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SINGAPORE: There was an error in the formula that investors were told would be used to calculate any remaining value in their investments should there be a "credit event".
But, DBS Bank is arguing, this was such "an obvious clerical mistake", that it would be apparent to any investor who had read his or her documents thoroughly.
The bank responded on Thursday to a suit by more than 200 investors who had bought into the now-worthless Lehman-linked DBS High Notes 5 (HN5).
In documents filed with the High Court, the bank also highlighted its original disclaimer in the set of investment documents for the structured notes usually given to investors at point of purchase.
The disclaimer states that the bank gives no "representation whatsoever as to the truth, accuracy, completeness" of the information in the pricing statement, "save that (it) has taken reasonable care to correctly extract and/or reproduce such information".
The investors, who are represented by Premier Law's Mr Siraj Omar, had filed their suit in July, in which they claimed the documents had laid out four formulae to determine a "credit event redemption amount" (Cera) that were "different, inconsistent and irreconcilable".
The Cera is the amount investors would receive on their notes after the occurrence of a credit event, which in this case was triggered by the bankruptcy of Lehman Brothers last September.
These investors argued, the bank's documents did not provide any mechanism to resolve the inconsistency, rendering it impossible to calculate the amount - and, therefore, the contract between DBS and the investors was void.
Refuting this, DBS, which is represented by Senior Counsel Davinder Singh, insists that "the four Cera descriptions ... are accurate, consistent and reconcilable, except that the fourth Cera description contains an obvious clerical mistake."
Instead of stating the aggregate principal amount should be multiplied by the final price, the fourth description had erroneously included a "1-" (one minus) before the words "final price".
This mistake "would have been apparent to any HN5 investor who had read the rest of the pricing statement," the bank stressed. That's because the resulting calculation involving "1- final price" would have been "absurd" - the effect would have been that "the lower the prevailing market value of the defaulted reference entity's reference obligation ... the higher the amount each HN5 investor would receive".
This would "turn on its head" the risk that was undertaken and accepted by the HN5 investor, the bank pointed out in its affidavit. In return for the higher interest yield, an HN5 investor effectively agreed to take on the risk of financial difficulties that may be faced by the structured note's eight reference entities - one of which was Lehman.
Documents of the structured notes had also made it clear that investors could lose all of their principal amount in the event of a credit event occurrence.
Lastly, DBS noted that there was a "continuing common intention" between bank and investor, with regards to the calculation of the redemption amount, that existed "from the time the application forms were signed and submitted ... through the acceptance by" the bank.
In Singapore, more than 1,400 investors bought into $103 million worth of HN5. DBS has so far compensated $7.6 million to 197 affected investors based on the cases it investigated for mis-selling. - TODAY
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