Investment advisers should be wary of structured products such as “principal protected” notes and reverse convertibles, even though they are gaining in popularity, according to Jeff Benjamin in his InvestmentNews article, “Advisers should think twice about structured products.”
“Principal protected” notes are essentially zero-coupon notes linked, in part, to a derivative based on 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.
In addition, because principal protected notes are unsecured debt of the issuer, they are subject to the risk of default attendant to that issuer. Investors in so-called principal protected notes issued by Lehman Brothers, and sold by UBS Financial Services, found that out the hard way when Lehman went bankruptcy and the principal protection proved illusory.
The U.S. Securities and Exchange Commission is investigating misleading marketing by Wall Street banks of principal protected notes.
Over the past eighteen months, three separate arbitration panels sitting in three separate cases have ordered rescission of principal protected notes sold by UBS Financial Services. In other words, the panels ordered UBS to buy back the notes sold to investors at their original cost. The Claimants in those cases were represented by Seth E. Lipner. 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 a number of investors in Lehman structured note cases, some of which also involve reverse convertibles.
Reverse convertibles are known by many names (UBS refers to them as Yield Optimization Notes). They are often sold to investors as safe income-producing investments. They are not. Reverse convertibles are, in reality, complex option combinations that put investors’ principal at risk. The high-yield, short-term note that investors think they are buying is linked to the performance of a “reference asset” such that, if the reference asset declines in value, the investor receives the depressed asset at maturity instead of a return of principal in cash. That is why FINRA has warned that these products are not suitable for investors with accounts not approved for options trading. These structured products are so opaque and complex that no ordinary investment advisor can properly evaluate them and disclose the risks to investors.
“We continue to receive inquiries from investors who acquired structured products based on representations that they were safe,” said J. Boyd Page, a senior partner at Page Perry in Atlanta. “Our legal team continues to investigate and pursue arbitrations on behalf of investors who purchased these products,” he added. ??The brokers who sold the structured products are not targets of investor claims.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing institutional and individual investors in securities-related litigation and arbitration all over the country. 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.