 cases under HKMA disciplinary consideration were already been or will be referred to SFC as well.

Can SFC please confirm that SFC have sufficient grounds or cases for investigation into all the Banks including Standard Chartered Bank, Citibank, and ABN AMRO selling Equity Linked Notes (ELN) through private placements?

Can SFC also please confirm that they have already received the 667 cases under HKMA disciplinary consideration and will investigate into those involving Banks as well?
In fact, Citi Ka Wah, Shanghai Commercial Bank, Dah Sing Bank, Bank of China, may have sold Mini-bonds but they also have sold ELN (which HKMA included PPN into the same category as ELN). So does SFC also investigated into the Equity Linked Notes mis-selling by these Banks, or is SFC only concentrated on Mini-Bonds? I noted that SFC already may have completed their investigation on at least DAH SING BANK selling PPN NOTES (which though PRINCIPAL PROTECTED are actually identified in the same category as EQUITY LINKED PRODUCTS).

Hang Seng Bank was also involved in selling ELN or PPN, however there was no mention to it at all.

However, I noted from HKMA press releases up to date to June 26, 2009, that they have so far referred 458 cases involving 16 Banks to SFC for action, which includes 367 minibonds , 91 others (ELN & PPN), and 24 cases of Products referenced to Lehman, which may include Constellation and Octave Notes.

There may be no doubt that the 367 cases of minibonds may include sample cases of all those complaints of 14 to 16 Banks selling these minibonds. It may also be assumed or understood that the 24 cases may be referring to mainly Constellation Notes and mostly from DBS.

On the 91 OTHERS cases, all these were PRINCIPAL PROTECTED NOTES (PPN) sold by DAH SING BANK.

1./ On October 17, 2008 HKMA referred the first batch of 24 cases involving 2 banks, which included 23 cases of OTHERS PRODUCTS (DAH SING BANK - PRINCIPAL PROTECTED NOTES).

2./ On October 24, 2008, HKMA referred the second batch of 40 cases involving 2 banks, which included 39 cases of OTHERS PRODUCTS (again are cases from DAH SING BANK - PRINCIPAL PROTECTED NOTES) .
As at October 24, 2008, there were 1 Mini-bond cases, 1 Constellation, and 62 cases of OTHERS PRODUCTS referred by HKMA to SFC. In fact these 62 OTHERS PRODUCTS cases were all involving DAH SING BANK who sold the LEHMAN PRINCIPAL PROTECTED NOTES in end of August, 2008 even after Lehman has already been downgraded by June 6, 2008 by rating agencies and there was news that Lehman may go into bankruptcy.

3./ On November 21, 2008, HKMA referred in their sixth batch of 53 cases, including 21 cases of DAH SING BANK (PRINCIPAL PROTECTED NOTES).
TOTAL: 83 CASES DAH SING BANK (PPN).

4./ On December 24, 2008, another 1 case of DAH SING BANK PPN.
TOTAL: 84 CASES DAH SING BANK (PPN).

5./ On March 20, 2009 there were 2 more cases of OTHER PRODUCTS.
TOTAL 86 CASES DAH SING BANK (PPN)

6./ On April 24, 2009 there were another 7 cases of OTHER PRODUCTS.
TOTAL : 91 cases DAH SING BANK (PPN)

All these OTHER PRODUCTS cases so far referred to SFC only involve the PRINCIPAL PROTECTED NOTES by DAH SING BANK.

Logically, it is clear that cases involving the three foreign banks including Standard Chartered Bank, Citibank, and ABN AMRO are not referred by HKMA to SFC for any action or further investigation.

As at Jan. 9, 2009, cases referred to SFC involve 14 Banks.

As at Jan. 16, 2009, cases referred to SFC involve 15 Banks.

As at Feb. 20, 2009, cases referred to SFC involve 16 Banks.

Up to June 16, 2009, there were only cases involving 16 Banks referred to SFC, from where it is assumed that the three foreign banks selling EQUITY LINKED NOTES (ELN) were not included. To repeat, these foreign banks included STANDARD CHARTERED BANK, CITIBANK, and ABN AMRO.

HANG SENG BANK was also neglected in the whole investigation process.

SFC must investigate into all these Banks, and the bank victims are relying on both SFC and HKMA to co-operate and resolve the issue with no further delay.

During our meeting on June 26, 2009 with Raymond LI of HKMA, he reiterated that HKMA have no authority to ask Banks to compensate, neither can HKMA impose any sanctions against any of these Banks.

On the HKMA press release of October 17, 2008, A HKMA spokesperson said that the cases had been reviewed by the HKMA, which had determined that there were sufficient grounds for referring them to the SFC in accordance with the mechanism established under the Securities and Futures Ordinance and the Memorandum of Understanding between the HKMA and the SFC. “The HKMA is satisfied that there are adequate justifications for referring them immediately to the SFC, which is the authority ultimately responsible for deciding whether a bank has been guilty of misconduct," the spokesperson said. "The SFC will review the evidence and will consult with the HKMA in determining what sanction, if any, is to be imposed," the spokesperson added. Sanctions that the SFC may impose on a bank include suspension or revocation of registration, reprimands, fines or prohibition orders.”

In my observations, those cases referred to SFC were mostly been settled between the Banks and the complainants (except a few may still be under negotiation). These include a lot of Mini-Bonds and PPN. It is a great achievement by SFC and HKMA.

SFC’s approach of top to down investigation on Banks has proved to be successful. SFC has achieved to the best of the investors interests with Sun Hung Kai and KGI voluntarily offering to purchase all outstanding Mini-Bonds at the principal amount invested by their clients. It was a great encouraging step resolving the issues to the highest public interest avoiding unnecessary costs and expenses. It is important that SFC continue to adopt the top to down approach into their investigations of banks. This should include the investigation into Banks including all banks selling ELN notes.

Sincerely,
Phillip Khan