Hong Kong: Hong Kong banks agreed to return more than $800 million to investors burned by Lehman Brothers-backed derivatives, potentially ending a nearly yearlong dispute that sparked street protests and exposed problems in this financial center’s markets.
The 16 banks will initially return 60 or 70% of the principal to thousands of investors with those over 65 years old getting the higher amount, regulators said on Wednesday. That could total HK$6.3 billion, or nearly $810 million.
Martin Wheatley, chief executive of the territory’s securities watchdog, the Securities and Futures Commission, called the deal a “watershed.”
“This is a huge settlement,” Wheatley said. “It is unprecedented, certainly in Hong Kong and most other jurisdictions around the world.”
Some investors expressed disappointment over the deal and said they wouldn’t support it.
The agreement could effectively shut down any government investigations into claims the banks used deceptive marketing techniques, said Peter Chan, head of the Alliance of LB Victims, which represents about 8,000 investors. He worried even those interested in accepting the offer may not be covered because of a provision excluding buyers of other structured and leveraged investment products, which aren’t uncommon in Hong Kong.
“It’s not reasonable and it’s not fair. This is meant to trick us,” said Chan, who plans to reject the deal.
He questioned why regulators would cut a deal that might exclude many investors. “Mr. Wheatley is a man from Mars. He’s a nice Englishman, but he doesn’t understand Hong Kong.”
The dispute erupted in September after the collapse of Wall Street investment bank Lehman Brothers Holdings Inc., throwing into doubt the value of financial products it backed and channeled to Hong Kong investors, many of them retirees, through the territory’s banks and brokerages.
Facing billions of dollars in possible losses, investors took to the streets. Meanwhile, authorities opened probes, lawmakers condemned regulators for failing to protect investors and banks were accused of peddling highly risky derivatives products most of which went by the wholesome sounding name of “mini-bonds” as safe investments.
Speaking on behalf of the banks, the chairman and chief executive of Hong Kong’s Bank of East Asia, David Li, said the deal would “reinforce public confidence” in Hong Kong as an international center for finance a reflection of concerns the fiasco had damaged the territory’s reputation.
The banks will also set up a HKD$200 million ($25 million) fund to help pay legal costs of trying to recover collateral that was backing many of the investments. Most of the initial recovery amount would be kept by the banks, likely to help them recoup their payouts to investors. Anything above 70% would go toward increasing the payouts.
About $1.8 billion of Lehman “mini-bonds” were sold in Hong Kong to around 30,000 people. Another $20 million or so in different structured derivatives products arranged by Lehman, which aren’t covered by the deal, were also sold.
The announcement comes months after agreements were secured from other financial firms. In February, Sun Hung Kai Investment Services agreed to repurchase nearly $11 million of the investments and was reprimanded by regulators.
Banks selling the products included Bank of East Asia, Bank of China, Bank of Communications and Industrial and Commercial Bank of China.