PROTECTION FOR INVESTORS AND STRUCTURED PRODUCTS

1. What steps can aggrieved investors take to recover their money?

Prosecution

The Hong Kong Monetary Authority (HKMA) has already referred the “minibonds” mis-selling cases to the Securities and Futures Commission (SFC), which is a Hong Kong Government regulatory body that can initiate disciplinary proceedings. The SFC will carry out an investigation and will prosecute the violators if it finds sufficient evidence of wrongdoing.

The penalties available to the SFC include public reprimands, fines and suspension or removal from the list of licensed or registered persons.

Section 107 of the SECURITIES AND FUTURES ORDINANCE, Chapter 571, Laws of Hong Kong provides:-

• “(1) A person commits an offence if he makes any fraudulent misrepresentation or reckless misrepresentation for the purpose of inducing another person -
  (a) to enter into or offer to enter into -
  
  (i) an agreement to acquire, dispose of, subscribe for or underwrite securities; or
  
  (ii) a regulated investment agreement; or
  
  (b) to acquire an interest in or participate in, or offer to acquire an interest in or participate in, a collective investment scheme.
   

   

  (2) A person who commits an offence under subsection (1) is liable -
  
  (a) on conviction on indictment to a fine of $1000000 and to imprisonment for 7 years; or
  
  (b) on summary conviction to a fine at level 6 and to imprisonment for 6 months.
   

   

  (3) For the purposes of this section -
  
  (a) "fraudulent misrepresentation" means -
  
  (i) any statement which, at the time when it is made, is to the knowledge of its maker false, misleading or deceptive;
  
  (ii) any promise which, at the time when it is made, its maker has no intention of fulfilling, or is to the knowledge of its maker not capable of being fulfilled;
  
  (iii) any forecast which, at the time when it is made, is to the knowledge of its maker not justified on the facts then known to him; or
  
  (iv) any statement or forecast from which, at the time when it is made, its maker intentionally omits a material fact, with the result that -
  
  (A) in the case of the statement, the statement is rendered false, misleading or deceptive; or
  
  (B) in the case of the forecast, the forecast is rendered misleading or deceptive;
   

   

  (b) "reckless misrepresentation" means -
  
  (i) any statement which, at the time when it is made, is false, misleading or deceptive and is made recklessly;
  
  (ii) any promise which, at the time when it is made, is not capable of being fulfilled and is made recklessly;
  
  (iii) any forecast which, at the time when it is made, is not justified on the facts then known to its maker and is made recklessly; or
  
  (iv) any statement or forecast from which, at the time when it is made, its maker recklessly omits a material fact, with the result that -
  
  (A) in the case of the statement, the statement is rendered false, misleading or deceptive; or
  
  (B) in the case of the forecast, the forecast is rendered misleading or deceptive.”

Recently certain bank officers have been prosecuted under section 107.

However, even after successful prosecution of bank officers or financial institutions by the SFC, aggrieved investors are not automatically entitled to compensation for their loss. Additional separate Civil proceedings are also needed. That is, the investors must still sue the relevant party (or parties) in Court to recover all or part of their losses.

Damages for the Loss

As previously said, both the SFC and HKMA cannot order compensation be paid to the aggrieved investors. This generally requires a court order.

Section 108 of the Securities and Futures Ordinance lists out civil liability for inducing others to invest money in certain cases.

Compensation, then, is a matter for the Civil Courts.

Civil Court Proceedings

For claims of up to HK$75,000, aggrieved investors have to commence legal proceedings in the Small Claims Tribunal where no legal representation is allowed.

For claims over HK$75,000 up to HK$3,000,000, legal action must be commenced in the District Court. Claims above HK$3,000,000 must be presented in the Court of First Instance of the High Court of Hong Kong.

In both the District Court and the High Court, legal representation is allowed. Investors who have difficulty funding their litigation could approach the Legal Aid Department. Their financial position and the merits of their cases would be scrutinized before Legal Aid is granted.

However, investors may choose to represent themselves in court and act “in person”.

Alternative Dispute Resolution

As an alternative to bringing civil action in Court, the parties could attempt to resolve their disputes through other dispute resolution mechanisms. The most common means are mediation and arbitration.

The HKMA has made available mediation and arbitration services for helping resolve questions of compensation between investors and banks.

The service is provided by the Hong Kong International Arbitration Centre (HKIAC). The HKMA will pay the investor’s share of the fee for these services on behalf of (1) investors whose complaints in relation to the sale of the products have already been referred by the HKMA to the SFC for the SFC to decide whether or not to take any further action, or (2) investors whose complaint has already resulted in a finding against a relevant individual or executive officer by either the HKMA or the SFC.

Activation of the mediation process requires agreement from both the investor and the bank in question. Mediation is a form of voluntary dispute resolution which involves appointing a neutral mediator, who will bring the two parties together with the aim of settling claims in a speedy, confidential and amicable way, or of narrowing the issues in dispute. The mediator has no powers to decide or pass judgment on the dispute, but has training and experience in helping parties reach a negotiated settlement.

If, after mediation, the case remains unresolved, the HKMA suggests that the two parties consider agreeing to appoint an arbitrator with powers to decide the case on the basis of documentary evidence submitted by both parties. As with mediation, the initiation of arbitration requires the agreement of both parties.

For cases that the HKMA has not referred to the SFC for investigation, or cases that have not resulted in a finding against a relevant individual or executive officer by either the HKMA or the SFC, banks and customers could still try to settle these cases through mediation and/or by arbitration.

There are a number of organizations in Hong Kong which provide lists of mediators and arbitrators for the general public. The major providers are: the Hong Kong Bar Association, the Law Society of Hong Kong and the Hong Kong International Arbitration Centre (HKIAC).

2. Apart from the position of investors under common law explained above in Q1, what are the relevant statutes?

In Hong Kong, some of those principles mentioned above are incorporated in statutes. The Misrepresentation Ordinance, Chapter 284, Laws of Hong Kong is one of those statutes.

Section 2 of the Misrepresentation Ordinance provides:-

• “Where a person has entered into a contract after a misrepresentation has been made to him, and -
  (a) the misrepresentation has become a term of the contract; or
  (b) the contract has been performed,
  or both, then, if otherwise he would be entitled to rescind the contract without alleging fraud, he shall be so entitled, subject to the provisions of this Ordinance, notwithstanding the matters mentioned in paragraphs (a) and (b).”

Section 3 details damages for misrepresentation:-

• “(1) Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true.
  
  (2) Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising out of the contract, that the contract ought to be or has been rescinded the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party.
  
  (3) Damages may be awarded against a person under subsection (2) whether or not he is liable to damages under subsection (1), but where he is so liable any award under subsection (2) shall be taken into account in assessing his liability under subsection (1).”

Cap. 284 does not add to or alter the common law position outlined above.

As previously mentioned, the contracts between the investors and the banks would most likely contain a clause limiting or excluding the bank’s liability in case the investment failed. However, that does not mean that an investor is unable to pursue a legal claim against the bank.

The Control of Exemption Clauses Ordinance, Chapter 71, Laws of Hong Kong, is aimed at protecting a contracting party who is facing clauses excluding the liability of the other contracting party under their contract.

Section 7 of the Control of Exemption Clauses Ordinance covers “Negligence Liability”:-

• “(1) A person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence.
  
  (2) In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness.
  
  (3) Where a contract term or notice purports to exclude or restrict liability for negligence a person's agreement to or awareness of it is not of itself to be taken as indicating his voluntary acceptance of any risk.”

Section 8 provides for “Liability arising in contract”:-

• “(1) This section applies as between contracting parties where one of them deals as consumer or on the other's written standard terms of business.
  
  (2) As against that party, the other cannot by reference to any contract term -
  (a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or
  
  (b) claim to be entitled -
  
  (i) to render a contractual performance substantially different from that which was reasonably expected of him; or
  
  (ii) in respect of the whole or any part of his contractual obligation, to render no performance at all, except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness.”

In Hong Kong, contracts are generally required to be reasonable. The "reasonableness" test is laid down under section 3 of the Control of Exemption Clauses Ordinance.

Schedule 2 of the Control of Exemption Clauses Ordinance laid down the guidelines for the application of the reasonableness test.

To be effective, the exemption clause has to satisfy the “reasonableness” test.

1. What can an aggrieved investor do? Is it possible for them to get back the principal sum that they invested?

An investor could pursue legal action in tort [a wrong that involves a breach of a duty of care owed to someone else] and/or under contract law, as the facts suit. He could sue for damages in tort, or claim for damages for breach of contract and/or could also ask the court to rescind the contract so that he can get back what he paid.

The bank or financial institution would be pursued as the principal of the particular bank officer or broker in question who sold the “minibonds”. It would be difficult to pursue legal action against the issuers since the investor would normally have no direct dealings with them.

Moreover, the issuers of the products are most likely companies registered overseas with limited liability and limited financial resources. It would be fruitless to engage in legal action against the issuers directly.

Tort Law

A principal is liable for the negligence of his agent whilst acting in the course of his authority, as joint tortfeasors [persons who commit a tort] they are jointly and severally liable. If the principal gave the agent express or implied authority to commit an act which is wrongful under the law of tort, the principal will be liable, even though he may be the employer of an independent contractor.

Liability of the principal may also be founded under the doctrine of ratification. If one person commits a tort whilst acting on behalf of another person, albeit without his authority, and that other person later ratifies the act, he becomes just as responsible for the wrong as if he had authorised it initially, before its commission.

A bank, as the principal, would be vicariously liable for the actions of its employees who are acting in the course of their employment.

In order to determine whether or not a bank was negligent in selling the “minibonds”, the first thing to decide is whether or not a duty of care was owed to the investor.

Whilst a banker must exercise due care and skill in the business of banking, it is not part of his ordinary business to give advice regarding investments. In the normal course of events a bank does not owe a duty of care, whether in tort or in contract, to give any explanation or to advise the taking of independent advice, to a customer who comes to its premises in order to sign securities. However, if giving investment advice forms part of the ordinary business of a bank, the bank has a duty not to act negligently or fraudulently in giving such advice.

The manager of a finance company owes a duty of care to prospective investors where he claims skill and competence in investment, especially when he himself will benefit from the brokerage of an investment. The standard of care is that of an ordinary prudent and skilful financial adviser.

In other words, if a bank officer or broker professes himself to have skill and competence in investing in “minibonds”, a duty of care [a duty of care arises when one person undertakes an activity which could harm another person physically, mentally or economically] will be owed to the prospective investor.

If the bank assumed liability for the accuracy of the advice given and the customer relied on that advice, the bank will be liable to the customer under the tort of negligent misstatement.

If the investor relied on the bank officer’s words that the products were “just like a time deposit” or “100% principal-protected” (which in fact they were not), the bank would be liable (as the employer of the officer).

Contract Law

When an agent makes a contract on behalf of his principal with a third party, the transaction gives rise to legal effects between principal and third party, between agent and third party, and between principal and agent.

The general rule is that a principal, whether disclosed or undisclosed, is liable to the third party. An agent is neither liable under nor entitled to enforce a contract he makes on behalf of his principal. So if a bank officer or broker makes a contract on behalf of the bank or the financial institution with an investor, the bank or the financial institution will be liable to the investor under the contract.

There are 3 legal aspects an investor has to examine before taking legal action against the bank or financial institution involved: misrepresentation, undue influence and non est factum [not my deed]. These three terms are explained below.

Misrepresentation :

A person is guilty of fraudulent misrepresentation if he makes an ambiguous statement intending it to bear a meaning which is to his knowledge untrue, and if the statement is reasonably understood in that sense by the other party. In such a case it is no defence for the person making the representation to show that, on its true construction, the statement bore a meaning that was in fact true.

A misrepresentation is negligent if it is made carelessly and in breach of a duty owed by the representor [the person making the representation] to the representee to take reasonable care that the representation is accurate.

A misrepresentation generally has no effect unless it is material. That is, it must be one which would affect the judgment of a reasonable person in deciding whether or not, or on what terms, to enter into the contract; or one that would induce him to enter into the contract without making such inquiries as he would otherwise make.

There are two exceptions to the requirement of materiality. First, a person who has successfully perpetrated a fraud cannot be heard to say that the representation which he used to achieve this end was immaterial. Secondly, every representation is material if the contract so provides.

The person to whom the misrepresentation was made must have relied on it. He therefore cannot rescind, or claim damages, for misrepresentation if the representation did not come to his notice, if he knew the truth, if he took a deliberate risk as to the truth of the matter stated, if he would have entered into the transaction even though he had known the truth, or if he relied on his own information.

To give an example, if the customer would have purchased the products anyway no matter what the broker or bank officer told him, the broker or the bank officer could not be held liable as there was no reliance on them by the customer.

Under common law a person who suffers loss as a result of acting in reliance on a fraudulent statement can recover damages in court. He can generally do this whether he rescinds the contract or not, though he cannot pursue both remedies if this results in his recovering twice over for the same loss.

The general rule is that misrepresentation makes the contract voidable at the option of the representee.

Undue influence :

The law of equity [legal principles which reflect fairness when the strict application of law would give rise to harsh results] gives relief on the ground of undue influence where an agreement has been obtained by certain kinds of improper pressure exercised by one contracting party on the other party.

In a number of situations the relationship between the parties involved in the contract is such as to give rise to a presumption of undue influence; and in these situations there is no need to show that undue influence existed and had been exercised.

The relationship between a banker and a customer will not normally give rise to a presumption of undue influence; but it can do so in exceptional cases if the customer has placed himself entirely in the hands of the bank and has not been given any opportunity to seek independent advice. For instance, if a customer and his banker have a long standing relationship and he placed himself entirely in the hands of his banker when purchasing “minibonds” without having the opportunity to seek independent advice, a presumption of undue influence could be inferred.

Non est factum (“Not my deed”) :

As a general rule, a person is bound by his signature to a document whether he reads it or understands it, or not.

So an investor who singed a document or contract to buy “minibonds” is bound by it and the terms therein. The terms would inevitably include the “risk disclosure clause” (see above) and a clause limiting or excluding the bank’s liability when the investment falters. However, the law recognises that if a person who could not read executed a deed after it had been incorrectly read to him, he is not bound by it. He could plead non est factum (i.e. not my deed).

Non est factum can only be pleaded where the mistake of the signer was a serious one. The difference between the document as it was and the document as it was believed to be must be radical or substantial or fundamental. The plea of non est factum is not normally open to a person who is merely ignorant of (as opposed to mistaken about) what he is signing.

Carelessness of the signer excludes the doctrine of non est factum. The signer can not rely on the doctrine if he or she has been careless in signing the document without reading it. For the same reason, a person cannot rely on the doctrine if he signs a document containing blank spaces, and these blank spaces are filled in later by another party otherwise than in accordance with the signer’s instructions.

In order to succeed, an investor would have to show that he did not know what he was signing or that the document/contract was incorrectly explained to him.

IV. New Measures Added to Various Ordinances to Enhance Protection for Investors

The SFC has introduced amendments to its Code of Conduct for Persons Licensed by or Registered with the SFC (“the Code of Conduct”) to enhance protection for investors. The four major aspects of these amendments are: (a) investors characterization; (b) pre-sale disclosure of monetary and non-monetary benefit; (c) disclosure of sale related information; and (d) refund by distributors under a cooling-off period.

(a) Investors Characterization

Under the new paragraph 5.1A of the Code of Conduct, a distributor should assess a client’s knowledge of derivatives and characterize the client (other than professional investors for the purpose of paragraph 15 of the Code of Conduct) based on his knowledge of derivatives:-

“5.1A Know your client: investor characterization (with effect from 4 June 2011)
(a) A licensed or registered person should, as part of the know your client procedures, assess the client's knowledge of derivatives and characterize the client based on his knowledge of derivatives.
(b) Where a client without knowledge of derivatives wishes to purchase a derivative product (hereafter refer to as a “transaction” in this paragraph) which is:

(i) traded on an exchange and the licensed or registered person has not solicited the client or made a recommendation to the client in relation to the proposed transaction, the licensed or registered person should explain the relevant risks associated with the product to the client;

(ii) not traded on an exchange and the licensed or registered person has not solicited the client or made a recommendation to the client in relation to the proposed transaction, the licensed or registered person should warn the client about the transaction and, having regard to the information about the client of which the licensed or registered person is or should be aware through the exercise of due diligence, particularly the fact that he is a client without knowledge of derivatives, the licensed or registered person should provide appropriate advice to the client as to whether or not the transaction is suitable for the client in all the circumstances. Records of the warning and other communications with the client should be kept. If the transaction is assessed to be unsuitable for the client, the licensed or registered person may only proceed to effect the transaction if to do so would be acting in the best interests of the client in accordance with the general principles of the Code.”

(b) Pre-sale Disclosure of Monetary and Non-monetary Benefit

The New Code of Conduct requires distributors to provide relevant disclosure regarding the benefits they receive from product issuers for distributing their investment products. Under the new paragraph 8.3 of the Code of Conduct:-

“Information for clients”

8.3 Pre-sale disclosure of monetary and non-monetary benefits (with effect from 4 June 2011)

Part A

Disclosure of monetary benefits

Where the monetary benefits received are quantifiable

(a) Specific disclosure

Explicit remuneration arrangement

(i) Where a licensed or registered person and/or any of its associates explicitly receives monetary benefits from a product issuer (directly or indirectly) for distributing an investment product, the licensed or registered person should disclose the monetary benefits that are receivable by it and/or any of its associates as a percentage ceiling of the investment amount or the dollar equivalent.

Trading profit made from a back-to-back transaction

(ii) Where a licensed or registered person enters into a back-to-back transaction concerning an investment product, the licensed or registered person should disclose to the client the trading profit to be made. The trading profit should be disclosed as a percentage ceiling of the investment amount or the dollar equivalent.

Notes

For the avoidance of doubt, the specific disclosure should be made on a transaction basis.

As a minimum, a licensed or registered person should disclose the monetary benefits that are receivable by it and/or any of its associates or the trading profit in the form of a percentage ceiling of the investment amount rounded up to the nearest whole percentage point or the dollar equivalent. However, having regard to its own circumstances, the licensed or registered person may disclose a specific percentage or the dollar equivalent instead.

Back-to-back transactions refer to those transactions where a licensed or registered person, after receiving a purchase order from an investor, purchases an investment product from a third party and then sells the same investment product to the investor and no market risk is taken by the licensed or registered person.

(b) Generic disclosure

Non-explicit remuneration arrangement

(i) Where a licensed or registered person does not explicitly receive monetary benefits for distributing an investment product which is issued by it or any of its associates, the licensed or registered person should disclose that it or any of its associates will benefit from the origination and distribution of this product.

Where the monetary benefits received are not quantifiable:

(ii) Where the monetary benefits received by a licensed or registered person and/or any of its associates are not quantifiable prior to or at the point of sale, the licensed or registered person should disclose the existence and nature of such monetary benefits.

Part B

Disclosure of non-monetary benefits

(a) Where a licensed or registered person and/or any of its associates receives from a product issuer non-monetary benefits for distributing an investment product, the licensed or registered person should disclose the existence and nature of such non-monetary benefits.”

(c) Disclosure of Sale Related Information

Distributors are required to disclose sales related information to investors (i.e. the capacity in which a distributor is acting, any affiliation with the product issuer, monetary and non-monetary benefits received by distributor and including any discounts of fees and charges) prior to or at the point of sale.

A new paragraph 8.3A added to the Code of Conduct provides:-

“8.3A   Disclosure of sales related information (with effect from 4 June 2011)

(a) Where a licensed or registered person distributes an investment product to a client (including where it sells an investment product to or buys such product from the client), the licensed or registered person should deliver the following information to the client prior to or at the point of entering into the transaction:

1. The capacity (principal or agent) in which a licensed or registered person is acting;
2. Affiliation of the licensed or registered person with the product issuer;
3. Disclosure of monetary and non-monetary benefits (Please refer to paragraph 8.3 of the Code); and
4. Terms and conditions in generic terms under which client may receive a discount of fees and charges from a licensed or registered person.

(b) The disclosure must be made in writing, electronically or otherwise. The licensed or registered person should have adequate measures in place to ensure that the above information is provided to the client prior to or at the point of sale.

(c) In circumstances where provision of information in written form is not possible before a transaction is concluded, the licensed or registered person should make a verbal disclosure and provide such information in writing to the client as soon as practicable after the conclusion of the transaction.

(d)The information disclosed in written form should be in Chinese or English according to the language preference of the client.

Notes

The licensed or registered person should ensure that the disclosure in writing is prominent, is presented in a clear and concise manner and is easy for average clients to understand.”

(d) Refund by Distributors under the Cooling-Off Period provision

A “cooling-off” period has been introduced to the investment product whereby for a specified time period following their signing of a contract, an investor can change their mind about purchasing the investment product and exercise their right under this mechanism to back out of the purchase and get a refund (including any sales commission), less a reasonable administrative charge.

A new paragraph 13.5 has been added to the Code of Conduct:-

“13.5 Refund obligation

Where a cooling-off mechanism is incorporated in an investment product and a client exercises his right under such mechanism to cancel the order, sell the product back to the issuer or its agent, or otherwise unwind the transaction in relation to that product, the licensed or registered person should promptly execute the client’s instruction and pass on to the client the full amount of refund (including the sales commission (refer to Note 1 below) ) received from the product issuer less a reasonable administrative charge (refer to Note 2 below).

Notes

1 This includes any sales commission retained by the licensed or registered person in relation to that transaction.

2 The administrative charge should be disclosed to the client at or prior to point of sale and should not contain any profit margin.

This “post-sale” cooling period offers an additional layer of protection to the investors. The HKMA has also imposed a “pre-sale” cooling off period which applies to the period between the time of the provision of disclosure documents and the closing of the sale.

III. Actions may be taken

II. The Legal Position of investors

I. Background

On 15 September 2008, Lehman Brothers Holdings Inc. (LBHI) filed for bankruptcy protection under Chapter 11 of the US Bankruptcy Code. Subsequently, eight Lehman companies have been put into liquidation in Hong Kong. As a result of this, investors who had purchased Lehman retail investment products suffered huge losses and blamed banks or brokers for “mis-selling” Lehman “minibonds” to them.

Some investors may regard the term “minibonds” as misleading in that these investment products are not actually “bonds”, but are “structured products”. These are products which, in addition to an exposure to the credit or default risk of the issuer (or guarantor where applicable), contain an exposure to an underlying asset, opportunity, or risk that is usually unrelated to the issuer or the guarantor. These so-called “minibonds” are in fact credit-linked notes with payment of interest and redemption payout at maturity linked to the credit of specified reference entities (these reference entities are generally well-known companies) for each series of “minibonds”. The exact mechanism and nature of these products are very complex and may not be comprehensible to ordinary citizens (especially senior citizens) unless they are seasoned investors having in-depth knowledge of the financial market.

For most of these products, the issuer also entered into swap arrangements with a swap counterparty whose obligations were guaranteed by Lehman Brothers Holdings Inc. (LBHI). Under these swap arrangements, the amounts received in respect of the collateral are swapped for amounts payable by the issuer under the credit-linked notes. On some occasions, the issuer also entered into a credit default swap with the swap counterparty under which the swap counterparty paid a premium in return for the issuer’s agreement to deliver the collateral to the swap counterparty upon the occurrence of a specified credit event.

To put it simply, these structured products were tied to LBHI’s credit risks. They were sold as a way for the company to generate revenue, and that revenue was lost during the sub-prime mortgage crisis.

When purchasing “minibonds” at the recommendation of bank officers or brokers most investors did not see it as a bundle of derivatives that had the potential to turn into a ticking time bomb. Very often, an investor bought the “minibonds” after hearing only a brief presentation from the bank officer or broker in person, or even after hearing only a brief presentation over the telephone.

Some investors complained that they were told the products were “principal-protected” or “100% principal protected notes”, which were "like a time deposit". These products were sold as “a safe alternative to buying stocks” and “a low risk investment”. The investors would be entitled to the “promised annual interest”. Contrary to what the investors were led to believe, after LBHI filed for bankruptcy, the “minibonds” devalued to such an extent that the investors saw their principal investment sum vanish into thin air.

The banks and brokers, on the other hand, argued that the investors were all supplied with advertising brochures which stated very clearly that these products were not principal-protected and that they were "linked to the credits" of various companies including LBHI. The banks and brokers also argued that they provided investors with prospectuses that contained clear risk disclosures.

However, as previously stated, the mechanism and nature of these products are highly complex. Most investors would not be able to understand how they work even after reading the prospectus.