Lehman Brothers Minibond saga



The Lehman Brothers Minibond saga refers to the chain of events resulting from the Lehman Brothers’ bankruptcy filing in September 2008.1 Following the collapse of the Lehman Brothers, about 10,000 retail investors in Singapore lost all or a large part of their investments totalling over S$500 million in structured investment products linked to the American investment bank.2 The financial institutions that distributed the products were accused of having mis-sold these relatively high-risk products to investors, many of whom were the elderly and less educated. This prompted government investigations, which eventually led to penalties being imposed on 10 financial institutions, and tighter supervision of the industry. 

Background
The investment products in question were the Minibond Notes, High Notes 5, Jubilee Series 3 LinkEarner Notes and Pinnacle Series 9 and 10 Notes.3 For each of these products, the investor was paid a regular stream of interest/coupon until maturity, at which point the investor was entitled to a redemption amount as described in the terms and conditions of the product.4 Pegged to considerably higher interest rates than fixed deposit rates, the notes were eagerly taken up by investors.5 However, with multiple risk exposure, there was no guarantee that investors would get back their principal when the notes were redeemed, either upon or before maturity.6


Unwinding of products
On 15 September 2008, news broke that Lehman Brothers had filed for bankruptcy in the United States, which sent shockwaves across the world and immediately worried investors who had bought its Minibond Notes.7 Lehman Brothers had arranged all nine series of Minibond Notes. It was also the swap counterparty, which meant that its collapse would cause the notes to default on their scheduled interest payments.8 This would, in turn, lead to an early redemption of the notes and liquidation of the underlying assets.9


Shortly after, investors who had bought High Notes 5 (arranged and issued by DBS Bank) and Jubilee Series 3 LinkEarner Notes (arranged by Merrill Lynch) discovered that the collapse of Lehman Brothers had also triggered a mandatory early redemption of their notes. They could get nothing from the forced sale of the underlying collateral, as the values of these assets had fallen drastically amid the global credit crisis at the time.10 Their worst fears came true in October 2008, when it was announced that investors would not receive any payout from the unwinding of the two products.11

The hopes of Minibond Notes investors were raised in October 2008 when some financial institutions expressed interest to take over as the swap counterparty, thus avoiding an early redemption.12 However, this option was ruled out in December 2008 because of legal challenges by Lehman Brothers’ lawyers in the United States. As the legal issues had to be cleared first, the investors were also told that the underlying assets could not be sold for at least another two years.13 Fortunately, this happened earlier than expected, and the process of liquidating the assets began in October 2009. In February 2010, investors received their share of the proceeds,14 with payouts ranging from 21.5 to 70.8 percent of the amount invested.15

In November 2008, investors of Pinnacle Notes Series 9 and 10 were informed that their notes would be unwound, and that they could lose almost all of their original investments. The event was triggered by the failure or near-bankruptcy of five underlying assets, namely Lehman Brothers, two mortgage giants in the United States, Freddie Mac and Fannie Mae, and Icelandic banks Kaupthing and Landsbanki.16

Investor activism and compensation
Soon after the affected investors found out that they could lose their entire capital, the local media began carrying stories on the plight of those who claimed they were misled into buying the investment products.17 The unhappiness stemmed from the way these risky products were marketed and sold as safe investments.18


A large number of the investors were elderly people and less-educated individuals. They were not proficient in English or had little financial knowledge, and thus would have found it difficult to fully understand the risks of these complex structured investments.19 Questions were raised on why the products had been offered to these investors in the first place.20 The public sentiment was that of increasing anger directed at the institutions that sold them the products.21 Adding to the debacle was news that eight town councils run by the ruling People’s Action Party had S$16 million invested in various products linked to Lehman Brothers.22

Thousands of complaints were sent by affected investors to the 10 financial institutions that distributed the notes: DBS Bank, ABN Amro (now Royal Bank of Scotland), Maybank, Hong Leong Finance, CIMB-GK Securities, DMG and Partners Securities, Kim Eng Securities, OCBC Securities, Phillip Securities and UOB Kay Hian.23 Some who were dissatisfied with the responses they received from the financial institutions took their cases to the Financial Industry Disputes Resolution Centre.24 Many investors also joined public protest rallies, petitioned to the Monetary Authority of Singapore (MAS), and/or initiated collective legal action against the distributors.25

As of 31 May 2009, DBS Bank, ABN Amro, Maybank and Hong Leong Finance received 5,551 complaints. Of the 5,352 cases decided on, 3,607 (67 percent) received settlement offers, of which 85 percent were accepted by the investors. The compensation offered totalled S$104.6 million or 32 percent of the amount invested in the cases decided.26

The six brokerages, which received 952 complaints, offered compensation for 33 percent of the 889 cases decided on. The offers, of which 70 percent were accepted, totalled S$2.74 million or 5.6 percent of the amount invested in the cases decided.27 All settlements were offered without admission of liability.28

The first lawsuit arising from the Minibond saga was by a group of 204 investors. They sued DBS Bank in July 2009 for the S$17 million they lost from investing in High Notes 5.29

Government response
While reminding investors that they were ultimately responsible for their own financial choices and should make the effort to understand what they were investing in,30 MAS took an active role in helping those affected.31 Besides telling the distributors to handle all complaints fairly and prioritise vulnerable investors such as retirees with little education, MAS also ordered them to appoint independent parties to oversee the investigations into mis-selling and the complaints handling procedures.32 In addition, MAS drew up a timeline that distributors had to follow in the handling of customers’ complaints, requiring them to complete their review of each complaint within four weeks of receiving it.33


After looking into the sales practices of the 10 distributors, the MAS’s findings led to sales bans being imposed on them starting from 1 July 2009.34 Hong Leong Finance received the heaviest penalty – a two-year ban, while DBS Bank, Royal Bank of Scotland and Maybank were given six-month bans. The six brokerages were handed bans of six months or one year. These institutions could not resume selling structured notes until their internal processes were strengthened to MAS’s satisfaction. Hong Leong Finance has since said that it would not sell such products in the future. The bans on the three banks were lifted with effect from 12 February 2010,35 while the six brokerages had theirs lifted with effect from 24 August 2010.36

In a move to keep rules updated and relevant, MAS reviewed the regulatory framework for marketing investment products and proposed several enhancements to better safeguard the interests of retail investors.37 For example, it put forth a user-friendly “Product Highlights” sheet that describes the key features and risks of an investment product, as well as a seven-day cooling off period during which investors can cancel their investments without incurring sales charges or commissions.38

Other proposals put forth by MAS included measures to raise the competency of individuals selling complex investment products.39 Having sought public feedback in early 2009 and early 2010, MAS also published an online consumer guide titled Making Sense of Structured Products to help investors make more informed decisions regarding such products.40



Author
Valerie Chew



References
1. Siow, L. S. (2008, September 17). Investors fret over Lehman’s Minibonds. The Business Times, p. 1; Chan, F. (2008, September 25). Minibond investors turn to MAS. The Straits Times, p. 49. Retrieved from NewspaperSG.
2. Chan, F., & Lum, S. (2008, October 31). Stay calm and follow process, investors urged. The Straits Times, p. 1; Chen, G., & Chan, F. (2008, October 11). MAS: 10,000 here invested $501m. The Straits Times, p. 55. Retrieved from NewspaperSG.
3. Monetary Authority of Singapore. (2009, July 7). Investigation report on the sale and marketing of structured notes linked to Lehman Brothers, p. i. Retrieved 2016, October 31 from Monetary Authority of Singapore website: http://www.mas.gov.sg/~/media/resource/news_room/press_releases/2009/INVESTIGATION%20REPORT_7%20JUL%2009.ashx
4. Chen, O., & Srinivasan, A. (2008, October 29). Which credit products are suited to the masses? The Straits Times, p. 22. Retrieved from NewspaperSG.
5. Ee, J. W. W., & Tan, D. W. (2008, September 28). How pushy can they get? The Straits Times, p. 10. Retrieved from NewspaperSG.
6. Monetary Authority of Singapore. (2009, July 7). Investigation report on the sale and marketing of structured notes linked to Lehman Brothers, pp. iv–v. Retrieved 2016, October 31 from Monetary Authority of Singapore website: http://www.mas.gov.sg/~/media/resource/news_room/press_releases/2009/INVESTIGATION%20REPORT_7%20JUL%2009.ashx
7. Chan, F. (2009, October 2). Minibond investors to get some money back. The Straits Times, p. 57; Chan, F. (2008, September 25). Minibond investors turn to MAS. The Straits Times, p. 49. Retrieved from NewspaperSG.
8. Monetary Authority of Singapore. (2009, July 7). Investigation report on the sale and marketing of structured notes linked to Lehman Brothers, p. 2. Retrieved 2016, October 31 from Monetary Authority of Singapore website: http://www.mas.gov.sg/~/media/resource/news_room/press_releases/2009/INVESTIGATION%20REPORT_7%20JUL%2009.ashx
9. Monetary Authority of Singapore. (2009, July 7). Investigation report on the sale and marketing of structured notes linked to Lehman Brothers, p. 3. Retrieved 2016, October 31 from Monetary Authority of Singapore website: http://www.mas.gov.sg/~/media/resource/news_room/press_releases/2009/INVESTIGATION%20REPORT_7%20JUL%2009.ashx
10. Chan, F. (2008, September 25). Minibond investors turn to MAS. The Straits Times, p. 49; Chan, F. (2008, September 18). DBS High Notes investors at risk. The Straits Times, p. 4; Siow, L. S. (2008, October 10). Investors of Merrill notes to get back nothing. The Business Times, p. 4. Retrieved from NewspaperSG.
11. Siow, L. S. (2008, October 10). Investors of Merrill notes to get back nothing. The Business Times, p. 4; Siow, L. S. (2008, October 29). Zero payout for most High Notes 5 investors. The Business Times, p. 3. Retrieved from NewspaperSG.
12. Chen, G., & Chan, F. (2008, October 11). MAS: 10,000 here invested $501m. The Straits Times, p. 55. Retrieved from NewspaperSG.
13. Siow, L. S. (2008, December 3). Restructuring of Minibonds on hold. The Business Times, p. 2. Retrieved from NewspaperSG.
14. Cua, G. (2010, February 4). Minibond: 80% to recoup half or more of principal. The Business Times, p. 2. Retrieved from NewspaperSG.
15. Chan, F. (2010, February 12). MAS lifts ban on three banks. The Straits Times, p. 16. Retrieved from NewspaperSG.
16. Chan, F. (2008, November 15). Bad news for Pinnacle buyers. The Straits Times, p. 3. Retrieved from NewspaperSG.
17. Siow, L. S. (2008, September 24). Move to help Lehman ‘victims’ gathers pace. The Business Times, p. 2. Retrieved from NewspaperSG.
18. Chan, F. (2009, September 11). Minibond investors begin legal action. The Straits Times, p. 7. Retrieved from NewspaperSG.
19. Chan, F., & Low, I. (2008, October 18). MAS to banks: Do the right thing. The Straits Times, p. 1. Retrieved from NewspaperSG.
20. Toh, M. (2008, October 12). Over 500 investors at protest rally. The Straits Times, p. 1. Retrieved from NewspaperSG.
21. Chen, G., & Chan, F. (2008, October 11). MAS: 10,000 here invested $501m. The Straits Times, p. 55. Retrieved from NewspaperSG.
22. Goh, C. L. (2008, November 18). Town councils’ exposure: $16m. The Straits Times, p. 1. Retrieved from NewspaperSG.
23. Monetary Authority of Singapore. (2009, July 7). Investigation report on the sale and marketing of structured notes linked to Lehman Brothers, p. 4. Retrieved 2016, October 31 from Monetary Authority of Singapore website:  http://www.mas.gov.sg/~/media/resource/news_room/press_releases/2009/INVESTIGATION%20REPORT_7%20JUL%2009.ashx; Chan, F. (2009, September 11). Minibond investors begin legal action. The Straits Times, p. 7. Retrieved from NewspaperSG.
24. Chan, F. (2008, October 25). Unhappy investors turn to dispute body. The Straits Times, p. 18; Chan, F. (2009, September 11). Minibond investors begin legal action. The Straits Times, p. 7. Retrieved from NewspaperSG.
25. Chan, F. (2008, September 25). Minibond investors turn to MAS. The Straits Times, p. 49; Chan, F. (2009, September 11). Minibond investors begin legal action. The Straits Times, p. 7; Toh, M. (2008, October 12). Over 500 investors at protest rally. The Straits Times, p. 1. Retrieved from NewspaperSG.
26. Chan, F. (2009, September 11). Minibond investors begin legal action. The Straits Times, p. 7. Retrieved from NewspaperSG.
27. Monetary Authority of Singapore. (2009, July 7). Investigation report on the sale and marketing of structured notes linked to Lehman Brothers, p. xvii. Retrieved 2016, October 31 from Monetary Authority of Singapore website: http://www.mas.gov.sg/~/media/resource/news_room/press_releases/2009/INVESTIGATION%20REPORT_7%20JUL%2009.ashx
28. Chan, F. (2008, October 29). Brokerages act to help ‘vulnerable’ investors. The Straits Times, p. 4. Retrieved from NewspaperSG.
29. Chan, F. (2009, September 11). Minibond investors begin legal action. The Straits Times, p. 7. Retrieved from NewspaperSG.
30. Monetary Authority of Singapore. (2009, July 7). Investigation report on the sale and marketing of structured notes linked to Lehman Brothers, p. v. Retrieved 2016, October 31 from Monetary Authority of Singapore website: http://www.mas.gov.sg/~/media/resource/news_room/press_releases/2009/INVESTIGATION%20REPORT_7%20JUL%2009.ashx
31. Kor, K. B. (2008, November 7). MAS active in looking after investors’ interests: SM. The Straits Times, p. 65. Retrieved from NewspaperSG.
32. Chan, F. (2008, September 25). Minibond investors turn to MAS. The Straits Times, p. 49; Chan, F., & Low, I. (2008, October 18). MAS to banks: Do the right thing. The Straits Times, p. 1. Retrieved from NewspaperSG.
33. Chan, F., & Low, I. (2008, October 18). MAS to banks: Do the right thing. The Straits Times, p. 1. Retrieved from NewspaperSG.
34. Chan, F. (2010, February 12). MAS lifts ban on three banks. The Straits Times, p. 16. Retrieved from NewspaperSG; Monetary Authority of Singapore. (2009, July 7). Investigation report on the sale and marketing of structured notes linked to Lehman Brothers, p. xviii. Retrieved 2016, October 31 from Monetary Authority of Singapore website: http://www.mas.gov.sg/~/media/resource/news_room/press_releases/2009/INVESTIGATION%20REPORT_7%20JUL%2009.ashx
35. Chan, F. (2010, February 12). MAS lifts ban on three banks. The Straits Times, p. 16. Retrieved from NewspaperSG.
36. Chan, F. (2010, August 25). MAS lifts ban on six brokerages. The Straits Times, p. 18. Retrieved from NewspaperSG.
37. Cua, G. (2008, October 3). MAS to review structured products rules. The Business Times, p. 2. Retrieved from NewspaperSG.
38. Monetary Authority of Singapore. (2009, March). Review of the Regulatory Regime Governing the Sale and Marketing of Unlisted Investment Products, p.39. Retrieved 2016, October 31, from Monetary Authority of Singapore website: http://www.mas.gov.sg/~/media/resource/publications/consult_papers/2009/MAS%20consult%20paper%20structured%20pdt%20review.ashx
39. Chan, F. (2010, February 12). MAS lifts ban on three banks. The Straits Times, p. 16. Retrieved from NewspaperSG.
40. Monetary Authority of Singapore. (2009, July 7). MAS Releases Investigation Findings on the Sale and Marketing of Structured Notes Linked to Lehman Brothers. Retrieved 2016, October 31, from Monetary Authority of Singapore website: http://www.mas.gov.sg/News-and-Publications/Media-Releases/2009/MAS-Releases-Investigation-Findings-on-the-Sale-and-Marketing-of-Structured-Notes-Linked-to-Lehman-Brothers.aspx; Monetary Authority of Singapore. (2010, January 28). MAS Issues Consultation Paper on Regulatory Regime for Listed and Unlisted Investment products. Retrieved 2016, October 31, from Monetary Authority of Singapore website: http://www.mas.gov.sg/News-and-Publications/Media-Releases/2010/MAS-Issues-Consultation-Paper-on-Regulatory-Regime-for-Listed-and-Unlisted-Investment-Products.aspx; Monetary Authority of Singapore. (2016). Making SENSE of Structured Notes. Retrieved 2016, October 31, from Monetary Authority of Singapore website: http://www.mas.gov.sg/moneysense/understanding-financial-products/investments/guides-and-articles/making-sense-of-structured-notes.aspx



The information in this article is valid as at 2010 and correct as far as we are able to ascertain from our sources. It is not intended to be an exhaustive or complete history of the subject. Please contact the Library for further reading materials on the topic.


 

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Bond funds--Singapore
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