Statement from the Minibonds US Class Action Counsel Regarding the Proposed Settlement

Statement from the Minibonds US Class Action Counsel Regarding the Proposed Settlement
Date: Tue, 29 Mar 2011 20:41:55 -0700
From: PatrickD@rgrdlaw.com

Robbins Geller represents Minibond investors who have, for the past two years, prosecuted claims against HSBC Bank USA, N.A. ("HSBC"), the trustee for the Minibond program, and Lehman Brothers Special Financing, Inc. ("LBSF" or "Lehman"), the creator and arranger of the Minibonds program and counter-party to the transactions underlying the various series of Minibonds. The action on file against HSBC and LBSF is known as Wong v. HSBC Bank USA, N.A. et al., US Bankruptcy Court, Southern District of New York, Adversary Proceeding No. 09-01120 (the " US Class Action").

Over the past two years, the US Class Action plaintiffs have fought vigorously and with great determination to hold HSBC and LBSF responsible for the hundreds of millions of dollars of losses inflicted on them through a deceptive scheme created, marketed and overseen by HSBC and LBSF. The US Class Action plaintiffs have won significant victories and rulings from the US District Court appealing orders by the Bankruptcy Court against the plaintiffs and have persevered in pursuing their claims.

In the past few months, LBSF sought, with HSBC's support, and won again from the Bankruptcy Court, an order to EXCLUDE the US Class Action plaintiffs from participating in any arbitration of the Minibond investors' claims. The effect of the order from the Court was to permit LBSF and HSBC to conduct all discussions of any proposed resolution of the Minibond investors' claims behind closed doors and without any input or scrutiny from the very parties whose financial interests are most at stake - the individual Minibond investors , and specifically the US Class Action plaintiffs . In objecting to the Minibond investors being excluded from these discussions, the US Class Action plaintiffs argued that LBSF itself conspired with HSBC to fraudulently create and market the entire Minibond program and that to permit the two perpetrators of the fraud - HSBC and LBSF - to negotiate with the Minibond investors' money would compound the injustice and injury that the Minibond investors have suffered.

Unfortunately, the US Class Action plaintiffs' prediction has now come true. Even from the scant details that have been released thus far on the proposed settlement, it appears that HSBC will receive at least US$85 million in fees (over HK$650 million), and possibly as much as US$120 million or HK$950 million, from the Minibond investors. According to the US Class Action suit, this minimum payment of HK$650 million HSBC from Minibond investors is on top of and in addition to the millions in HK$ fees that HSBC received from establishing and perpetrating the Minibonds fraud on investors in the first instance.

Additionally, it appears that LBSF itself may retain a significant amount of the collateral underlying the Minibonds as part of the settlement. The exact amount is unclear from the details thus far revealed, and Minibond investors certainly deserve a detailed accounting of those payments to LBSF. But even if the amount LBSF retains is "only" 15% of the Minibond collateral, that amounts to a payment to LBSF from Minibond investors of US$225 million or HK$1.7 billion. This is, of course, on top of the tens of millions of dollars of fees and profits that LBSF itself generated from perpetrating the fraud on the Minibond investors in the first instance.

Patrick Daniels, a managing partner of Robbins Geller Rudman & Dowd LLP ("Robbins Geller"), the US law firm representing the US Class Action plaintiffs, blasted the settlement: "This appears to be yet another sweetheart deal negotiated in the dark and behind closed doors. Tens of thousands of Minibond investors, many of whom are retirees, are once again paying for HSBC's and Lehman's complicity. The two perpetrators of this outrageous fraud, HSBC and Lehman, have rubbed salt into the wounds of Minibond investors by potentially extracting hundreds of millions of dollars in additional fees and expenses from Minibond investors, while avoiding the consequences and any further scrutiny of their actions. We will be demanding more detailed information and answers to critical questions that have been raised by the way in which this supposed settlement came about and a full accounting of every penny of the Minibond investors' collateral."

In a statement supporting the settlement, HSBC attempted to justify the settlement by stating that the "agreement allows...[HSBC] to avoid the risks and uncertainty of prolonged, complex and costly litigation with Lehman Brothers and other parties." In response, Mr. Daniels pointed out that HSBC has not appeared to have filed one scap of paper in any court in the US or in England, where other investors have brought, and won, actions related to the securities underlying the Minibonds program. "They gave up the fight without even attempting to assert the Minibond investors' claims - as the US Class Action plaintiffs have done for the past two years - and for that HSBC expects US$85 million. I guess it's still pretty good business to be a Fat Cat banker!"

Just yesterday, in an action in an English court raising virtually identical legal issues against Lehman and LBSF that the Wong Class Action plaintiffs had raised against Lehman in the US, the English courts ruled against Lehman in a precedent that surely would have bolstered support for the US Class Action claims . Clearly Lehman saw that, over time, various courts around the world were seeing through their schemes to deny investors their rights and sought to resolve the Minibonds disputes as quickly as possible - and HSBC facilitated that by failing to put up much of a fight. Further information on the recent ruling in England is set forth below.


Lehman Loses UK Suit Over $4M In Swap Payments


By Samuel Howard

Law360, New York (March 28, 2011) -- A London court ruled Monday that British media company Carlton Communications Ltd. is not obligated to pay a Lehman Brothers Holdings Inc. subsidiary £2.6 million ($4.25 million) in interest rate swap payments following the bank's September 2008 collapse.

Justice Michael T. Briggs of the High Court of Justice, Chancery Division, concluded that Carlton is not bound to provide payment under the interest rate swap transactions for the betterment of Lehman's creditors or otherwise required to honor the swaps given Lehman's defaults.

Lehman Brothers Special Financing Inc., Lehman's fixed-income over-the-counter derivatives business, claimed Carlton owed £2.6 million plus interest after the March 2, 2009, maturity of two linked interest rate swaps.

The Lehman unit contended that provisions in the master agreement suspending Carlton's payments are unenforceable because they violate the anti-deprivation principle, which protects general creditors in bankruptcies, or constitute a breach of contract, according to the order.

Although Lehman's bankruptcy constituted a default under the swap agreement, it claimed Carlton's payment was due because it never elected for early termination of the agreement, according to the order.

The court, however, determined that even if the master agreement did not rate as a so-called walk-away contract following Lehman's defaults, and merely suspended Carlton's payment obligations, the suspension is ongoing until Lehman remedies its default and again provides a hedge for the swaps.

"In substance the effect of the bankruptcy condition precedent is to relieve the nondefaulting party from payment obligations for as long as the defaulting party is, by reason of bankruptcy, incapacitated from providing the promised hedge," Justice Briggs said.

Having ruled that the anti-deprivation principle did not apply to the case given that Lehman and then the special financing unit's bankruptcies qualified as a default, the court likewise found that the doctrine of penalty is irrelevant to the disputed sections of master agreement.

"It follows therefore that LBSF's claim for payment of that which, but for the condition precedent in Section 2(a)(iii) of the master agreement, would have been payable on March 2, 2009, by Carlton, fails and must be dismissed," Justice Briggs said.

Carlton and Lehman entered the interest rate swap transactions in December 2004 for two related interest rate swap transactions. The notional amount for each was £250 million.

Under the first swap LBSF paid a fixed rate of £7 million and Carlton paid a floating rate based on the sterling London Interbank Offered Rate, fixed in arrears, on the same dates, according to the order.

Representatives for Lehman and Carlton could not be reached immediately for comment Monday on the ruling.

Lehman is represented by Jonathan Nash QC of Three Verulam Buildings, who was in turn instructed by Weil Gotshal & Manges LLP .

Carlton Communications is represented by Felicity Toube of South Square, who was instructed by Hogan Lovells .

The case is Lehman Brothers Special Financing Inc. and Carlton Communications Ltd., case number HC10C02146, in the High Court of Justice, Chancery Division.

--Editing by Lisa Uhlman.