HK brokerage agrees to refund minibond buyers

By Tom Mitchell in Hong Kong
Published: January 23 2009 04:22 | Last updated: January 23 2009 04:22

A Hong Kong brokerage has agreed to refund retail investors in full for their losses on so-called “Lehman Brothers Minibonds”, in a settlement that will set a worrying precedent for other financial institutions in the territory that have sold about $2bn worth of the controversial investment products.

In a deal reached with Hong Kong’s market regulator, the Securities and Futures Commission, Sun Hung Kai Investment Services agreed to refund $11m to more than 300 buyers of the minibonds, which are in fact complex derivative instruments linked to the now defunct US investment bank.

The agreement goes beyond calls by the Hong Kong government last year for banks to repurchase the instruments at their “market value”. Instead, Sun Hung Kai will repay investors their entire principal. Twenty-four banks and brokerages, led by Bank of China’s Hong Kong branch, sold Lehman Brothers minibonds with an estimated face value of $2bn to more than 40,000 investors.

“We are very pleased with the outcome that has been achieved and we believe the approach adopted has produced a result which is in the best interests of the investors,” Martin Wheatley, SFC chief executive, said in a statement.

The controversy surrounding the mini-bonds has sparked a political firestorm in Hong Kong, with burned investors descending regularly on bank offices, SFC headquarters and the territory’s legislature. Many have lost their life savings and claim that the risky minibonds were mis-sold by bank and brokerage staff.

While Sun Hung Kai did not admit to any wrongdoing in its settlement with the SFC, the brokerage acknowledged concerns raised by the regulator including inadequate due diligence, training of sales staff and record keeping.

“We achieved an outcome which we believe represents the best possible solution for our minibond customers,” Lee Seng-huang, Sun Hung Kai executive chairman, said. “We understand it has not been an easy time for all concerned, but we believe that this voluntary initiative will bring closure to our affected customers, particularly in light of this challenging economic environment.”

The Hong Kong Monetary Authority, the territory’s bank regulator, has received about 20,000 complaints related to the sale of minibonds. As of January 15 the authority had formally opened more than 4,500 investigations and referred 251 cases to the SFC for possible enforcement action.

Hong Kong’s politicians have also leapt into the fray, working with the protesters and forming a special legislative subcommittee to look into the controversy.