Three years and 1.5 million yuan later, Chinese investor Song Wenzhou thought he had finally settled his landmark battle with a foreign bank in June 2011. However, his nightmare returned with a vengeance earlier this year when he discovered that another 4 million yuan of his money had gone missing, again related to the same bank.

Big Profits Look so Pretty
For 49-year old Song, the story dates back 4 years. In March 2008, he was contacted by Wang Wei, a client finance manager at Standard Chartered Bank (China) Ltd., the China unit of the British lender, looking to sell him financial products. According to Song, Wang had been in charge of his investments at Bank of China Ltd., where he had previously had his business. The two had had a strong business relationship which had built up a special trust between them, so Song agreed to sign up to two products being offered by Wang.

Specifically, Song says, he agreed because Wang had assured him that the products had the option of early redemption, allowing the investor to cash out to prevent losses even though the principal was not protected in such a structured product. So on March 11 and March 14, 2008, Song bought two products over the phone, as he was in Japan at the time.

The products he bought were Qualified Domestic Institutional Investor series equity linked convertible structured investment QDSN08012E(CNY) and QDSN08017E (CNY) for a total investment amount of 63 million yuan (about $9.02 million at the exchange rate at the time).

According to the term sheet, both products included two sub-schemes. Take QDSN08012E, which was composed under sub-scheme A&B. Under sub-scheme A, the bank invested all proceeds in an offshore product, Merrill 1 Lynch 1.5-Year EUR Bank Stocks Linked Convertible Structured Note. Sub-scheme B invested in Merrill Lynch 2-Year EUR Share Linked Non-Principal Protected Structured Note.

The two products Song bought had the same structure; the only difference was the shares they were linked to.

According to the term sheet, if the condition for maturity is fulfilled, sub-scheme A will be automatically converted into sub-scheme B; if the maturity condition is not fulfilled, sub-scheme A will mature accordingly and the whole investment will be terminated. The maturity date of sub-scheme A was Sept. 21, 2009; the issue date of sub-scheme B was Sept. 28, 2009 and the maturity date was Sept. 28, 2011.

But on May 19, 2008, although the product was doing well, Song decided to redeem the product because he needed the principal to be returned. Wang, however, insisted the economic situation was good and that there were still plenty of opportunities to profit, and warned that a loss would be incurred if the product was redeemed at that time.

A few months later the financial crisis exploded and shook the global economy, causing the value of the products Song had invested in to fall.

Song was starting to grow increasingly concerned about the safety of the product and was confused about whether he could pull his money out early of not; when he’d called the bank the previous April he’d been told that the product couldn’t be redeemed early.

Frustrated that he couldn’t get a satisfactory response, Song made an appointment to see Zhang Yongxin, the president of Standard Chartered’s branch in Zhongguancun, which is located in an area of Beijing known as “China’s Silicon Valley”. “When we had tea at noon, Zhang told me to take it easy, for the product could absolutely be redeemed,” Song recalled. “[But] when I called him at 9pm [the same day], he suddenly told me that after a meeting, they [the bank] found that the product couldn’t be redeemed early”. The response was undoubtedly a shock for Song.

As time wore on, no further progress was being made on redeeming the product early; on the contrary, his investment was shrinking like a sponge, down by more than 80 percent, or a loss of 53 million yuan. So, in June 2009, Song moved to sue the bank’s Zhongguancun branch for the return of his 64 million yuan principal.

Courtroom Confrontation
At the court, Song sued for the termination of the contract and for the principal to be returned. He said that the product should be eligible for early redemption under sub-scheme A. He also insisted that not only when buying the product, but also when signing the contract, that the customer finance manager had explicitly stated the product could be redeemed early. To support his case, he had a copy of a vital phone call with Wang that he had recorded.

The bank disagreed, saying that the risk disclosure in the term sheet only applied to sub-scheme A. According to item 16.1, the product couldn’t be redeemed in the A period; the early redemption right only applied to the B period.