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A Primer on Structured Investment Products

Arbitration claims involving structured investments have become a growing source of contention among investors – many of whom have experienced massive financial losses because of these Wall Street-engineered instruments.

Structured investment products, or SIPs, take several forms. Typically, they entail securities mixed with other derivatives, with a repayment value that is linked to the performance of the underlying assets. The assets can include a single security, a pool of securities, stock, bonds, debt issuances, foreign currencies or swaps.

For years, structured investments have been touted by brokers as a way for risk-wary investors to take advantage of stocks or other investments without having to actually “own” those investments. At the same time, investors could maintain a level of protection in the event of any losses.

What many of these brokers failed to add is that the “protection” in principal-protected notes is contingent on the solvency of the company linked to the note.

Lehman Brothers Holdings is a prime example. When Lehman filed for bankruptcy in September 2008, investors holding Lehman Return Optimization Securities and 100% Principal Protected Notes became stuck with essentially worthless investments. Today, these products are trading for pennies on the dollar.

Many investors who bought structured products are retirees. They sought the investments on the recommendation of their brokers, who touted the “conservative,” “minimal risk,” and “principal-protected” benefits of the products. Those benefits, however, never materialized.

At minimum, investors believed that principal-protected notes like those of Lehman Brothers would allow them to always maintain their principal original investment. Lehman’s own marketing brochures even advertised the products this way.

Lawsuits and arbitration filings over structured investment products have risen significantly in past few years. Among the allegations in the complaints: Investors were never informed about the potential risks of structured investments. Moreover, they never realized that the “investment product” they had put their money and faith behind was actually the unsecured debt of the issuer. If that company went bankrupt, as in the case of Lehman, their investment disappeared, as well.

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