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DBS Group Holdings Ltd., one of 14 banks in Hong Kong that have agreed to compensate investors in structured notes linked to Lehman Brothers Holdings Inc., has been accused in a lawsuit of failing to comply with securities laws while selling the products.
The complaint, filed in Hong Kong’s High Court by a retired couple now living in California, claims Southeast Asia’s biggest bank failed to comply with the code of conduct for financial institutions under the city’s Securities and Futures Ordinance, including “failing to make accurate and not misleading representations.”
The Hong Kong units of DBS, Bank of China Ltd. and Citigroup Inc. and 11 other banks have compensated more than 60 investors, after lobbying from the city’s Democratic Party, its chairman Albert Ho said. Lawsuits including a proposed class action in the U.S. and a Hong Kong legislature investigation into the banks and structured financial products may encourage more, the lawyer and lawmaker added.
“The threat of litigation is one of the most effective tools in forcing settlement,” Ho said. Some of the banks became more willing to settle in case litigation exposes them to “more embarrassment,” he said.
DBS, which said Oct. 22 it expected compensation to Singapore and Hong Kong customers to amount to as much as S$80 million ($54 million), said it could not comment on the Hong Kong lawsuit. “If there are cases where our standards are not met, DBS will not hesitate to make compensation,” it added.
New sales process
DBS plans to change the way it sells investment products by Jan. 1, reviewing the suitability of each customer, the Straits Times reported Nov. 12, citing Chairman Koh Boon Hwee.
Hong Kong’s Securities and Futures Commission said in October individual investors in the city had HK$15.6 billion ($2 billion) of structured notes arranged by or linked to Lehman, which filed for bankruptcy on Sept. 15.
Stephen Tou and his wife are seeking to recover $1.26 million they invested in Constellation Structured Notes in July 2006 and April 2007, according to the writ filed on Dec. 8.
Linked to eight financial institutions, including Lehman and Morgan Stanley, the DBS bank representative told the couple that in the worst-case scenario where one of the reference institutions failed, there would be a reduction in one-eighth of the principal value of the notes, the writ said.
“My clients will of course consider DBS’ defense carefully before taking the next step in litigation,” Anthony Neoh, lead counsel for the couple, said in an e-mailed reply to questions late yesterday. Neoh is the former chairman of Hong Kong’s regulator, the Securities and Futures Commission.
The case is Stephen Tou Kwok Woon and Wong Fung Chun v. DBS Bank (Hong Kong) Ltd., HCA2547/2008, Hong Kong High Court.