AARP Issues Warnings about Principal Protected Notes and Other Structured Product Investments


John F. Wasik’s article in the March | April 2011 edition of AARP Magazine, entitled “The Time Bomb in Your Nest Egg,” is a “must read” as it focuses on a hot group of investment products called Structured Products, which are being marketed to conservative fixed income investors seeking better yields. Sales are rising, and they are dangerous. As Mr. Wasik states at the outset, “They’re sold as supersafe investments. They promise higher returns than any CD. And they’re not to be trusted.”

One kind of Structured Product featured in the article is a group of products called “Principal Protected Notes” that was issued by Lehman Brothers and sold by UBS Financial. Lehman issued and UBS sold several subgroups of Lehman “principal protected notes.” One subgroup offered “100% Principal Protected,” another offered “Partial Protection” and was called “Return Optimization Securities linked to the S&P 500 Index, and still another offered “contingent protection” with names like “Bearish Autocallable Optimization Securities with Contingent Protection linked to the Energy Select Sector SPDR? Fund.” Like Lucifer himself, they have so many names!

The basic problem is two-fold. The notes, which are really derivatives, are so complicated that no one can understand them, including the brokers who sell them, and they are pitched to investors, many retired and on a fixed income, as high-yield notes with low or no risk. As one man featured in the article put it: “We weren’t looking for home runs’.We were looking for something we’d be able to count on. We were told that there was no risk. We thought we were fairly safe.”

It is understandable that investors would think their money was safe. The product has the words “principal protection” in its name. The broker’s assurances merely confirm the obvious.

But they lost everything. How? Investors had the impression that since UBS sold the product, that UBS stood behind the promise of principal protection. Unfortunately, that was not the case, and UBS did not explain two important facts to investors: (1) that the promise of principal protection rested entirely on the ability of Lehman Brothers to make good on it, and (2) by at least July 2007, financial professionals knew that Lehman Brothers was a very troubled company, and that its debt traded as junk bonds. When Lehman went belly-up in September 2008, the principal protection evaporated and the investors were left with nothing but unsecured claims (worth little or nothing) in the Lehman bankruptcy case.

Seth E. Lipner, a partner in the law firm Deutsch & Lipner in New York, said: “UBS’s own analyst wrote that he had a negative fundamental view of Lehman. He singled out Lehman for risk-taking exposure that continues to increase, and he described Lehman as the most vulnerable firm among its troubled peer group. UBS had a duty to disclose its own analyst’s negative view of Lehman to investors before selling them the Notes. ”

Knowing those facts, no risk-averse investor in his right mind would buy the product. Even a sales force motivated by commissions as high as 10% (as compared to regular bonds that pay less than 1% commissions) would hit a brick wall of resistance. But those facts were not told to investors. So brokers had a field day.

“The big wave is yet to come?most people don’t know what they have yet,” Joseph P. Borg, director of the Alabama Securities Commission, who is investigating structured products sales abuses, was quoted as saying.

J. Boyd Page, a senior partner of Page Perry in Atlanta, said: “Some investors who were sold these Lehman notes in 2007 and 2008 are beginning to reach, or may have already reached, the four year anniversary of the purchase date. We urge any such investor who has not yet filed an arbitration claim not to delay in contacting an attorney with experience in this area.”

Page Perry, a law firm based in Atlanta, Georgia, is co-counsel with Mr. Lipner and his Garden City, New York law firm, Deutsch & Lipner, in representing numerous investors in Lehman structured note cases.

Page Perry has over 125 years collective experience representing institutional and individual investors in litigation and arbitration involving principal protected notes, reverse convertibles and other structured products. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.