Bank of America Principal Protected Notes May Create More Problems for Wall Street Firms

 

The financial crisis and recent bear market have caused many investors to become more concerned about safety of principal. The investment industry has taken advantage of that concern by creating so-called “principal protected” notes and pushing them hard on retirees and others in need of safe, steady income.

“Principal protected” products are essentially zero-coupon notes linked, in part, to the performance of an equity index, like the Standard & Poor’s 500 or the Russell 2000, or some other basket of securities. In some cases, there is a trap door in the linkage, however. If the index falls 25.5 percent or more, or rises more than 27.5 percent, the investors are promised a return of principal but no additional return in exchange for their loan.

As investors in Lehman-issued “principal protected” notes found out, however, the supposed principal protection is often illusory. When Lehman went bankrupt, investors in Lehman-issued “principal protected” notes lost virtually their entire principal investment. Many investors have filed arbitration claims against UBS, which sold Lehman principal protected notes. Investors had never been told that the notes were really options combined with an unsecured obligation of Lehman Brothers.

The Securities and Exchange Commission and the Financial Industry Regulatory Authority have expressed concern about firms’ misrepresentations and failure to disclose material facts in selling “principal protected” notes to retirees and others.

The SEC’s Structured and New Products Unit is conducting a review of principal protected notes and other structured products, examining whether and how the selling firms described the risks and whether the use of the term “principal protection” was deceptive and misleading. The brokerage firms that reportedly sold the “principal protected” products under investigation include Citigroup, Barclays, Morgan Stanley and Bank of America (now Bank of America Merrill Lynch).

Bank of America issued a number of “principal protected” notes that were sold by Merrill Lynch and others, which reportedly have been subjects of investor complaints, including, but not limited to, the following:

  • Bank of America (Basket EAGLES) Equity Appreciation Growth Linked Securities
  • Bank of America Return Linked Notes
  • Bank of America CYCLES (Capital Protected Equity Performance Linked Securities)
  • Bank of America EAGLES (Equity Appreciation Growth Linked Securities)
  • Bank of America Strategic Equity Exposure Performance Linked Securities.

Page Perry is an Atlanta-based law firm with an active practice in representing investors in disputes with firms in the financial services industry. The firm is currently involved in representing dozens of investors that lost money in so-called principal protected notes and other structured products. For further information, please contact www.pageperry.com.