The law of investor protection in the age of currency wars
Updated: 2013-05-23 05:31
By Andrew Mak(HK Edition)
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We are coming to an age where the common law on investor protection needs to be further developed.
Abenomics seems to have solved the biggest problem of Japan in recent years. The weaker yen was reported to have accounted for almost half the GDP growth in the recent quarter. The yen has dropped 30 percent against the US dollar and against the Chinese yuan since August, and 37 percent against the euro.
China is becoming an increasingly larger part of global trade as it continues to develop. And while Japan exports the most to China it competes directly with many other countries including the US and Europe for that business.
These complex changes in international economic trends followed by government actions, are not necessarily known to average investors in a growing sophisticated financial and stock market. On the other hand, it may not be odd to discover that law reports of the last decade are full of unsuccessful suits by investors against their banks for negligent or unsuitable advice. It will become even more difficult in future.
The reasons for the apparent lack of investor protection may not be that cynical. While there are possible causes of action in claiming breaches by the bank of contractual duty (in particular, through misrepresentation), duty of care, statutory duty and fiduciary duty, claims are often unsuccessful because the investor is a sophisticated investor; or is an institution rather than an individual; or has strong financial resources or of "high-net worth", and thus is in a good bargaining position.
The situation reminds me of a recent comment by the Singapore Law Gazette of the case of Deutsche Bank v Chang Tse Wen. Chang, a Taiwanese scientist, was about to receive a considerable amount of wealth ($118 million) through selling his shares in a company he founded. His relationship manager at Deutsche Bank courted him as a prospective client and was aware that Chang had limited investment experience. After a presentation by Wan (the manager), Chang opened an advisory account with the bank and signed a Service Agreement and a Derivative Agreement. The bank also extended to him unsolicited margin financing to the tune of $35 million. The bank then sold Chang derivative products called Discounted Share Purchase Programs (DSPPs), more commonly called accumulators. An accumulator is a speculative product which commits the buyer to purchase more of certain shares if its price falls below a specified price. It allows the seller to terminate the contract if the share goes above another specified price. Within a short period of time commencing November 2007, Chang purchased 34 DSPPs. Chang learnt for the first time in March 2008 that he had exposure of $78 million and thereafter faced several margin calls. Subsequently, in November 2008, the bank exercised its contractual termination and security rights and liquidated the shares in the account, with a net amount of close to $1.8 million owing to the bank. The bank sued for this sum while Chang counterclaimed for his investment loss of $49 million.
The Singapore Court decided in Chang's favor, holding that Deutsche Bank had breached its duty of care to Chang and that the disclaimers contained in the Service Agreement and the Derivative Agreement did not stop Chang's claim.
The case shows an evolving law in Singapore on the subject of investor protection. But it is a case decided on its own facts and the particular contractual clauses in question. There is more in the law of investor protection in Hong Kong that needs to be resolved as one aspires towards a highly well-reasoned legal framework. We need a legal framework which is able to discern and distinguish deserving and undeserving cases, and avoid focusing on features which may not be the sufficient or appropriate litmus tests, such as whether the parties are commercial or non-commercial, sophisticated or unsophisticated and of equal or unequal bargaining power. In particular, the law needs to be able, and for the right reasons, to conclude that an investor may have a remedy notwithstanding that he had signed a contract with clauses that appear to take away his rights, even if done to a party with substantial financial means. This will transform Hong Kong into an authentic international financial center with adequate investor protection.
The author is a Hong Kong barrister and chairman of the Hong Kong Bar's Special Committee on Planning and Policy.
(HK Edition 05/23/2013 page9)