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9/06/2011

When would stock exchanges be sued?

When the Lehman bonds and High Notes turned out to be lemons, many investors suffered huge losses across the world. There were compensations and pay back to some investors, notably the ignorant and less well educated uncles and aunties.

The well heeled and branded investors, known simply as sophisticated investors, were not so lucky. Even the sellers of the toxic notes were spared except some low level clever sales people who were found to have fouled only because they sold to the ignoramous. If the clever sales people targeted the intelligent and sophiscated investors, it was caveat emptor. No trouble at all. Under the same logic, they could even sell poison.

The bottom line is that the notes were dangerous but intelligent investors should know the risks involved. They were dangerous but not poison. They were not snake oil but high risks financial instruments.

The financial institutions were taken to task not because of faulty products but not telling enough of the risks. No one really was found guilty of any crime except some low level sales people, also not for crime but maybe a bit negligent.

Last week the American govt took up a suit against more than a dozen financial institutions for selling flawed products during the housing crisis. What this means is that someone and some institutions could be found guilty. The names of those senior people instrumental in the packaging of the toxic products have been compiled and awaiting prosecution. This is a serious development as the products were never seen to be at fault.

What if the banks and financial institutions were found guilty of selling snake oil or fraudulent products, or guilty of fraudulent practices? Would the banks and financial institutions here also be found guilty for selling snake oil as well? At the moment everyone is walking around with a hallow on his head, like angels. Water under the bridge, no point digging out shit to get people to court.

The seriousness of the American govt suit against the financial institutions and the legal implications can be widespread, depending on the findings. If fraud can be established, many heads will roll. Those heads over here may have to face the music as well.

An interesting article in the ST yesterday titled America’s great bank robbery by Nassim Nicholas Taleb and Mark Spitznagel is worth reading. It discussed the elaborate schemes of bankers and fund managers in transferring their client’s wealth into their own personal accounts. This kind of day light robbery is not confined to the US but affected all the financial systems modelled after them. The same players, the same systems and the same copycats, all lining their pockets with quick easy money.

Would the stock exchanges be next to be sued?

6 comments:

Anonymous said...

I would say that we should use the same legal principle for both drugs and financial products.

Manufacturers of defective drugs are legally liable.
Distributors (drug stores) are not liable.

By this logic, the stock exchanges (distributors) are not liable.

Likewise:
Consumers of defective drugs are allowed to sue the drug manufacturers.
Caveat emptor does not apply because the drug companies have more information at their disposal.

See "information asymmetry" below.

http://en.wikipedia.org/wiki/Information_asymmetry

Chua Chin Leng aka redbean said...

Give you another example. If the drug is a control drug, poison, and not to be sold over the counter, except with doctor's prescription.

What if the distributor or drug store chooses to sell openly knowing well that it will kill? the profit is good and they don't care if the customers got poisoned?

Anonymous said...

Dear Mr Chua
If the law already says the drug is controlled.
Can only sell with doctor's prescription.

And the distributor still sells the drug without a prescription.
Then the law has been broken.
And the distributor is clearly legally liable.

Not sure if I have addressed your point.

Chua Chin Leng aka redbean said...

Hi anon 11:17,

That's exactly what I was trying to say. We sell no snake oil. But my snake oil is not snake oil.

The point that I am trying to push is a bit trickier. Let me try another example. If a pharmacy claims to sell only reputable and well proven drugs but decided to sell some drugs that may not be that reputable but other people are also selling it, and the profit is good.

Lemon bonds and many toxic products were sold that way, would not die immediately, but poison is poison and will strike, only when.

Anonymous said...

Dear Mr Chua
I'm not a lawyer, so I can only use logic rather than principles of law to discuss the scenario you raise.

For a distributor to be liable, he must have knowledge that the drug is defective. For example, the distributor conducts his own tests to determine the effectiveness of the drugs in question.

If the distributor has such knowledge, and proceeds to sell the drugs anyway, then the distributor is liable.

This is why distributors don't conduct such tests.

I believe it's called "plausible deniability".

http://en.wikipedia.org/wiki/Plausible_deniability

And that is why when a high level political meeting takes place, meeting notes are extremely sparse if any.

Anonymous said...

MAS ( Monetary Authority of Singapore ) is the authority which oversees all financial institutions in Singapore. MAS holds the ultimate responsibility for allowing toxic American financial products to be sold in Singapore and therefore it should be held responsible for paying compensation to the victims.

It was also responsible for allowing Malaysian Clob shares to be transacted in Singapore thus causing Singapore investors to lose billions of dollars. Instead of owning up the responsibility and pay compensation to Clob share victims, MAS shirked responsibility by turning the table on the victims claiming that they bought the Clob shares with open eyes, intentionally forgetting that it was the authority which claimed that it was legal for Singaporeans to trade in Malaysian Clob shares.

Sg