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.

Principal-Protected Notes (PPNs) – and the misrepresentation of them – are back in the news. The Financial Industry Regulatory Authority (FINRA) has fined UBS Financial Services $2.5 million over PPNs, requiring the brokerage firm to pay $8.25 million in restitution for omissions and statements made to investors about the products.

According to FINRA, UBS’s statements about the products effectively misled some investors about the “principal protection” feature of 100% Principal-Protection Notes issued by Lehman Brothers Holdings prior to its September 2008 bankruptcy filing.

Principal-protected notes are considered fixed-income security structured products with a bond and an option component that promise a minimum return equal to an investor’s initial investment.

According to FINRA, as the credit crisis worsened during March to June 2008, UBS advertised – and some UBS financial advisors described – the structured notes as principal-protected investments while failing to emphasize they were actually unsecured obligations of Lehman Brothers.

In making its decision against UBS, FINRA found that the firm:

• Failed to adequately disclose to some investors that the principal-protection feature of the Lehman-issued PPNs was subject to the credit risks of Lehman Brothers Holdings;
• Did not properly advise UBS financial advisors of the potential effect of the widening of credit default swap spreads on Lehman’s financial strength or provide them with proper guidance on using that information with clients;
• Failed to establish an adequate supervisory system for the sale of Lehman-issued PPNs;
• Failed to provide sufficient training and written supervisory policies and procedures;
• Did not adequately analyze the suitability of sales of the Lehman-issued PPNs to certain UBS customers; and
• Created and used advertising materials that essentially misled some customers about specific characteristics of PPNs.

UBS neither admitted nor denied the charges levied by FINRA, but consented to the entry of the findings.

A $2.2 million arbitration award is the latest win for investors in cases involving UBS and Lehman Brothers Principal-Protected Notes. The award, which was announced in December by a three-person arbitration panel of the Financial Industry Regulatory Authority (FINRA), is the seventh consecutive win for investors with pending complaints against UBS over the Lehman Brothers notes.

The focus of investors’ complaints centers on the failure of the 100% principal-protected notes touted by UBS to live up to their hype. Instead of the safety and security of fixed- income investments, the notes were actually complex products comprised of risky derivatives.

What UBS and other brokerages failed to emphasize to investors was the fact that the notes were unsecured obligations of Lehman Brothers. When Lehman filed for bankruptcy on Sept. 15, holders of the notes were left with investments that traded for pennies on the dollar.

UBS sold $1 billion of Lehman Principal-Protected Notes to investors. Commissions on the notes were 1.75%, a far higher percentage than what could be generated from sales of certificates of deposit.

If you’ve suffered financial losses in Lehman Principal-Protected Notes and wish to discuss filing an individual arbitration claim with FINRA or have questions about these investments, please contact us.

The wealthiest U.S. investors are putting fewer dollars into structured financial products than the less affluent, according to a study by the Securities Industry and Financial Markets Association.

As reported Nov. 11 by Investment News, U.S. investors bought more than a $42 billion of structured notes this year. Nearly every major bank or brokerage sells structured products. Morgan Stanley leads the pack, issuing $10.1 billion, the most of any bank, followed by Bank of America Corp., which issued $7.9 billion.

Because of their complexity, structured products are not for those who don’t fully understand them. Moreover, once an investor puts money into a structured product, he or she is essentially locked in for the duration of the contract.

And, contrary to promises of principal by some brokers, investors can still lose money – and a lot of it – in structured notes.

Case in point: Lehman Brothers Holdings. Investors who invested in principal-protected notes issued by Lehman Brothers lost almost all of their investment when Lehman filed for bankruptcy in September 2008. In total, structured products have been linked to an estimated $1 billion in investor losses in just Lehman notes.

Investors have since filed arbitration claims against UBS, one of the largest sellers of Lehman structured notes.

Other structured investment vehicles like reverse convertibles and equity-linked notes also have become the target of arbitration claims, as well as investigations by state regulators.

Most structured notes are “a hot mess,” said Janet Tavakoli, president of Tavakoli Structured Finance in Chicago in an Oct. 20, 2010, article by the New York Times. “Most professionals can’t analyze them. When I have done it, I find these notes are loaded with hidden fees and hidden risks.”

If you have suffered investment losses in principal-protected structured notes and wish to discuss filing an individual arbitration claim with Financial Industry Regulatory Authority (FINRA), please contact us.

The Security and Exchange Commission’s investigation into the collapse of Lehman Brothers Holdings is gaining momentum and, specifically, into the accounting practices that the company allegedly used to give the appearance of a robust financial picture.

As reported Sept. 10 by the Wall Street Journal, Lehman’s method of accounting was denounced in March as “misleading” by a court-appointed examiner. The practice, known as Repo 105, allowed Lehman to shift as much as $50 billion in assets off of its balance sheets. In using Repo 105, Lehman was able to give the appearance, albeit a false one, that it had reduced its debt levels.

Meanwhile, Lehman allegedly never told its board, regulators or even investors about Repo 105.

According to the Wall Street Journal article, questionable accounting isn’t Lehman’s only problem. The SEC also is reportedly looking into whether former Lehman executives failed to adequately mark down the value of a real-estate portfolio acquired during the firm’s takeover of apartment developer Archstone-Smith Trust or to disclose the resulting losses to investors.

Complex securities sold as 100% principal protected notes have failed to live up to their billing. In recent months, untold numbers of investors have witnessed billions of dollars in losses because of so-called investments that were touted by brokers as good as cash investments.

A May 21 article by Gretchen Morgenson in the New York Times highlights the questions surrounding 100% principal protected notes and how these complex securities became the darling of Wall Street and a disaster for many investors.

Principal protected notes are essentially zero-coupon notes whose return is partly tied to the performance of an equity index, such as the Standard & Poor’s 500 or the Russell 2000. How an investor makes money on these types of investments, however, is a complex process. The securities promise to return an investor’s principal, typically at the end of 18 months, along with the added gain from the index’s performance if that index trades within a certain range.

The tricky part is this: For an investor with one of these notes to earn the return of the index, as well as get his principal back, the index cannot fall 25.5% or more from its level at the date of issuance. The index also cannot rise more than 27.5% above that level. If the index exceeds those levels during the holding period, an investor would receive only his principal back.

As the New York Times article points out, 100% principal protected notes were sold by many brokerages to conservative investors who typically put their money in low-risk financial products like certificates of deposit. Many investors quickly became disenchanted with their decision to buy into principal protected notes, especially those who bought notes issued by Lehman Brothers Holdings. Those investments are now worth mere pennies on the dollar following the company’s bankruptcy filing in September 2008.

Two investors who lost big on 100% principal protected notes with Lehman were Corinne and Gregory Minasian, according to the New York Times. On the suggestion of their UBS broker they invested almost $100,000 – more than half of their savings – into Lehman notes in early 2008. They ultimately lost everything, and currently have an arbitration case pending in an attempt to recover their losses.

The Minasians contend their UBS broker failed to explain the risks in the securities, and never provided them with a prospectus. They contend they didn’t’ even know their investment had been issued by Lehman Brothers until the firm actually collapsed in 2008.

“I am not a sophisticated investor,” said Mr. Minasian in the NYT’s article. “Many years ago I dabbled in the stock market, but I learned my lessons. Over the past 10 to 15 years my wife and I invested in CDs.”

UBS sold $1 billion of these notes to investors. Commissions were 1.75%, a percentage that is far higher than those generated on sales of CDs. When Mr. Minasian asked about the commission, he says his broker said none existed.

Main Street Natural Gas Bonds

The September 2008 bankruptcy filing of Lehman Brothers Holdings is unlikely to fade from the memory of investors anytime soon. That’s because the bankruptcy had a ripple effect on other investments tied to Lehman, including investments in Main Street Natural Gas Bonds.

Main Street Natural Gas Bonds were marketed and sold by many Wall Street brokerages as safe, conservative municipal bonds. Instead, the bonds were complex derivative securities backed by Lehman Brothers. When Lehman filed for bankruptcy protection in September 2008, the trading values of the Main Street Bonds plummeted.

Many investors who put their money in Main Street Natural Gas Bonds allege that the brokers in question never disclosed all of the risks associated with the bonds nor did they reveal the fact that the bonds were connected to the financial health of Lehman Brothers.

If you were sold Main Street Natural Gas Bonds as a safe, low-risk investment, you may have a viable claim for recovery. Please contact our firm to tell us your story.

Main Street Natural Gas Bonds have proven to be an investor’s worst nightmare after they became subject to the bankruptcy of Lehman Brothers Holdings.

Marketed and sold by a number of brokerages as safe, conservative municipal bonds, Main Street Natural Gas Bonds actually were complex derivative securities backed by Lehman Brothers. When Lehman filed for bankruptcy protection in September 2008, the trading values of the Main Street bonds plummeted.

Many investors who put their money in Main Street Natural Gas Bonds have come forth with claims alleging they were never told that the viability of the Main Street investments was dependent on the viability of Lehman Brothers’ fiscal health. Investors didn’t know because they never received a prospectus on the bonds nor did their broker reveal the Lehman Brothers connection.

When a broker recommends an investment on behalf of a client, he has a legal obligation to adhere to that client’s specific investing objectives and risk tolerance levels. When this doesn’t happen, the broker has failed to uphold his fiduciary and due diligence duties.

If you were told Main Street Natural Gas Bonds were safe, low-risk municipal bonds, you may have a claim against the brokerage firm that sold the investment. Please contact our firm to tell your story.

As everyone knows by now, the meltdown on Wall Street has affected Main Street in unexpected, unusual and unprecedented ways. Consider the enchanting world of Walt Disney’s Magic Kingdom. As reported a year ago by USA Today, the natural gas that cooks the food in Disney’s Magic Kingdom – and elsewhere throughout America’s Main Street – was one of the things that Wall Street bought and sold to investors as safe, low-risk investments.

On Sept. 15, that natural gas deal – known as the Main Street Natural Gas bonds – went bust, plummeting in value after Lehman Brothers Holdings, which had guaranteed the bonds, filed for bankruptcy protection. Investors and consumers subsequently found themselves reeling from the fallout. Investors were out $700 million and places like Disney World experienced higher prices to cook the food for the visitors to its Magic Kingdom.

Main Street Natural Gas is a non-profit corporation of the Municipal Gas Authority of Georgia. In 2006, several Wall Street investment firms came up with the idea to get the Authority to lock in, for presumably decades, inexpensive supplies of natural gas. The idea was simple: Borrow money at low, tax-exempt interest rates and provide that money to the investment banks. Wall Street would then use that debt to make investments and, in turn, supply natural gas at low prices.

The investments made by Main Street included natural-gas derivatives – contracts that bet on the cost of natural gas in the future. In April, Main Street borrowed $700 million, giving it to Lehman Brothers. In return, Lehman promised to arrange delivery of nearly 200 billion cubic feet of natural gas over 30 years at a below-market price.

“That’s like a taxi driver borrowing $7,000 and giving it to a man who promises to supply gasoline for the next 30 years at 50 cents per gallon less than the market price,” said the USA Today article.

The savings associated with such a deal would be nothing to sneeze at – that is if the company holding all the money stayed in business. Lehman Brothers Holdings filed for bankruptcy on Sept. 15. At the time, less than 1% of the natural gas it promised to deliver actually made it.

As for the $700 million, it went the way of Lehman’s other assets: into a pool of money allocated to repay creditors. In other words, Main Street Natural Gas’ lenders must wait in line with countless other unsecured creditors. If they’re lucky, the lenders might get 30% of what they are owed. And the bonds they purchased to finance the natural-gas deal in the first place? They now sell for pennies on the dollar.

The brokerage firms that sold Main Street Natural Gas Bonds to investors never let on about the significant risks associated with the investments nor did they disclose critical information about the deteriorating fiscal health of Lehman Brothers and its toxic mortgage debt exposure.

If you own or owned Main Street Natural Gas Bonds guaranteed by Lehman Brothers Holdings, you may have a viable claim to recover any investment losses you suffered following Lehman’s bankruptcy. Please contact our firm to tell us your story.

Preferred stock losses in Fannie Mae, Freddie Mac, Lehman Brothers, and other fiscally troubled companies have cost investors dearly over the past two years. Preferred shares generally are considered more conservative, low-risk – investments especially attractive to retirees seeking predictable income via dividends. In many cases, however, the supposedly “low-risk” preferred stocks sold to investors turned out to be highly volatile because of the financial health of the issuing companies.

Many investors had been told by their brokerages and financial advisers that preferred stocks were a safe and secure investment. As a result, they purchased large concentrations ofcertain preferreds, including those like Fannie Mae and Freddie Mac. In the case of the nation’s two biggest mortgage lenders, investors believed they had built-in protection. If either company failed, their investment principal would fall under the protection of the federal government.

Or so they thought.  It didn’t turn out that way, of course. When the government placed the two companies into conservatorship, investors holding preferred and common shares were essentially wiped out, leaving them with huge financial losses and not the “safe” and “predictable” income they had been told to expect.

If you’ve experienced substantial investment losses because a brokerage or financial advisor misrepresented the risks of Freddie Mac, Fannie Mae or other preferred stocks, please contact us. We can advise you regarding your legal options.