How BOCHK hid the truth about PIFL Minibonds from Its customers using its sale managers

We have known for more than two years that BOCHK misled its customers when it sold them so-called Minibonds as bonds issued by PIFL. But the leaflet said “Not Principal Protection Notes” issued by Lehman Brothers. Now, according to a handful of victims during discussions and in court hearings, it turns out the firm also used its own sale managers to sell a lot of these Minibonds saying these notes were safe but hide the facts that BOCHK rated these notes as high risk.

Since shortly after Lehman Brothers filed for bankruptcy in September 2008, we have been hearing essentially the same story from thousands of customers from banks to banks. These were conservative investors, many with a long history of investing in term deposits, HK issued bonds and the like. Their bank managers came to them with a pitch for so-called “Minibonds” that similar to bonds. This was a very safe proposition, they said. The customers could potentially link to seven large companies, and the worst that could happen was that all seven companies had credit events, then they would not get their principal back which would likely not happened. Many customers were never even told that Lehman was the issuer of the notes, let alone that the notes were just a structure products of Lehman that invested into all kind of CDS, CDOs kind of derivatives.

We all know what happened next. These deceptively named notes were just synthetic bonds, and investors’ entire principal went to HSBC as trustee when Lehman folded and HSBC did not yet pay back any of the money they are supposely to do so. Many banks had payback 60% of this investment to their customers for these many of these banks were saying the Minibonds were low risk themselves. While BOCHK, the largest seller of Minibonds, rated the Minibonds as high risk, pocketed tens of millions in underwriting fees on the Lehman notes it helped to sale thru its bank sales managers. But these sale managers are now being charged in court for not telling their customers these notes were high risk for they got their shares of bonus for this mass mis-selling frauds. But the BOCHK bank managers are not responsible for the crimes as they signed the form without seeing the customers, and put all responsibility to their sale managers.

Here’s where things really get interesting. As the two-year anniversary of Lehman’s failure has come and gone, and as BOCHK frauds keep piling up, we have come to learn in court that BOCHK customers weren’t the only ones being deceived. BOCHK executives consistently issued training documents and CDROM to their sale managers for each products, encouraging their financial advisors to continue selling these notes to their best customers and lulling them into holding the notes even when alarm bells began to ring in the spring and summer of 2008. And let these sale managers to read the fine details themselves.

Sale managers have showed that in court that senior management told them to read the ratings agencies’ “A marks” for these linked seven companies and themselves had to reassured their customers that their due diligence were thorough in the training documents. Their bank managers did not have to check them but sale managers themselves counter-signed these risk forms for each others, these actions would pretend that the BOCHK did preformed the due diligence as required by SFC to sell the notes. Meanwhile, the higher-ups investment department of BOCHK must have tracked the market’s true measure of default risk: credit default swap spreads (in short, the price of insuring against hundred of companies default) without sale managers knew anything. Even as most major US companies’ spreads exploded, the executives apparently soft-pedaled the impact of this information, only to tell their sale managers that the Minibonds were not linked to US sub-prime housing market. But to those who sold Octave Notes that had US housing market CDOs, the sale managers never remind their customers to sell off their Octave Notes.

According to these disillusioned sales mangers inside court, when they told their customers that these seven companies were A rated, the witness and the sales managers had proved that these sale manager sometimes used the BOCHK training documents photocopies that did not have disclaimer to hide the high risk nature of the Minibonds. In truth, they must have seen and worried about the parallels in court being asked by the judge how they can sell AAA rated CDOs but high risk to customers to be a secure investment. That why in many cases the Minibonds victims of BOCHK never got the sale documents from BOCHK sales managers for these managers ticked the high risk box in the sale documents and refused to give the form to their customers. In some cases, the sales manager folded the sale form hiding the high risk ticks and put the form inside the envolope so to let the customers not to read the form when they get home.

As BOCHK own investment department was exposure to Lehman—a fact the world now knows from BOCHK Legco hearings that BOCHK issued their training system inside the banks that let sale managers to get all the blames in selling out a lot of their Lehman Minibonds products—even as late as in 2008!

Many BOCHK sale managers got their customers in 2008 for catastrophe while many other smaller banks stopped sales of Minibonds in 2008 but all these banks never warned their customers. For most, they bit on their company’s pitch hook, line and sinker. They remained in the dark until it was too late and now are being charged.

Due to their greed, these sales managers are hopping mad at HKSFC, but their defense cost have to depend on BOCHK, but they could not come out as a result of their own firm’s deceit about their situations. Along with their (often former) customers, they should have joined the club no one wants to be a member of: Victims of BOCHK.