Federal Regulators Investigate 10 States for Brokers Selling Improperly Structured Notes

October 28, 2011

Federal Regulators Investigate 10 States for Brokers Selling Improperly Structured Notes

Financial Regulators in 10 states including Florida, Texas, New Hampshire and Missouri, are examining whether brokers improperly sold structured notes; securities that package debt with derivatives which are typically offered to individual investors.

This financial product was marketed to customers as a solid and secure investment.  They are called a ‘100 percent principal protected absolute return barrier notes,’ complex debt instruments whose pay-offs are linked to the performance of reference stocks, indices, commodity prices, interest rates, or exchange rates.

The regulators are investigating whether investors received adequate disclosure of the risks associated with this product from their financial advisers. Investors in these securities have suffered billions of dollars in losses since the financial meltdown in 2008.

Brokerage firms often issued these securities; many investors bought Lehman Principal Protected Notes marketed by Lehman Brothers, Citigroup, Merrill Lynch, UBS and Wachovia. Those notes are now virtually worthless.

The Swiss bank UBS sold $1 billion of these Lehman structured products to investors before Lehman Brothers Holdings Inc. went bankrupt.

Investors sought legal counsel and filed arbitration claims against UBS and other financial institutions which sold these securities. The claimants have been successful in at least seven of the cases against UBS; a single loss was reported of an investor who was not represented by an Attorney.

$8 billion worth of Lehman principal-protected notes were outstanding at the time of their bankruptcy, and of this total over $2.8 billion of these ‘notes’ were sold in 2008.

The Securities Litigation and Consulting Group, a financial economics consulting firm, analyzed 14 issues of these principal-protected notes. Their findings discovered over half carried a yield of less than 2 percent. Their analysis concluded that, “Investors would be better off investing in Treasury securities,” more than half the time.

Publisher: Salient News