LM’s Unauthorized Fund Documents: Distribution to the Public Was a Criminal Offense

[The information in this blog post is intended to be a resource for LM victims in Hong Kong who are filing complaints with SFC, OCI, the police, and any other authority. A link to this post has been sent to all authorities. If any readers are not familiar with the LM scandal, read the the SCMP article, When an Investment Fund Goes Bad.]

LM MPF Information Memorandum Dec 2012

The LM Managed Performance Fund (MPF) was not authorized by the SFC for distribution to the Hong Kong public. According to Section 103 of the Securities and Futures Ordinance, it would have been a criminal offense for a financial adviser or insurance company to issue any of the related MPF fund documents (such as the Fact Sheet or Information Memorandum) to a non-professional investor. The penalty for an offense is a fine of up to $500,000 HKD and up to three years imprisonment.

Several LM victims who were interviewed by the South China Morning Post said that they were not asked to prove that they were professional investors, and “on their application forms, the sections regarding professional investor status [were] crossed out.” Presumably, these investors were not professional investors.

SFC Issued a Warning to the Industry in 2005

SFC Issued Another Warning to the Industry in 2009

Many LM victims were sold the MPF fund through a “portfolio bond”, which is a type of life insurance policy called an investment-linked assurance scheme (ILAS). ILAS policies, like investment funds, must be authorized by the SFC before being distributed to the Hong Kong public. If either the ILAS policy or the underlying investment funds are not SFC-authorized, it would be illegal to issue an invitation, advertisement, or other document inviting the public to purchase these products.

Even LM Warned Financial Advisers and Insurance Companies to Avoid Breaking the Law

LM Investment Management was fully aware of Hong Kong’s laws regarding the marketing of unauthorized funds to the public. That is why nearly every document that LM issued contained a warning to intermediaries which stated, “Not for distribution to Hong Kong public.”

Here is an excerpt from one of the MPF Fact Sheets, dated November 2012. See the red arrow:

Excerpt from the Jan 2013 LM Fact Sheet (Highlighted)

Excerpt from the LM MPF Nov 2012 Fact Sheet

Financial Advisers and Insurance Companies Broke the Law Anyway

The MPF Information Memorandum for bond providers (i.e., insurance companies) was packaged together with the MPF Application Form. The Information Memorandum states that it is designed for bond providers to give to their policyholders (“Indirect Investors”) for the purpose of providing information to them about the fund. The Information Memorandum also states that policyholders should read the Information Memorandum before directing the bond provider to invest in the MPF on their behalf:

In other words, the bond providers had a duty to give the MPF Information Memorandum to their policyholders, so that the policyholders could read the document and make an informed decision about whether they wanted to be exposed to the risks of the MPF.

If the bond provider gave the Information Memorandum to a Hong Kong policyholder who was not a “professional investor”, the bond provider would have committed a criminal offense.

As reported by SCMP, several LM victims who invested in the MPF, apparently through a portfolio bond, were never asked to show proof that they were a “professional investor”. These investors were presumably not professional investors.

When submitting the MPF Application Form, bond providers were required to affirm that they had broken no laws, such as when they gave the Information Memorandum to their policyholders:

Bond providers could not have given the Information Memorandum to a non-professional investor without breaking the law. It may be the case that some bond providers additionally committed an act of fraud by affirming that they did not break any laws.

Fraud is an act of deception perpetrated for financial gain. Bond providers clearly had something to gain when investing in the MPF. As explained by whistleblower Martyn Terpilowski, the LM MPF fund was very popular with advisers because the fund paid such high commission—as high as 15% upfront. Bond providers who did not process applications for the MPF fund risked losing business to their competitors, as advisers would simply advise clients to use an alternative bond provider who would process the application. 

Bond providers are not the only ones who may have broken the law. Advisers also had a duty to give the MPF fund documents to clients. According to a 2010 MPF Fact Sheet (which was for “Adviser / Intermediary Information Only”), the fine print stated that “investors must have read and considered the current Information Memorandum before investing in or holding this product”.

March 2010 Fact Sheet - Adviser or Intermediary Information Only (Highlighted)

LM MPF March 2010 Fact Sheet. “For Adviser / Intermediary Information Only”

Investors Must Have Read the Information Memorandum Before Investing - March 2010 Fact Sheet (Underlined)

LM MPF March 2010 Fact Sheet. Investors must of have read the Information Memorandum before investing.

If advisers gave the Information Memorandum to any clients who were non-professional investors, they committed a criminal offense.

SFC Must Hold Lawbreakers Accountable to Deter Future Violations and to Ensure that Victims Receive Justice

There is very strong evidence that both insurance companies and financial advisers (i.e., insurance brokers) violated Section 103 of the Securities and Futures Ordinance when they distributed the LM MPF fund. I hope the SFC will look into this matter further and punish anyone who is guilty of breaking the law. This will deter other insurance companies and financial advisers from feeling tempted to break the law again in the future.

However, the top priority of the SFC should be to keep in mind that many LM victims are retirees who have lost their life savings. These victims are facing and will continue to face severe financial hardships unless they receive compensation.

The SFC should also note that LM victims are scattered across the world, yet it appears that no regulator in any country has taken action against the financial advisers and insurance companies who irresponsible/unethically/illegally distributed the LM funds to their clients. I have personally been in contact with LM victims from more than half a dozen different countries, and a number of them have told me that they are all closely watching developments in Hong Kong, as they are hopeful that Hong Kong regulators will be the first to act and set a precedent for regulators across the region.

I hope the SFC does not let these people down.

LM’s Unauthorized Fund Documents

Below is a list of all the unauthorized LM fund documents which have been forwarded to me by several different sources. Click on the links to download.

LM MPF Summary Flyer – July 2008

LM MPF Fact Sheet – March 2010

LM MPF Summary Flyer – Sept 2010

LM Portfolio Bond Commission Instruction Form – Jan 2011

LM MPF Information Memorandum – 22 Feb 2011

LM MPF Rate Sheet – March 2011

LM MPF Fact Sheet – 30 June 2011

LM MPF Fact Sheet – 31 August 2011

LM Product Range and Upfront Commission Rates – 6 Oct 2011

LM – A Safe Harbour for Nervous Investors – 7 Dec 2011

LM MPF Fact Sheet – 30 Nov 2012

LM MPF Disclosure Update – 30 Nov 2012

LM MPF Information Memorandum and Application Form – 14 Dec 2012

LM MPF Fact Sheet – 31 Jan 2013

LM MPF Disclosure Update – 31 Jan 2013

LM MPF – List of Portfolio Bond, Platform, Trust, & SIPP Providers – 31 Jan 2013

Anyone who has more LM documents which are not listed here, please send them to me (lindelll@gmail.com), and I will add them to this list.

New Additions (Added on 23 Jan 2015)

LM MPF Three Highlights – Nov 2009 – Coomera Capalabra, Runaway Bay

LM MPF Information Memorandum – 25 Nov 2009

LM MPF Information Memorandum – 1 Nov 2011

LM MPF Audited Annual Report – 30 June 2012

LM MPF Update – Dec 2012

Peter Drake Responds to Questions about LM MPF – 1 March 2013

The Law: Section 103 of the SFO

Below, I have provided screenshots and links to sections of the law which I think are the most relevant to LM victims. Note that I am not a lawyer, so maybe I overlooked something.

Section 103 of the SFO states that it is an “offense to to issue advertisements, invitations or documents relating to investments in certain cases” (e.g., to non-professional investors). Note that the LM MPF was a “collective investment scheme” as mentioned in paragraph (b) below.

The Offense

Section 103(1) of the SFO

Section 105 of the SFO grants the SFC the ability to “authorize issue of any advertisement, invitation, or document which is or contains an invitation to do any act referred to in Section 103(1)” above. The MPF fund documents were not authorized under Section 105 of the SFO.

Penalty for an Offense

The maximum penalty for an offense is a fine of up to $500,000 HKD and 3 years imprisonment.

Section 103(4) of the SFO

Exceptions to the Rule

Unauthorized funds and related documents can be issued to “professional investors” without committing an offense.

Section 103(3) of the SFO

Section 103(3k) of the SFO

The Definition of a “Professional Investor”

The definition of a professional investor is described in several paragraphs in Schedule 1 of the SFO. The relevant paragraph is (j):

Definition (j) of Professional Investor in Schedule 1 of the SFO

Section 397 of the SFO grants the SFC the ability to make rules.

The rules made by the SFC regarding “professional investors” are located in two places. The first place is in the SFO under the Securities and Futures (Professional Investor) Rules Section 3. The part which concerns LM victims is paragraph (b), which states that individuals who have a portfolio of $8 million HKD or more will be regarded as professional investors:

Professional Investor - SFO Rules

The second place which describes SFC’s rules regarding “professional investors” is in SFC’s Code of Conduct, beginning on page 35:

Professional Investor - SFC Code of Conduct

Anyone who knows more about Hong Kong law than I do may feel free to leave a comment below or email me if I have left out any important information or made a mistake. (lindelll@gmail.com)

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