DBS High Notes

This article by BT's Michelle Quah on 4/11/2011 tells about the DBS High Notes investor's disappointment. Did DBS really win?

Excerpts....  The 220 investors who collectively lost $18 million when the DBS High Notes 5 structured product went belly up in 2008 have expressed their disappointment in the Court of Appeal's decision on Wednesday to dismiss their claim against DBS Bank. 'We are disappointed that the court appears to have resolved this inconsistency and based its decision by relying on documents that did not involve us, that did not form part of our contract with DBS and which we never saw until after the hearing of the appeal,' the investors said in a statement yesterday. 'Nonetheless, given that there are no other avenues of recourse, we have no choice but to accept the decision. We have tried our best to recover some of the life savings that so many of our group members have lost and are sad that we have been unsuccessful,' they added. At the heart of the investors' claim was that the credit event redemption amount (CERA) to be paid out to them, in the event that Lehman defaulted, was defined differently in four different instances in the DBS High Notes 5 pricing statement, thereby rendering the notes void for uncertainty. The Court of Appeal agreed there were inconsistencies between the four definitions of CERA in the pricing statement and directed DBS to produce the product's reference notes. The court found that the definition there was the same as the third CERA description in the pricing statement. 'The result was that owing to Lehman's bankruptcy, the CERA payable to HN5 holders on their investment was indeed zero,' the Court of Appeal ruled. It agreed with an earlier High Court ruling that the DBS High Notes 5 contract was not void for uncertainty and dismissed the investors' appeal with costs. The 21 investors, who brought the lawsuit against DBS on behalf of 199 others, were represented by Siraj Omar of Premier Law LLC. DBS was represented by Senior Counsel Davinder Singh and Una Khng of Drew & Napier. Some 9,900 people here have lost most, if not all, of their investments totalling about $520 million in Lehman-linked products, such as the DBS High Notes, Minibonds, Merrill Lynch Jubilee Series 3 LinkEarner Notes and Morgan Stanley Pinnacle Series 9 and 10 Notes, distributed by DBS and other financial institutions.

BT

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My Thots....

Losing money an a high note.
Lost monies in the DBS High Notes 5 structured product, lost in the verdict;  possibly,  have to pay for the high flying lawyers that DBS hired to win the case.


Legally, DBS won.
In terms of Goodwill, I wonder.....

Would anybody trust the RMs pushing financial products at the counters ( or Cubicles), anymore?

Daka

This article from the BT dated Oct 20, 2011, by Michelle Quah,  tells about the Daka Saga....

Excerpts...... Two former executives of Daka Designs, a company once listed in Singapore, have been convicted in Hong Kong on charges of defrauding their shareholders and the Singapore Exchange (SGX) between early 2003 and May 2005 - and sentenced to jail. The company's ex-CEO Raymond Chow and former executive chairman Mah Pat Y were sentenced to three years two months' jail, and two years' jail, respectively. Both men are also disqualified from serving as directors on the board of any Hong Kong company for five years. Such a disqualification also makes them unfit to serve as directors on any Singapore board. The two men - along with a third, Daka's former chief financial officer Kevin Leung - were arrested by Hong Kong's Independent Commission Against Corruption (ICAC) in October 2007 and charged in September 2009. Leung has yet to be convicted. The actions against them took place in Hong Kong as Daka and the three men are based in the special administrative region. The SGX has worked closely with ICAC and the Corrupt Practices Investigation Bureau (CPIB) in Singapore over this case, and one of its officers testified at the hearing in Hong Kong. Lorraine Chay, vice-president, Risk Management and Regulation, at SGX, said: 'Having been actively involved in the investigation and assisting as a prosecution witness in the Hong Kong Court, I am very pleased that the efforts have resulted in the successful prosecution against former directors of Daka Designs. SGX will continue to actively work with enforcement agencies to protect the integrity of our marketplace.' Yeo Lian Sim, SGX's chief regulatory officer, said: 'All the effort has been worthwhile to bring the wrongdoers to justice. SGX takes a stern view of fraudulent behaviour in listed companies and will do our utmost against it, assisting regulatory authorities.' The three men were accused of having 'dishonestly falsified' financial records, such as goods receipt acknowledgements and delivery notes of its subsidiary Briga Group (Macao Commercial Offshore) Company Ltd. They were said to have inflated the turnover and profit figures by over HK$8.9 million (S$1.44 million), according to ICAC. These inflated numbers were in 'dishonestly compiled and published documents' such as the annual report for the financial year ended March 31, 2004. 'It is alleged that the defendants had misled existing and potential shareholders of Daka Designs and SGX as to the true financial position of the company, and prevented SGX from taking any action against the company for its failure,' ICAC had said in a statement. Trouble began brewing at Daka not long after the company went public in July 2004. In late 2005, the SGX called for a special audit on Daka following two profit warnings from the company. When Daka blocked access to its records, the SGX slapped a trading halt in January 2006; the exchange subsequently hardened that into a trading suspension after special auditor KPMG, commissioned by the SGX to look into Daka's affairs, found serious irregularities in the company's finances. The suspension was never lifted. The issue was then turned over to Singapore's Commercial Affairs Department. In 2007, Daka sold its entire business to its parent Daka Direct and, as a listed shell company, tried to engineer a couple of reverse takeovers that failed. Chow, Mah and Leung ceased to be involved in the management of the company, and ceased to hold any interest in the shareholding of the company, from April 2007. Daka, which was renamed Carats in 2007, was eventually delisted a year later as the SGX denied an extension of the deadline for it to secure a new business.

BT

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My Thots.....

One down, more to go......
How about Beauty China, another from-HK managed biz, with very similar circumstances?

MIIF

Biz Trusts with wrong incentive structure.

http://www.macquarie.com/mgl/miif/investor-centre/management-fees

Base Fee
In effect, by doing share purchase.....
They are trying to nudge A up and bring C down, have been unsuccessful at D and know that they can't raise B becos the cost of equity is so much higher than the cost of debt at the ridiculous price MIIF (discount to NAV) is trading at.

Performance Fee
The only way they can bring the share price up (more correctly support the share price in a plunging bear market)  is by share purchase.


My Thots....
As a fund manager, their track record on "Buys" and "Sells"; on trading of assets is weak.
Check out their acquisition and divestments of Arqiva and CAC.
In one fell swoop, they negated all the profits made since IPO.
The acquisition and divestments were made to comply with the wishes and decisions made by fellow co-investors ( or some higher ups in the MacQ structure?)  who have their own calculations and motivations.

As a FoF (fund of fund), the basic U would expect from such an investment fund  is that they will buy when prices are down and sell when prices are up. They did the exact reverse.
Having sold in a distressed mkt, U would expect them to have better acquisitions in mind. Instead, they got stuck with cash they do not seem to be able to make better use of for the past yrs.
Failed to do due diligence when buying Miaoli windfarm : i.e. they bought a windfarm w/o much wind.
Somehow, the Big M name did not live to its reputation and the whole biz model of the M Group failed to deliver when under savage attack by Jim Chanos and his gang.

Management of MIIF should put shareholders first, not their siblings in the MacQ Group.
MIIF is one big lesson for me.
Divested, about breakeven, slightly underwater.
Needs plenty of patience and a bouyant equity mkt to recover.

Other Thots...

MAS should review Biz Funds Incentives & Structure too

Opaque
MIIF remains opaque. altho it owns 81% of Hua Nan ,we do not know much about the loan structure.
 See Hua Nan slide 19, the senior debt is supposedly pegged at
5 year PBOC2 rate:
- 7.83% without 10% discount
- 7.05% with 10% discount
As the loan starts after acquistion  in 2007, and  the  interest rates(based on the above) are pegged at  5yrs PBOC rate, will the interest rates change?
And when? Every year ? Or every 5 yrs? Will it go up or down in 2012?
What instruments do they use to hedge this huge variability?
There is no update on this, since the acquisition.
 At the same time, slide 20, says there are no hedging mechanism for both forex and the interest rates in China.
So what are we to make of the latest results 2011 Interim presentation that maturity is 2022?
There is no info on whether how the Senior Note is structured .
Who subscribed for the Senior Notes?
Are there covenants?
Asset level debt is supposedly non-recouse at MIIF level.
Are there SPVs involved, what are they and how are they structured?
 MIIF has 81%, the vendors Topwise and Preciseway has 9% and the Guangzhou authorities 10%, so if anything go wrong with the Senior Notes, who is ultimately responsible .
Will MIIF be ultimately accountable; as with Miaoli; even tho the debt is non-recourse?

Incentives
Some may argue that the incentive structure  for Performance Fees are aligned with unitholders interests.
True, but the fact is that after the sale of Arqiva, MIMAL has NOT matched Basic minimal performance expected of Infrastructure Fund.
Yes, the question is NOT Performance Fees, but whether MIMAL should even be paid Basic Fees.
MIIF's raison d'etre as an Infrastructure fund, is to do the basic of  researching and finding good long term Infrastructure assets and investing in  them to provide DCF; this they are not doing well as I will explain later.
MIIF has ended up as a short term trader of assets, destroying shareholder value in the process as they  incurred losses from their trades.
NIV is basically pegged to Market Cap (with Cash at hand end of yr and Borrowings as other side factors).
MIMAL,  it seems has "switched off " , focussed on using the cash for Daily Share buy backs to shore up Market Cap ( a no-win situation in a Bear Market);  which arguably could be better put to better use to acquire  good undervalued Infrastructure assets in a bear market.
MIMAL is sitting on the Cash Pile they hurriedly collected when they sold in the last distressed market (during the GFC) and  NOT putting it to use in the current bear mkt caused by the Eurozone crisis.
Yet, MIMAL is collecting the Base Fees, altho they are not doing what they are expected to do.
Isn't the incentive i.e. "Base Fees"----- not aligned to unitholders interests?
In fact, one may even argue that the cash be better spend as a dividend payout to long suffering unitholders, if they cannot be put to better use than share buybacks ( which is arguably a form of  leakage thru Base Fees).

MAS Review?
The reason I am revisiting this post is that I think that MAS should look into both the incentive structure for Biz Trusts; as well as the need for  more disclosure about the assets whereby the Biz Trusts has majority (>50% control) of the assets.
There is a strong case for making the Biz Trusts asset class more transparent .... less opaque.

see post at Valuebuddies forum

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.