Den of The Lion Investor

Tan Kin Lian provides some updates of legal proceedings with regards to Lehman-linked products. Summary notes can be found here.

Part 1

Part 2

Part 3

Part 4

Mandarin Version

It has been reported in the news that the distributors of the Minibond products will be contributing money to the receivers’ cost of obtaining legal opinions. This is required due to the complex issues raised from lawyers dealing with Lehman Brothers in the US.

Even DJ newswire picked up the news from our MAS announcement and if you read the DJ report, you will probably interpret it at face value - distributors footing the legal fees.

Lehman Minibond Distributors to Help Pay Legal Fees (DJ newswire)

However, if you read the announcement by MAS carefully, you will find this sentence:

“The expenses will be refunded to the distributors from any proceeds of enforcement in the usual manner.”

Distributors of Lehman Minibond Notes to Contribute to Legal Defence (MAS announcement)

So in actual fact, the legal bill will be paid by Minibond investors.

Legal War Chest Beefed Up (Straits Times)

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There appears to be a flurry of activities happening on the minibond legal front in Hong Kong.

Two legal law firms from the United States will be going to Hong Kong to establish links with investors. They are working on a “pay only if we win” deal.

Hong Kong minibond investors eye US class action suit (The Standard)

Two Singaporeans who are based in Hong Kong have proceeded with a US$1.26 million lawsuit against DBS. It will be interesting to see how things unfold.

2 Singaporean residents sue DBS Hong Kong over failed Lehman-linked products (The Standard)

It was also reported that 60 investors in Hong Kong have received HK$30 million in compensation from the financial institutions. The range of compensation was very wide with some of them even getting a full refund with interest.

Minibond investors get HK$60 million compensation (pdf)

Banks repay $30 million (AFP)

5 younger Minibond investors in Hong Kong, aged 33 to 44, have filed claims at the Small Claims Tribunal with assistance from the Democratic Party. Most of the investors who have reached settlement have been over 50.

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Following the legal dispute which were raised by US lawyers on the unwinding of the Minibond, it appears that plans to restructure the Minibond has been derailed as well. 

HSBC Trust has updated their FAQ to address this:

Can you confirm the reports stating that any restructuring of the notes is not feasible for the time being?

Yes, although draft proposals have been made by interested parties the Receivers, in consultation with the independent advisers appointed by MAS in relation to the restructuring proposals, have ruled out any restructuring for the time being due to the legal complexities which are likely to be encountered in unwinding the notes and seeking to obtain control of the ultimate underlying assets. See answers to questions 14 and 19 for further details.

Can you confirm that the note trustee has received a notice from the lawyers of Lehman Brothers? What does it say and what are the implications? 

Yes, we have received a communication from Lehmans’ lawyers in the US which indicates, as a result of the Lehman bankruptcy, there could be legal challenges on behalf of Lehman relating to the documentation and the actions which need to be taken to unwind the notes both at the Minibond level and for those series in respect of which the underlying securities are underlying synthetic notes at the underlying level as well. This raises the possibility of prolonged litigation as part of the process which has to be taken by the Receivers to unwind the notes. We cannot comment further at this stage other than to say that the contingent litigation risk as referred to in the answer to paragraph 14 makes it impossible for the Receivers to make any kind of estimate of what value may ultimately be realised for noteholders and means that the overall process could take a considerable time.

Series 9 and 10 will face a less complicated process compared to the other series, as the underlying securities for these notes are corporate bonds and have no swaps. This means the ultimate collateral is more readily accessible to the Receivers and there are fewer aspects of the unwinding process which might be subject to being challenged by Lehman. Accordingly, the process may be somewhat shorter than for the other series.

Update from MAS

Fresh Woes for Minibond Holders (Today)

No Swift Solution for Lehman Minibond Holders (Channel News Asia)

Restructuring of Minibond on Hold (Business Times)

Expect 2 year Refund Delay (Straits Time)

It appears that the Hong Kong plan to buy back the Minibond has run into some obstacles. Apparently, HSBC Hong Kong has received a stop order a few days ago from Weil, Gotshal & Manges, Lehman’s bankruptcy counsel.

Complex issues of US bankruptcy law have been raised.

Article in Hong Kong on this issue

HSBC Institutional Trust Services (Singapore), the trustee for minibonds sold in Singapore, also received legal notice from Lehman Brothers attorneys on Wednesday that any termination of swap agreements underlying the Singapore minibonds would be deemed illegal.

Version 9 of the HSBC FAQ (dated 25 Nov) makes no mention of this yet. Paragraph 18 takes about the legal implications of transfering swaps, but is not exactly the same issue of swap termination.

On 13 November 2008, Lehman Brothers Holdings Inc. and its affiliated debtors in chapter 11 proceedings in New York filed a motion seeking an order that would (a) allow them to assume, sell and assign executory, derivative contracts that have not yet been terminated and (b) permit them to enter into settlement agreements with counterparties under terminated derivative contracts without further approval from the United States courts.

For each series of the Minibond notes, Minibond Limited entered into swap agreements with Lehman Brothers Special Financing Inc.

If a United States court order is granted in connection with the motion above, Lehman Brothers Special Financing Inc. will be allowed, as a matter of United States law, to transfer any open swaps to third parties who wish to acquire them without the need to seek the consent of the swap counterparty.

The swap agreements entered into in connection with the Minibond notes are governed by Singapore law and are subject to the exclusive jurisdiction of the Singapore courts. The trustee understands from its legal advisers that it is highly unlikely that the unilateral transfer of swaps (under any order made pursuant to the motion referred to above) by Lehman Brothers Special Financing Inc without consent from Minibond Limited, would be recognised and enforced as a matter of Singapore law. If this is correct, even if the order was made, noteholders would still have the opportunity to reject any transfer purported to be made under it as and when the transferee sought to assert any rights in relation to the swaps under Singapore law. It is however emphasised that the trustee cannot give legal or other professional advice to the noteholders on this or any other issue and noteholders cannot rely on advice obtained by the trustee. Noteholders may therefore wish to seek independent professional advice with respect to their own positions.

We will have to wait and see how all these unfolds.

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