Citigroup and the ""I kill you latter" scam

[CARLHAYDEN]

From Forbes (its very funny how Citigroup got involved in anothe scam):

Wall Street's China Stock Gambit
Gady Epstein, 08.27.09, 06:00 PM EDT
Forbes Magazine dated September 01, 2009
What were Goldman Sachs and Citigroup doing selling something called ''I-Kill-You-Later''?
 
Hao Ting, who owns a petroleum-equipment business in Beijing, recalls the investment sales pitch from her private banker in Hong Kong at Singapore's DBS Bank: "The world is made for wealthy people. The more wealth you have, the easier it is to make money." Today she's out $10 million and owes the bank another $12 million. Hao and the bank are now suing each other in Hong Kong, with the bank saying it followed "local regulatory guidelines."

The investment opportunity that Hao fell for was all the rage at the peak of the stock market two years ago. The marks: often Chinese entrepreneurs and state-owned enterprises. The banks selling the investment: firms including Goldman Sachs ( GS - news - people ), HSBC ( HBC - news - people ), Citigroup ( C - news - people ) and UBS ( UBS - news - people ).

Yahoo! BuzzWhat is this too-good-to-be-true investment? The sellers call it an "accumulator," but disillusioned buyers have come to know it as the "I-Kill-You-Later." Here's how it worked: You commit to accumulating large blocks of shares of a Hong Kong-listed stock every day for, say, 12 months at a discount to the share price when you sign up. You could load up on lots of a $10 stock for just $8. Easy money.

The catch is that an accumulator contract terminates if the stock goes up only 5% or so, but if the stock tanks, you have to keep buying it. Then comes the I-Kill-You-Later part: If your $10 stock drops below the discount price of $8, you have to double up how many shares you buy each day. If you don't have enough cash, the bank extends credit or demands that you pay up to cover the rest of your contract, often adding up to large multiples of your initial outlay. "These are designed to rip people off," insists Jie Gan, a finance professor at Hong Kong University of Science & Technology.

In Hong Kong, where most of the selling takes place, regulators estimated there were $23 billion in still outstanding accumulator positions in April of last year; add in leverage, and the real amount at risk was much higher.

Chinese entrepreneurs and companies were on the hook for much of that, and many were slaughtered in the bear market. Accumulator victims included Hong Kong tycoons, possibly hundreds of mainland millionaires and state-owned Citic Group's Hong Kong affiliate Citic Pacific, which piled up paper losses of $2 billion last fall on currency-linked accumulator bets placed with several banks, including HSBC and Citigroup.

But in a commentary this spring in the Chinese business publication Caijing, finance lawyer Mushtaq Kapasi, a former Goldman Sachs specialist in exotic derivatives, described how banks structured accumulators to have a big edge over the customer, like the house over the bettor in a casino. Whatever exposure they had with the accumulator client they could hedge away with other derivatives, all but locking in a profit.

Banks aren't likely to lose big in court, either. Hong Kong and China don't allow American-style class actions, so clients like Hao Ting have to try their luck one case at a time. Most moneylosers are staying silent, including some who have lost tens of millions of dollars. Fear of embarrassment and of unwanted official interest in their financial affairs keeps mouths closed.

Additional reporting by Li Jie.

TOO GOOD TO BE TRUE

Here's how "accumulator" contracts work and why they can be dangerous:

1. Investor commits to accumulating large blocks of shares of a Hong Kong-listed stock every day for, say, 12 months at a discount to the share price when he signs up. A $10 stock for only $8, for example.

2. If the stock goes up a certain amount, often only 5% or so, accumulator contract terminates.

3. If the stock tanks, investor has to keep buying it, even doubling number of shares he had agreed to buy each day.

[opebo]

... "The world is made for wealthy people. ...

Well at least this part was extremely honest.