Pinnacle Notes

Will the Pinnacles Notes Trial in a NY court be a gamechanger? This BT article dated 13/10/2011, by Grace Leong, analyses....

Excerpts.....    These are interesting times for those burnt by products linked to failed US investment bank Lehman Brothers.In the two years since 10 local distributors were penalised for having mis-sold such products, at least one lawsuit has been brought in the Singapore High Court by investors alleging they were misled into thinking these were low-risk investments. That case, a test case brought by five investors who were part of a group of 165 investors with more than S$20 million in Lehman Minibonds, wasn't successful in recovering losses from the entities that issued and distributed the Lehman notes. The investors dropped their suit in May. But a class action lawsuit filed in New York by law firm Kirby McInerney LLP on behalf of a group of Singapore investors of Pinnacle Performance Ltd series 1,2,3,5,6,7,9 and 10 notes may prove a game changer. What makes the Pinnacle Notes case unique is that it doesn't target the distributors that sold the allegedly rigged investment products. Instead, it targets the entities it says engaged in 'undisclosed self-dealing' when they allegedly created and approved products that were 'designed to fail' so that every dollar the investors lost was gained by the bank. Morgan Stanley is accused of placing the Singapore investors' funds, about US$154.7 million, in synthetic CDOs (collateralised debt obligations) of its making, where the bank itself was allegedly a counterparty on underlying swap agreements. These underlying assets were then allegedly collateralised by sub-prime mortgages and Icelandic banks that failed. When those assets went belly up, all the money allegedly went to the bank in New York, the suit said. US District Judge Leonard Sand, in a recent federal court hearing in Manhattan, acknowledged the investors' lawyers face an uphill battle. 'As I understand the gist of plaintiff's claim, it is that Morgan Stanley, in the creation of these notes, did so with an intent that they would fail. Of course, that is a very hard thing to prove. That is the sort of thing which is proved by documents, created and preserved documents which would indicate that, or by testimony of usually a disgruntled ex-employee,' he said in court transcripts obtained by The Business Times. This case is pivotal. If fraud is indeed proven to have been committed by Morgan Stanley and its affiliates, the Monetary Authority of Singapore (MAS) may have good cause to take another look. MAS banned 10 distributors from selling structured notes. It had jurisdiction over them, but not over the creators of the products. If, however, the arrangers and issuers are proven to have deliberately created the toxic products, then that's a whole other ballgame. The local distributors that had to shell out millions of dollars in compensation to investors may look closer at possible actions against the product's issuers or arrangers. At least one distributor, Hong Leong Finance, is already trying its luck. It has got hold of some documents it hopes will explain the failure of Pinnacle Notes series 9 and 10, and help determine if it has a viable claim against Morgan Stanley Asia (Singapore). The Pinnacle Notes case also highlights whether Singapore investors need statutory protection from boilerplate clauses found in many investment products sold here, particularly complex derivatives that are typically very hard to understand, but that apparently give legal immunity to their arrangers and issuers. Morgan Stanley lawyer Bruce Angiolillo cited one such clause in the bank's defence. 'The economic interests of Morgan Stanley and/or its subsidiaries and affiliates in each such capacity may be adverse to the interests of the noteholders and potential and actual conflicts of interest may arise from the different roles played by Morgan Stanley and its subsidiaries and affiliates. As a result, noteholders will be exposed not only to the credit risk of Morgan Stanley and/or its subsidiaries and affiliates but also to the operational risks arising from the lack of independence of Morgan Stanley. . .' Simply put, it's like selling a knife to a child, and making the child sign a statement saying it fully understands how dangerous the knife can be, and that exempts the adult from liability. Such boilerplate clauses are insufficient, especially if it's proven that the Pinnacle Notes are 'fraudulent products specifically designed to fleece the plaintiffs of their money, and they did so by misrepresenting the terms and conditions of the notes', Andrew McNeela, the investors' lawyer, argued. But whether such issues get to see the light of day hangs on whether the case proceeds in New York. Morgan Stanley has so far refused to comment on whether there was a plan to create securities that would fail. It also denied any ties between the New York parent company and the Asian affiliates it claimed put together and sold the securities in the region. 'The Morgan Stanley entity most directly involved was Morgan Stanley Singapore, which is in Singapore, which arranged the transaction. They put it together,' Mr Angiolillo said. 'This is all about a Singapore dispute, a Singapore transaction, Singapore plaintiffs and Singapore sellers.' But Mr McNeela disagreed. 'The witnesses we need to establish the fraud, to put the lie to what they said in their offering materials, they are located most likely New York, based on where the synthetic CDOs were made, and in England with MS International, because that is the entity that engaged in the self-dealing.' And while Morgan Stanley raised questions over whether a US class action judgment in a securities fraud matter would be recognised in Singapore, the bank's own foreign law expert Tan Cheng Han had testified to the contrary in an unrelated fraud case in New York. In his declaration in the other case, Mr Tan, who is dean and professor of law at the National University of Singapore, said he believes it is 'highly probable that a Singapore court will recognise and enforce a judgment issued by a court in the United States'. This fight in New York will be closely watched in Asia.

BT
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My Thots.....

The Mom & Pop retail investors were at the unfortunate end of a long food chain.
Tracing back the food chain is necessary and useful, to prevent the culprits from repeating such "scams".
But doing in different jurisdictions with cross border issues makes the process ardous and painstaking.
Glad that HLF and the others have the courage to pursue the case in the US Courts.