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Not enough correction from Goldman Sachs’s Hong Kong warrants

Case highlights the often-dysfunctional relationship between Hong Kong’s issuers, investors, exchanges and regulators, and how urgently reform is required

The controversy over Goldman Sachs’s misprinted Hong Kong warrants has mostly blown over now that a majority of investors look like accepting the settlement offered, but in the aftermath the bank and the regulator must ask themselves some serious questions.

First, some background. On March 31 warrants linked to Japan’s Nikkei 225 index and sold by Goldman Sachs began to spike in value, because, it now seems likely, a single investor had noticed what proved to be a small but serious error in the settlement documents. Rather than settle at (closing level minus strike level) times index currency amount divided by exchange rate, the original documentation multiplied the prevailing exchange rate. The substitution of a multiplication sign meant in theory the warrants were worth more than 100 times their intended value. Goldman Sachs acted quickly to request a suspension of trading of the warrants while the matter was investigated, and on April 21 announced it would buy back the warrants at 110% of the higher of the price paid or the total buyback value of the warrants, plus an admin fee of HK$5,000 ($643).

Nobody emerges from this mess with an enhanced reputation. Goldman will be embarrassed by an incident that has angered individual investors at a time when it is trying hard to avoid being seen as an arrogant and too-powerful institution.

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