HSBC, BNY Mellon Accused of Not Protecting Collateral

HSBC Holdings Plc and Bank of New York Mellon Corp. were accused in a lawsuit of failing to protect $1.6 billion in collateral for structured notes linked to bankrupt Lehman Brothers Holdings Ltd.

A class action filed last night by seven U.S. and Hong Kong investors in Manhattan federal court asks for HSBC and BNY Mellon to release the collateral rather than allow Lehman’s estate to seize it. Damages are also being sought from HSBC for alleged breach of contract, breaches of fiduciary responsibilities and negligence.

HSBC and its units are the issuer, trustee and custodian of about $2 billion of derivatives marketed as "minibonds," according to the complaint, while BNY Mellon is a custodian of part of the collateral. Hong Kong’s securities regulator is investigating complaints about Lehman minibonds, while the city’s legislature is holding its own hearings.

Hong Kong-based HSBC spokeswoman Vinh Tran denied that HSBC owned the issuer of the minibonds. "All the allegations implied or otherwise that HSBC marketed and sold the minibonds are wrong," she said.

Tran did not comment on the holding of the collateral. BNY Mellon’s New York-based spokesman Kevin Heine declined to comment when contacted late last night.

Hong Kong Investors

A total of HK$13.9 billion ($1.8 billion) of the credit- linked notes arranged by a local unit of Lehman were sold to Hong Kong investors, according to a study by the city’s Securities and Futures Commission released last month. Investors in the notes, which were also sold in Singapore, have accused banks and brokerages of misrepresenting the risks involved in the securities when selling them.

Bank of China (Hong Kong) Ltd., Bank of East Asia Ltd., Wing Hang Bank Ltd. and Dah Sing Banking Group Ltd. were among the 19 firms that sold the notes in Hong Kong, according to the local bank lobby. HSBC wasn’t among banks who sold the securities, the association said.

Sun Hung Kai & Co Ltd., Hong Kong’s biggest local brokerage, in January agreed to pay back HK$86 million to investors in the notes, the first and only agreement by a seller to provide a full refund. The firm acted voluntarily and did not admit any liability or wrongdoing.

In January, the Monetary Authority of Singapore said 58 percent of complaints on products guaranteed by Lehman would receive a full or partial settlement.

Hundreds of investors in the notes last month protested outside the Legislative Council buildings in Hong Kong and in front of branches of distributing banks in the Central business district as the hearings started, demanding compensation.

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

(Published by Bloomberg - March 13, 2009)