Structured Products Attorney - Structured Products, Lehman Brothers Principal Protected Notes and Bankruptcy

The Campaign to Make Structured Notes Transparent: Is the SEC on a Fool's Errand?

Structured notes have been around since the 1980s, but for years sales were restricted to institutional investors.  With the recent surge in sales to retail investors, the SEC is demanding more transparency.  According to American Banker, over the past twelve months the SEC's Office of Capital Market Trends has been trying to obtain information from Citigroup, Bank of America, JPMorgan Chase and other structured note issuers about their pricing practices and risk warnings for these products. 

The question is whether it is even possible to make structured notes transparent. 

Structured notes come in many forms, including the reverse convertibles that are the subject of our December 19, 2012 article.  These products are so complex and variable that it is difficult to come up with a single definition that applies to every type of structured note.  In their most basic form, they are unsecured loans that - instead of paying interest like regular notes and bonds - pay returns based on a derivative tied to an index, equity or fund.  Like any debt security, structured notes are subject to the credit risk of the issuer.  However, that risk is often not made clear to retail customers.  The SEC is asking that sellers provide prominent warnings about credit risk.

Structured notes are being marketed to investors as attractive alternatives to bonds in the low-yield environment that currently exists.  However, the pricing of structured notes is not at all the same as the pricing of bonds.  The SEC is concerned that issuers and financial advisors are not adequately explaining those crucial differences to investors.

Pricing Concerns: Structured products are difficult to value, since they are illiquid securities that often reference hard-to-value derivatives.  Furthermore, the issuer often adds inadequately disclosed fees that add to the cost to the customer.  The absence of an active secondary market for structured notes can hide both the inflated valuations and the added costs.

It is common practice for issuers to estimate the value based on the prices of other bonds and derivatives that are traded more often.  This practice can lead to estimated valuations that are not just inaccurate; they can be misleading.

In a letter to JPMorgan quoted in American Banker, SEC Office of Capital markets Chief Amy Starr expressed concern about using more widely traded derivatives to arrive at these estimates (called “mid-market inputs”).  "If you do not use mid-market inputs, we believe you should disclose this fact, describe what you use, and the risk that the embedded derivative is being valued differently than other similar derivatives."

Of even more concern, is the possibility that the issuers’ valuations may purposely inflated.  Sometimes multiple, inconsistent values are placed on the same product.  The American Banker reports that the SEC is also questioning banks’ practice of providing customers with valuations for the notes that are higher than their own internal valuations.  

Can the SEC make structured notes transparent enough for the average investor to understand their value and their risks? Not according to Norway.  In 2008, the Norwegian government made it unlawful to sell structured notes to retail investors. Five years later, the SEC is still trying to put duct tape on a product that may very well be unfixable.

Reverse Convertible Concerns

Reverse convertibles are a type of structured note.  It is essentially is an unsecured loan to a company – the note component – wherein at maturity the investor may receive common stock of a publicly traded company that the structured product is tied to as opposed to repayment of the principal amount of the loan.   In other words, if you buy a structured note tied to Microsoft stock, then the lender can repay you the principal loaned to you if Microsoft’s stock price goes up and, if the price of Microsoft stock goes down below the knock in level/barrier during the life of the loan, the investor can get put a predetermined number of shares of the stock to you instead of repaying any of the principal of the money loaned. Reverse convertibles can be notes tied to individual stocks or stock indexes or other indices. Also, firms sell inverse reverse convertibles, which have knock in levels when the underlying stock goes up rather than down.

You may own Reverse Convertible notes without even knowing it.   Because each brokerage firm has very different names for these products,  “Reverse Convertible” is usually not part of the name. Regulators share some of our concerns regarding these products.  It is our belief that the major brokerage firms are overselling reverse convertibles to fixed income investors looking for low risk products with better returns than are now available from traditional fixed income products. 

The complexity of reverse convertibles leads some regulators to believe that many individual financial advisors do not fully understand the product they are recommending. Some regulators have also asserted that reverse convertibles should only be recommended to investors who are approved to do options trading.    

Although trying to describe reverse convertibles can be complicated and confusing, it can be greatly simplified by replacing Wall Street with an individual investment advisor.  Consider, the following example:

One’s trusted investment advisor coming to their home one night and says, “I have a great investment for you. I would like you to give me a loan for $100,000 with a term of one year.”

 He doesn’t say what he needs the loan for or even that he needs a loan.  Rather, he is recommending this deal to you as a good investment. He could go to the bank and borrow the money, but they would require him to secure it with collateral that the bank could seize in the event he didn’t pay back the loan with all interest.

He says, “so, as your trusted advisor, in order for me to make this a good deal for you, I need that $100,000 on an unsecured basis.  As an incentive, I will pay you extra interest over the life of the loan.” He offers two methods of recovering your money, “when the loan matures, either you will get you your money back with interest or you will get back today’s value in the stock of Microsoft which is selling at $25 a share, so you would get 4000 shares.”

What the client may not understand is that the financial advisor determines whether the loan will be repaid or whether he will get the stock instead. Simply put, the investor gets the $100,000 loan repaid with a bit of interest back if Microsoft stock goes up, or the investor gets 4,000 shares of Microsoft stock if the share price drops.  In the latter case, the investor gets  less than the original amount borrowed. This trusted financial advisor assures his client that this is a good deal for him.

Now, setting aside the significant risk of loaning significant funds on an unsecured basis (credit risk), this trusted advisor now has the client’s $100,000 to use or invest however he sees fit. For the sake of this example, let’s say he already owns the 4,000 shares of Microsoft in his personal portfolio when he makes this proposal. If Microsoft’s stock drops to $10 a share, the trusted advisor is covered. He simply delivers 4,000 shares of Microsoft, now valued at $40,000 and he  keeps the $100,000. He just purchased $100,000 for only $40,000. If the price of Microsoft goes up to $50 a share, the advisor sells his 4,000 shares of Microsoft for $200,000, returns the investor’s $100,000, and pockets the extra $100,000.  The client took on enormous risk in order to benefit the advisor, and while the client might come out a little bit ahead, it is the advisor who took on no risk and made all the profit.

The only difference between this example and what is going on today in major brokerage firms around the country is that the loan is being made to the Wall Street firm where your trusted advisor works rather than directly to your trusted advisor.  

As you can see from this example, reverse convertibles pose unique risks in addition to the risks that are common to other forms of debt securities.  While a traditional short term note exposes the purchaser to the issuer’s credit risk (will the issuer be able to repay the debt?) and the liquidity risks of other forms of structured products, investors in reverse convertibles are also separately and additionally exposed to the risk of a decline in the price of the referenced stock.  Those risks were dramatically demonstrated when Lehman Brothers collapsed and the issuers of notes tied to Lehman stock were able to avoid repaying the loans by substituting worthless Lehman stock from their own inventory for the note.   

Wall Street focuses on the potential for the (capped) gains in portraying this as a good investment  while ignoring the conflicts of interest and the profiteering off the deal by Wall Street.  However, we at Vernon Healy believe because this this huge conflict of interest is not acknowledged, even the best financial advisors may be hampered in their efforts to  put the interests of the client first. 

Lending Facility Concerns

While many investment advisors are recommending structured products to their clients, many investors are left wondering what structured products are. These are highly complex derivatives with pitfalls and risks that are inadequately disclosed.

Structured products, also known as structured notes, are now being used by major brokerage firms to turn their own client base into a lending facility. The underlying concept for structured products is disturbing in that your trusted financial advisory firm or wealth management firm is advising you, the client, to loan money to it – or one of its brethren on Wall Street – on an unsecured basis.  These same firms summarily fire individual financial advisors who solicit loans from their clients. Similarly, regulators such as FINRA, the Financial Industry Regulatory Authority, regularly investigate and punish individual financial advisors who borrow money from a client. The fairness of the terms and return is immaterial, financial advisors are forbidden from soliciting loans from their own customers.   

However, FINRA and the brokerage houses turn a blind eye when it is the firm thaqt solicits the loan.  There is an industry-wide willingness to disregard the massive conflict of interest created by a brokerage firm borrowing money from its own clients on a widespread basis that is embedded in these structured note products.

When investors buy a structured note issued by their own brokerage firm, the money is essentially an unsecured loan for that brokerage firm to use for operations or however it sees fit.   Why would the major brokerage firms borrow money from you instead of going to a bank or institutional lender?  In our opinion, they aren’t doing this to provide you with a wonderful investment opportunity, but rather they’re doing it because they can get much better loan terms from you than they could get from a banker or professional lender.

In the March 2012 issue of AARP Magazine, Vernon Healy co-founder, Chris Vernon, succinctly explained the problems with structured products when he was quoted as saying “The financial industry is effectively using structured products to borrow billions of dollars from Main Street investors with no collateral.”

The Lehman bankruptcy graphically illustrated the dangers associated with structured products. Beyond the fallout of the Lehman bankruptcy, at Vernon Healy we remain concerned about the promotion and sales of Structured Notes (which are still being heavily sold to retail investors in our home city of Naples and throughout the country by the big financial institutions).

Vernon Healy files another $800,000 in claims against UBS on behalf of Lehman principal protected notes investors

Naples, Fla. — UBS fraudulently misrepresented the safety of so-called Lehman principal protected notes that the firm sold to two elderly widows at a time when UBS knew of Lehman’s increasing financial desperation, according to separate claims filed today by the Vernon Healy investor advocacy law firm. 

The promised principal protection constituted a gross deception because the Lehman notes represented nothing more than unsecured loans by the investors to a financially faltering Lehman, according to the claims.

UBS knew of Lehman’s financial desperation — more than a year before Lehman filed bankruptcy — and was loaning Lehman money at predatory rates behind the scenes so that Lehman could remain solvent, according to the claims.
 
One woman, an elderly widow, was sold $750,000 in Lehman principal protected notes and Lehman structured products, in the last year of her life, according to the claim filed by Vernon Healy on her behalf today. She died in September 2008, the same month that Lehman filed bankruptcy, leaving behind 19 great-grandchildren.

The other woman, an 83-year-old widow from Naples, was sold $50,000 in Lehman principal protected notes in January 2008, less than nine months before Lehman Brothers filed for bankruptcy, according to a separate claim also filed by Vernon Healy today.

“The ‘principal protected’ label was grossly misused by UBS to deceptively market products with no ‘principal protection’ or ‘guarantee’ whatsoever beyond the promise of repayment by the borrower that exists with virtually any note or bond,” according to the claims.   

Just over a year ago, UBS was censured, sanctioned, and fined as a result of the Financial Industry Regulatory Authority’s investigation into UBS’s improprieties in promoting the Lehman structured products that were labeled as being “100 percent principal protected.” 

FINRA fined UBS $2.5 million and ordered the Swiss firm to pay $8.5 million in restitution to Lehman notes investors. UBS sold an estimated $1 billion in Lehman notes to investors.

Lehman note holders have been left standing at virtually the back of the line with other unsecured creditors in the Lehman Brothers bankruptcy. Lehman note investors received an initial distribution on April 17, but the initial distribution amounted to about 5 percent of investors’ principal investment.

“Much like the FINRA fine and restitution Order, the bankruptcy distribution is woefully inadequate to rectify the harm done to our clients,” securities attorney Chris Vernon, of the Vernon Healy law firm, said. In fact, the remaining distributions to investors will take another 3 to 5 years and will amount to less than 25 cents on the dollar according to information obtained from the Trustee by Vernon Healy. 

“UBS customers who were hoping to recover their losses from the bankruptcy court now know just how paltry that amount will be,” said securities attorney Susan Healy, of the Vernon Healy law firm. “FINRA arbitration is their best chance for meaningful compensation.” 

In an effort to gain additional recovery for investors beyond the bankruptcy and regulatory proceedings, Vernon Healy has filed more than $13 million in claims on behalf of individual Lehman note investors. Vernon Healy’s investigation and advocacy on behalf of Lehman note and structured product investors has been highlighted in AARP magazine.

For more information contact:

Chris Vernon
Vernon Healy, attorneys at law
(239) 649-5390

Lehman bankruptcy liquidation to provide poor recovery to 100 percent principal protected notes investors says Vernon Healy investor advocacy law firm

Naples, Fla. — Investors holding Lehman 100 percent principal protected notes or other Lehman structured products are now receiving word that their share of the initial Lehman bankruptcy distribution on April 17 amounts to 6 cents on the dollar.

“We’ve been informed by a representative of Wilmington Trust, the bankruptcy trustee that is handling Lehman notes distributions, that Lehman note holders may receive up to 21 cents on the dollar with that amount dribbled out over the next 3 to 5 years through the bankruptcy liquidation process,” said investor rights attorney Chris Vernon, of the Vernon Healy law firm. “In our ongoing efforts to assist investors, we are aggressively pursuing UBS in arbitrations before the Financial Industry Regulatory Authority for fraudulent misrepresentations to investors that their Lehman notes were safe and 100 percent principal protected.”

Vernon Healy has aggressively represented investors with more than $13 million in arbitration claims against UBS on behalf of Lehman note holders.

“We believe that this updated information from the bankruptcy trustee will shock those defrauded investors who have not obtained legal counsel yet and have held out hope that the bankruptcy process would provide them with some meaningful recovery,” Vernon said.

Vernon Healy’s advocacy on behalf of Lehman notes investors was featured in an AARP magazine article about the dangers of investing in structured products, which continue to be pitched by brokerage firms to retirees as safe investments. Vernon Healy’s ongoing investigation continues to reveal numerous concerns in relation to the sales of Lehman notes by UBS that have not been addressed by FINRA or federal regulators.

Vernon Healy claims have alleged that UBS fraudulently misrepresented Lehman principal protected notes not only to its brokerage firm clients but also to some of its own financial advisors, who continued to sell Lehman principal protected notes as safe investments to investors well after UBS knew Lehman was in financial trouble.

A second distribution in the Lehman Brothers bankruptcy is scheduled for Sept. 30, 2012 and a third distribution is scheduled for March 30, 2013 with semi-annual distribution thereafter. The Lehman Brothers bankruptcy in September 2008 is the biggest bankruptcy in U.S. history, and it touched off the world financial crisis and most significant economic recession since the Great Depression.

Former CEO Bryan Marsal, who ran Lehman during the bankruptcy, painted a bleak picture for creditors when he told Bloomberg Businessweek that the firm will continue selling assets through 2014 as it tries to raise a total of $65 billion to pay estimated claims of $370 billion.

Bloomberg Businessweek also noted that Enron investors were paid 53 cents on the dollar while average Lehman creditors will receive only an estimated 18 cents on the dollar.

For more information contact:

Chris Vernon
Vernon Healy, attorneys at law
(239) 649-5390
www.vernonhealy.com
www.lehmannotes.com

Vernon Healy Claim: UBS Used Bait and Switch While Selling Ohio Business Owner Lehman Notes

Naples, Fla. – UBS fraudulently misrepresented the investment products it was selling to an Ohio business owner, leading him to believe he was buying principal protected notes backed by UBS when in fact he was sold Lehman notes that were backed by the then financially struggling Lehman Brothers, a claim filed today by securities attorneys at Vernon Healy states.

The Ohio investor made numerous purchases for principal protected products recommended by his UBS financial advisor and totaling more than $150,000, the claim states. Even though the documents provided with the advisor’s initial sales pitch reflected UBS as the entity backing the notes, the actual purchase made on the investor’s behalf was for Lehman notes.

Moreover, the name “Lehman Brothers” did not appear on either the trade confirmation or on the monthly statements, the claim asserts. The sudden switch is especially troubling due to the fact that UBS recommended and sold the Ohio investor Lehman structured products just weeks before Lehman filed for bankruptcy. At that point, UBS clearly knew Lehman Brothers was in deep financial trouble, the claim asserts.

UBS had been well aware of Lehman Brothers financial woes long before it recommended structured products to the Ohio investor. Specifically, UBS had been propping up the faltering company with ultra-high interest loans in 2007 and 2008 while selling Lehman products to retail investors for huge profits.

“UBS engaged in a campaign to downplay and ignore concerns about Lehman’s creditworthiness,” said Chris Vernon, founder of Vernon Healy. “UBS encouraged, and in some cases even deceived its financial advisors into continuing to recommend these products to individual investors without advising them about Lehman’s credit and liquidity risks.”

Once the Lehman bankruptcy was underway, the Ohio business owner joined thousands of other Lehman notes holders left standing at the back of the line with all unsecured creditors.

In addition to compensatory damages, Vernon Healy is seeking significant punitive damages on behalf of the Ohio investor in light of UBS’s gross malfeasance, the claim states.

Vernon Healy has filed more than $12 million in Lehman notes arbitration claims on behalf of investors before the Financial Industry Regulatory Authority. The firm’s investigation of Lehman notes was featured in an AARP magazine article about the dangers of investing in structured products, which continue to be pitched by brokerage firms to retirees as safe investments. Vernon Healy’s ongoing investigation continues to reveal numerous concerns in relation to the sale of Lehman notes that have not been addressed by FINRA or federal regulators.

The securities attorneys at Vernon Healy represent individuals and businesses nationwide in disputes involving all manner of financial fraud and negligence, including Lehman notes, structured products, non-traded REITs, hedge funds, mutual funds, annuities, tax shelters and other investment products.

Contact:
Chris Vernon
Vernon Healy
(239) 649-5390
www.vernonhealy.com
www.lehmannotes.com

Vernon Healy Claim: UBS Deceived Texas Clients and Financial Advisors with Lehman Principal Protected Notes

Naples, Fla. – UBS fraudulently misrepresented Lehman principal protected notes not only to its brokerage firm clients but also to some of its own financial advisors, according to a claim filed today by securities fraud attorneys with the nationwide investor advocacy law firm Vernon Healy.

The nearly $300,000 claim against UBS filed by Vernon Healy today, alleges that the brokerage firm giant fraudulently sold Lehman brothers principal protected notes to a retired Texas couple after it knew that Lehman Brothers was in financial trouble, according to the claim.

“UBS told the retired couple that as a worst case scenario their principal investment would be protected,” said Chris Vernon, founder of Vernon Healy.  “In reality, the notes had no principal protection and were simply unsecured loans to Lehman, which were wrapped in a very complex structure, that helped conceal the lack of protection.”

Vernon Healy attorneys allege that UBS also misled the retired couple’s financial advisor by internally providing misleading and fraudulent marketing and training materials that erroneously described the notes as safe and principal protected, the claim states. UBS’s internal sales force was consistently and strongly encouraged to push  sales of Lehman structured products to main street investors while UBS was propping up Lehman with ultra-high interest loans, which demonstrated UBS’s knowledge of Lehman’s desperation and lack of liquidity, the claim asserts. 

At the onset of the Lehman bankruptcy, the Texas retirees joined thousands of other Lehman notes holders left standing at the back of the line with all unsecured creditors in the Lehman Brothers bankruptcy. According to the claim, UBS sold an estimated $1 billion in Lehman principal protected notes to main street investors. 

In addition to compensatory damages, Vernon Healy is seeking significant punitive damages on behalf of the Texas couple in light of UBS’s gross malfeasance, the claim states.

Vernon Healy has filed more than $12 million in Lehman notes arbitration claims on behalf of investors before the Financial Industry Regulatory Authority. The firm’s investigation of Lehman notes was featured in an AARP magazine article about the dangers of investing in so-called structured products, which have been increasingly pitched by brokerage firms to retirees as safe investments. Vernon Healy’s ongoing investigation continues to reveal numerous other concerns in relation to the sale of Lehman notes to retail investors that have not been addressed by FINRA or other regulators.

Structured products are extremely complex types of debt securities that include a derivative component and whose value at maturity is governed by arcane mathematical formulas, the claim states. 

For more information about Vernon Healy’s nationwide investigation of Lehman notes, visit lehmannotes.com.

The securities attorneys at Vernon Healy represent individuals and businesses nationwide in disputes involving all manner of financial fraud and negligence related to Lehman notes, structured products, non-traded REITs, hedge funds, fund of funds, bonds, mutual funds, annuities, tax shelters and other products.

Contact:
Chris Vernon
Vernon Healy
(239) 649-5390
www.vernonhealy.com
www.lehmannotes.com

Investors harmed by the Lehman Brothers bankruptcy get mixed messages this week

The Lehman Brothers bankruptcy that shook the financial world in 2008 still has investors who lost billions in the collapse wondering when they will begin to recoup their losses. Two decisions this week – one by a judge and the other by the Lehman Estate – did little to bring clarity to the situation or hope that investors will see a significant portion of their money anytime soon, say securities attorneys at Vernon Healy, the investor advocacy law firm.

In one development, a New York bankruptcy judge cleared the way for Neuberger Berman Group LLC to buy the 48 percent remaining equity interest in that company from Lehman Brothers Holdings Inc. over five years, generating about $1.5 billion.

In a second development, Lehman Brothers Holdings Inc. said it would take on billionaire Sam Zell's Equity Residential in a fight for control of Archstone, the company's largest real estate asset. After the Lehman collapse, the company owned 47 percent of Archstone and banks held the remaining 53 percent. But the banks sold half their holdings to Zell earlier this month, and Zell is seeking to buy their remaining 26.5 percent. Lehman Holdings will seek permission this week from a bankruptcy judge to exercise its option to match Zell’s offer with a $1.33 billion offer of its own.

While the Neuberger Berman deal injects a significant amount of cash into Lehman Holdings’ coffers, it appears the money is coming in over five years, meaning investors may see a trickle of cash versus a lump sum. Some estimates put the overall recovery for most investors in the 18 to 20 cents on the dollar range. If these estimates are correct, then investors may suffer an 80 percent or more loss of principal from products that UBS represented to be “principal protected.”

“UBS simply deceived my clients and thousands of other investors – as well as many UBS financial advisors – with respect to the principal protection in these products.  This deception was especially egregious given what UBS really knew about Lehman’s financial situation, including the Archstone purchase,” said securities attorney Chris Vernon of the Vernon Healy law firm.  

And the current Lehman contest with Zell over control of Archstone, while possibly viable for a healthy company is questionable in light of the bankruptcy, Vernon said.

“Lehman made a bad business decision in acquiring Archstone. Given the number of retail clients of UBS and other firms caught up in this bankruptcy as unsecured creditors,  Lehman should be focused on liquidating assets and distributing the proceeds to my clients and other unsecured creditors rather than extending the time that Lehman structured note investors have to wait to recoup what they can from the bankruptcy,” Vernon said. 

Christopher Vernon represents investor clients with more than $10 million in losses due to the Lehman Brothers bankruptcy. Vernon’s investigation into Lehman structured products has been featured in AARP magazine.

Contact for media inquiries.

Chris Vernon
Vernon Healy
239-649-5390
www.vernonhealy.com

UBS fraudulently hawked Lehman principal protected notes to clients,Vernon Healy investor claim states

Naples, Fla. — UBS fraudulently misrepresented Lehman principal protected notes in a heavy sales push to its brokerage firm clients at a time when it was systematically shedding its own Lehman debt behind the scenes in advance of the Lehman Brothers bankruptcy, according to a claim filed today by the nationwide investor advocacy law firm Vernon Healy.

Holders of Lehman notes have been left standing at the back of the line with unsecured creditors in the Lehman Brothers Bankruptcy despite the fact that UBS marketed the notes as safe and principal protected, according to the claim. UBS sold an estimated $1 billion in Lehman principal protected notes to main street investors who are now holding virtually worthless paper, according to the claim. 

Vernon Healy filed close to a half million in claims today on behalf of two UBS clients who assert that they were fraudulently sold Lehman structured products that UBS touted as safe and “principal protected.” The law firm has filed close to $12 million in Lehman notes arbitration claims on behalf of investors before the Financial Industry Regulatory Authority.

Vernon Healy’s investigation was featured in AARP magazine in an article about the dangers of investing in so-called structured products, which have been increasingly sold by brokerage firms to retirees in recent years as safe investments.
 
UBS provided misleading and fraudulent marketing and training material to its own sales force of financial advisors who were encouraged to push sales of Lehman structured products to main street investors, the claim states. Behind the scenes, UBS was propping up the financially faltering Lehman with loans and charging Lehman high interest rates, a situation that demonstrated Lehman’s desperation and poor credit worthiness, the claims assert. 

“As a creditor of Lehman, UBS was in a unique position to assess Lehman’s increasing financial difficulties.  However, despite its knowledge of Lehman’s financial situation, UBS failed to warn its financial advisors or its clients of the increasing risk posed by Lehman structured products,” a claim today filed by Vernon Healy on behalf of an investor states.

Vernon Healy is seeking significant punitive damages on behalf of investors in light of UBS’ gross malfeasance, the claim states. UBS made lucrative profits on its predatory lending strategy to a desperate Lehman at a time when it was making enormous profits on fees and commissions by deceptively selling mom-and-pop investors. UBS told these investors that as a worst case scenario their principal investment would be protected, the claims state.

For more information about Vernon Healy’s nationwide investigation of Lehman notes, see the firm’s web site lehmannotes.com

The securities attorneys at Vernon Healy represent individuals and businesses in disputes involving all manner of financial fraud and negligence including related to Lehman notes, structured products, non-traded REITs, hedge funds, fund of funds, bonds, mutual funds, annuities, tax shelters and other products.

For more information, contact:
Chris Vernon, attorney at law
Vernon Healy
(239) 649-5390
www.vernonhealy.com
www.lehmannotes.com

How do you know if you have a Reverse Convertible note – and why you should be concerned

Brokerage firms use a myriad of complex terms to describe the reverse convertible notes being hawked to retail investors. For example, UBS sells reverse convertibles under the name Yield Optimization Notes. Other firms that sell very similar products, use very different terms.

As a result, some investors are not aware that the structured note that they own is a reverse convertible note. Unfortunately, regardless of the fancy name provided to you by the brokerage firm, these are effectively sold as bond surrogates and, in reality, they are often rogue products that are not consistent with the best interest of the retail investor.   

While investors continue to fare well with FINRA arbitration claims against UBS for its overzealous sale of 100 percent principal protected notes and other structured products to fixed income investors, the Securities and Exchange Commission has been looking into the problematic and widespread sale of reverse convertibles to the same group of fixed income investors.

While selling unsecured promissory notes as 100 percent principal protected may have been the one of the most misleading product sales pitches to come along in a good while, the sale of reverse convertibles may be one of the most unsuitable and rogue product sales campaigns to come along in a good long while. 

The underlying concept for both principal protected notes and reverse convertibles is disturbing.  Specifically, in recommending the types of structured notes described above, your trusted financial advisor firm or wealth management firm is advising you, the client, to loan money to it – or one of its brethren on Wall Street – on an unsecured basis as the best investment idea for you.

Keep in mind that these same firms summarily fire individual financial advisors who borrow money from a client regardless of the return on the loan being offered to the client. Similarly, regulators such as FINRA, the Financial Industry Regulatory Authority, regularly investigate and punish individual financial advisors who borrow money from a client.   Thus, the very concept of a brokerage firm borrowing money from its own clients on a widespread basis highlights the firm’s willingness to disregard the massive conflict of interest embedded in these structured note products.    

Wall Street firms such as UBS – which use terms such as “Yield Optimization Notes” to refer to “reverse convertibles” – are preying on fixed income investors looking for low risk products with better returns than are now available from traditional fixed income products.

Similar to non-traded REITs, the sales pitch for structured notes focuses on the returns and downplays the risks and the conflicts of interest. In fact, last month the SEC examined the reverse convertible sales practices of more than ten broker-dealers and raised “suitability,” pricing, risk disclosure, and misrepresentation concerns about the firms’ sales and maintenance of reverse convertibles in client accounts.

These products are so complicated – they include an option-like component as part of the structure – that regulators have concerns that many individual financial advisors may not even fully understand the product they are recommending. Regarding the complexity, see FINRA regulatory notice 10-09. In fact, even the anemic FINRA regulators stated years ago that reverse convertibles should only be recommended to investors who are approved to do option trading.   NASD ( FINRA) Notice to Members 05-59.

If you are being pitched structured notes that are not FDIC insured, consider that the issuers and sales people are requesting your money to fund their own operations or operations of another big Wall Street firm. In other words, they have decided they would rather borrow money from you on an unsecured basis than borrow money from a bank or institutional lender. In our opinion, they aren’t doing this to provide you with a wonderful opportunity, but rather they’re doing it because the issuers and selling firms believe they can squeeze a better deal out of you than they can from a banker or professional lender.

As class actions relating to the sale of Lehman principal protected notes are winding their way through the system, Courts are also recognizing problems with the sales of structured notes.  For example, just last month, New York Federal Judge Lewis Kaplan stated the following in an opinion in one of the Lehman Brothers related class actions: 
“[The pricing supplements mention] 100% principal protection at least four times on the first page.  By contrast, the risk that investors could lose their principal if Lehman went bankrupt is not mentioned on that page at all.  The rest of each pricing supplement continues this trend, frequently mentioning principal protection, but rarely or obliquely disclosing the risk that Lehman would not repay.”

Reverse convertibles, like principal protected notes, will soon show that Wall Street firms are again pursuing their own greedy interests while failing to protect the interests of the investors they ask to trust them.

Chris Vernon, a founding partner of the Vernon Healy law firm, is an investor advocate who represents clients around the nation in securities fraud arbitration and financial litigation. Contact the Vernon Healy law firm at 239-649-5390.

 

SEC Warns Investors of the Dangers of Structured Products

Almost three years after the historic bankruptcy of Lehman Brothers, the Securities and Exchange Commission shows concerns that investors continue to be unaware of the potential risks of investing in structured products.

Just last month, the SEC issued a notice reminding investors to carefully review the terms, risks, fees, and other not-so-apparent disclosures before deciding whether to invest in structured products.

Structured products in general continue to be marketed as safe investments with attractive rates of return.  This sales pitch was invalidated when investors who purchased Lehman structured notes through UBS suffered dramatic losses in their portfolios as a result of these investments. 

The SEC warns in its regulatory pronouncement that even though these products often have reassuring names like “principal protection” or “absolute return,” investors could still stand to lose all of their money.  This is the case because structured notes are usually nothing more than unsecured loans to the issuer of the note and have the potential to lose all of their value if the issuer goes bankrupt. In other words, financial institutions effectively borrow money from Main Street investors with no collateral and on terms favorable to the borrower.  

But the problem is far more severe. Main Street investors are not only tricked into making unsecured loans to financial institutions; those institutions also charge investors hidden costs and fees in the process.  Put differently, it is like having somebody borrow money from you and then having that person charge you a fee for accepting your money. 

The SEC acknowledges that “even if the [structured notes] sales material suggests otherwise….structured notes can have hidden or imputed costs, which in some cases may be relatively high.” The SEC also recognizes that these costs generally “are not transparent to investors.”

Another component of the structured notes highlighted by the SEC in its regulatory pronouncement is the fact that in many instances, investors can find themselves tying up their principal for many years and during this time not receive any profit. Investors could bind their money “for upwards of a decade with the possibility of no profit on [their] initial investment….and, in the meantime, inflation could erode [the investors’] purchasing power.,” according to the SEC. 

This scenario continues to occur because structured products are just too complicated for ordinary investors to understand and evaluate and too profitable for Wall Street.  Furthermore, the potential return on structured products’ investments varies significantly based on the method the issuer uses to calculate gains or losses. Investors can find a useful illustration of one of these methods (shark fin payouts) in the SEC structured products warning.

In sum, structured products continue to be investment vehicles financial institutions utilize to get unsecured loans from Main Street investors; are packed with hidden fees and costs; and are designed in such a way that the odds are greatly stacked in favor of financial institutions. 

Vernon Healy is a Naples, Florida law firm that represents investors with more than $10 million in Lehman notes claims, including Yield Optimization and 100% Principal Protected Notes and has conducted an extensive nationwide investigation on structured products. Vernon Healy’s investigation of structured products was featured earlier this year in AARP Magazine. The attorneys at Vernon Healy collectively have more than 30 years of experience representing investors who are victims of stock fraud and stock losses due to misconduct. Vernon Healy securities attorneys are experienced in securities arbitration and assist clients in recovering losses caused by all manner of financial fraud and negligence.

For more information on whether you have a claim involving a structured product, contact the Vernon Healy law firm at 239-649-5390 or Toll Free at 877-649-5394 or email info@vernonhealy.com
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