Hong Kong Legislative Hearing - Blacked Out Portion Release

Lehman probe 'uncovers five suspect areas'
Minibonds 'mis-selling' revealed

Parts of a report into the Lehman Brothers minibonds saga withheld from the public revealed five categories of suspected mis-selling, a source said yesterday.
These mainly involve the selling of such products to unsuitable investors, the source, who is close to the legislature, said.

The observations were included in a report by the Hong Kong Monetary Authority sent to the financial secretary in January, but were blacked out from the reports disclosed to the public.

Eight pages of the report, which had been blacked out, featured summary observations of more than 200 cases the authority investigated, the source said. Observations on those cases seemed to agree with claims by victims that many had been sold minibonds, but the risks were not fully explained. The report identified the practice of selling Lehman Brothers minibonds to people who were over 65, illiterate or had only primary school education as the most common type of suspected mis-selling.

Hong Kong investors lost billions of dollars on minibonds guaranteed by Lehman when the US investment bank went bankrupt in September. Despite their name, Lehman minibonds are not corporate bonds but complex, high-risk derivatives.
Another category of suspected mis-selling involved the marketing of minibonds to investors just as their fixed time deposits matured, which may have misled them into thinking minibonds were equally low-risk.

The report also identified cases of minibonds being sold in August and September as the extent of the subprime mortgage crisis in the US was becoming clear. The report questioned whether there had been sufficient market analysis before the minibonds were sold. It also noted documentation irregularities such as missing signatures, and indications of an inadequate risk analysis system.

Yesterday, the chairman of the legislature's subcommittee investigating the minibonds saga, Raymond Ho Chung-tai, said its members had unanimously decided there was no justification for the blackout.

He said members would now use this information in their continued questioning of the monetary authority's chief executive, Joseph Yam Chi-kwong, on Tuesday and may include the information in its own report. However, the source said there was a possibility the authority may wish to initiate judicial proceedings against such a disclosure.

An authority spokesman said it had no comment, but the chairman of the Hong Kong Association of Banks warned that disclosure could affect Hong Kong's status as an international financial services centre. "If there is customer information there - it might affect Hong Kong's status as an international financial centre, because if you disclose customer information, then those customers may no longer want to do business in Hong Kong," said Peter Wong Tung-shun, who is also HSBC's executive director. He said the association would send a letter to the authority to reflect these concerns.
Peter Chan Kwong-yue, chairman of the Allied Victims of Lehman Products, welcomed the disclosure, and said he hoped it set a precedent for the banks to disclose their own internal investigations.

"It also sends an important message because it is a slap in the face of Joseph Yam," he said, referring to the chief executive of the monetary authority