HONG KONG – Angry voices shouting “World’s Local Crook” echo beneath the iconic HSBC building designed by British architect Norman Foster. The protesters are mocking the corporate slogan “The World’s Local Bank”, a catch-phrase that has come back to haunt Hong Kong’s reputation as a global financial center. The dispute centers on the HSBC role in the collapse of Lehman Brothers, which left investors, large and small, with a sea of worthless paper.
“HSBC was the main trustee for Lehman mini-bonds, sand therefore it is responsible for repaying our losses,” said Mae Chan, an activist with the victims’ committee that represents 43,000 investors who lost more than 1.6 billion U.S. dollars in the Lehman bankruptcy.
The victims’ group asserts that London-based HSBC is not an innocent party to the Lehman fiasco, as its lawyers claim, but in reality the major player in the scandal. The bank’s participation provided the false impression that the mini-bonds were “low risk”, while HSBC executives secretly exercised control over Pacific International Finance, a dummy company that marketed the Lehman product to investors.
Pacific Finance misrepresented the bonds as a risk-free investment issued on behalf of six major banks. In fact, these instruments, which should more accurately called credit risk swaps, were used to underwrite Lehman’s high-return/high-risk investments in some 150 financial companies, many of them heavily leveraged in sub-prime mortgages. By offering cautious investors a conservative 5.1 percent annual return, Lehman aimed at making double-digit profits by recycling other people’s money and without fear of liability in case things went wrong.
Things did go wrong with the collapse of the sub-prime mortgage market in the U.S. Lehman mini-bonds dropped to 15% of their face value, and then became worthless when the Wall Street firm went bankrupt.
At the time of the Lehman crisis two years ago, nobody suspected HSBC of influencing the bankruptcy proceedings to evade repayment to investors and creditors. Since then, mini-bond victims have retraced this Grand Theft Larceny to its source – the highest executive level of HSBC. The other five banks, it turns out, lent their names to Lehman due to their confidence in HSBC. As early as 2006, according to the victims’ group, HSBC was aware of the fraudulent nature of the Lehman credit-risk swaps.
In August 2010, a U.S. federal court overturned the bankruptcy judge’s decision in favor of the right of mini-bond victims to file a class-action lawsuit against HSBC. Besides the well-organized Hong Kong group, new victims’ organizations are now being formed in the Middle East and other regions. The claims of these individual investors may be small compared with the bank’s massive assets, but this case sets the precedent for claims by much-larger creditors including hedge funds, other banks and brokerages.
When questioned by Hong Kong regulators, HSBC executives said that Pacific Finance was controlled solely by Lehman and that HSBC had no part in its investment decisions. The victims’ group has since found out that Pacific Finance, registered in the Cayman Islands, is actually owned by HSBC Holdings, whose chairman is Stephen Green.
UK GOVERNMENT COLLUSION
Green’s career illustrates the revolving door between government and finance under the British system. A former civil servant with the U.K. Ministry of Overseas Development (a euphemism for neocolonialism), he entered the consulting company McKinsey, which acts like a hinge for the revolving door. The consultant joined HSBC in 1987, quickly rising up the corporate ladder with posts in Hong Kong, the Bermudas and London.
At the peak of his career, the banker has just announced his resignation to take up a government post. Stephen Green was just appointed by David Cameron to become the British government’s Minister for Trade. Presumably, this appointment will provide him with some degree of immunity from prosecution. The banker is jumping off a sinking ship, just when a class-action suit threatens to drag HSBC executives into the law court;s docket.
Green leaves behind an HSBC dogged with the debt from troubled acquisitions like the Royal Bank of Scotland and Household International. Quite possibly, the coming fall of HSBC could spark the second dip of the global recession.
David Cameron has hung an albatross around his neck by allowing his Cabinet to be a haven for the prime scoundrel in a global fraud. With his new trade portfolio, Green is a highly dubious economic envoy to the world, to say the least. What lies behind this disgrace to Great Britain?
The answer can be found by connecting the dots.
First, examine Cameron’s curious phraseology in announcing Green’s appointment as Trade Secretary: “I know he will make ‘an invaluable contribution’ towards this crucial agenda, helping to drive strong economic growth in the UK.” (Financial Times)
Put that “contribution” together with what the Independent newspaper has to say about the murky links between Cameron and his wealthy supporters: :The Conservative Party has pulled in millions of pounds from ‘hidden’ donors through a loophole that allows wealthy backers to fund political parties while keeping their identities secret.
The invaluable contribution must have been quite a sum. The money could have been better spent in paying back jilted investors.
“The banking industry has done many things wrong. It is important to remember that many ordinary bankers have always sought to provide good service to their customers; but we must also recognise that there have been too many who have profoundly damaged the industry’s reputation.”
Stephen Green, HSBC chairman and now U.K. Trade Minister
Fact: The Hong Kong and Shanghai Banking Corporation was established in the British Crown colony of Hong Kong in 1865 to facilitate payments between China and Britain notably for the opium trade.
From HSBC Watch: “A Mexican judge on Jan. 22, 2010, accused the owners of six centros cambiarios, or money changers, in Culiacan and Tijuana of laundering drug funds through their accounts at the Mexican units of Banco Santander SA, Citigroup Inc. and HSBC, according to court documents filed in that case.”
Case 1:10-cv-00017-WHP, Filed 08/09/10
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK USDC SDNY DOCUMENT ELECTRONICALLY FILED
KA KIN WONG, et al.,10 Civ. 0096 (WHP)Appeal from Bankruptcy Plaintiffs/Appellants,Case No. 08-13555 (JMP)
HSBC USA, INC., et al.,Defendants/Appellees.
WILLIAM H. PAULEY III, District Judge:
Plaintiffs/Appellants Ka Kin Wong and six other noteholders appeal from two orders of the United States Bankruptcy Court for the Southern District of New York (Peck,Bankr. J.)(the “Bankruptcy Court”) dated November 23, 2009 and December 3, 2009 dismissing their Class Action Complaint (the “Complaint”) with prejudice. While the events giving rise to this adversary proceeding are complicated, two discrete issues are presented on appeal: (1)whether Plaintiffs have standing to sue, and (2) whether amendment of the Complaint would be futile.For the following reasons, this Court affirms in part, reverses in part, and vacates in part the Bankruptcy Court’s orders.
1.Parties on Appeal
Plaintiffs seek to represent a class of purchasers of structured finance notes-also known as “Minibonds” between June 16, 2003 and September 15, 2008. (Appellants’ Designation of Contents of the Record Designation Number (“DN”) 1: Complaint against HSBC,USA, et al. dated Mar. 12, 2009 (“Compl.”) ¶ 1.) Plaintiffs brought claims against Pacific International Finance Limited (“Pacific Finance” or the “Issuer”), the issuer of the Minibonds, as well as several other entities and individuals. (Compl. ¶¶ 27-38.) The underlying transactions and relationships among the various entities are opaque.
On appeal, Plaintiffs pursue their claims against only two entities: HSBC BankUSA, N.A. (“HSBC Bank” or the “Trustee”), and Lehman Brothers Special Financing, Inc.(“LBSF”). HSBC Bank is the trustee of collateral securing Pacific Finance’s payment obligations to the Minibonds holders and LBSF. In the Complaint, Plaintiffs mistakenly named HSBC Bank’s predecessor as trustee, (DN 6 Ex. 2: Affidavit of Song Qun Sworn, Programme Prospectus dated Mar. 12, 2007 at 7), and now appeal the Bankruptcy Court’s denial of leave to amend the Complaint to name HSBC Bank. Defendant LSBF is a bankrupt Delaware corporation and a debtor in the underlying bankruptcy proceedings, which involve several Lehman entities (the “Lehman Bankruptcy”). (Compl.IT38, 67.)
II.The Minibonds Program
Plaintiffs seek damages and injunctive relief relating to $1.6 billion in Minibonds issued by Pacific Finance in separate, but virtually identical, series. (Compl. ¶ 45.) Pacific Finance sold the Minibonds to retail investors located primarily in Hong Kong, and marketed them as “credit-linked” to financially stable companies and backed by AAA-rated collateral.(Compl. ¶¶ 45, 47, 51.) As a consequence of Lehman Brothers Holdings, Inc.’s (“LehmanBrothers”) collapse, the Minibonds are now worthless. (Compl.T~67-69, 101-04.)