Skip to main content


Representing Individual, High Net Worth & Institutional Investors

Offices in Indiana and New York City


Home > Blog > Category Archives: Structured Notes

Category Archives: Structured Notes

UBS V10 Currency Structured Notes Under Investigation by U.S. Justice Department

The U.S. Justice Department is looking into the UBS V10 Enhanced FX Carry Strategy, a product sold to investors such as hedge funds and pension funds. Focusing on whether banks misrepresented how currency transactions were priced, authorities’ broaden their examination into manipulation in the foreign-exchange market.

The V10 product “allows an investor to potentially profit in moves in 10 of the most liquid major currencies by taking advantage of opportunities based on interest rate differentials,” according to a 2009 UBS publication.

Through interviews with UBS employees in 2013, the V10 product first arose in the Justice Department with investigators probing commissions on the product and whether the bank respected its fiduciary duties to clients. In recent weeks, the questions were raised once again as the agency pursued to secure proffer agreements.

For more information visit:

Mass. Securities Regulators Looking Into Alternative Products Sold to Seniors

Sales involving alternative investment products sold to elderly investors has an unleashed an investigation by Massachusetts securities regulators into 15 brokerage firms. The firms include LPL Financial LLC, Morgan Stanley, Merrill Lynch, UBS Securities LLC, Fidelity Brokerage Services LLC, Charles Schwab & Co. Inc., Wells Fargo Advisors, TD Ameritrade Inc., ING Financial Partners Inc.,  Commonwealth Financial Network, MML Investor Services LLC, Investors Capital Corp., Signator Investors Inc., Meyers Associates LP, and WFG Investments Inc.

As reported yesterday, the Massachusetts securities division has sent subpoenas to the firms being targeted, asking for information on sales of the products to state residents who are 65 or over.  Among the non-traditional investments included on the list:  Oil and gas partnerships, private placements, structured products, hedge funds and tenant-in-common offerings.

Massachusetts is demanding information on any such products that have been sold over the past year, the investors who purchased them, the commissions generated, how the sales were reviewed, and all relevant compliance, training and marketing materials used for marketing and sales purposes.

The firms have until July 24 to respond.

This isn’t the first time that Massachusetts has come down hard on broker/dealers for alleged improper sales of certain alternative investments. In May, the state settled cases involving non-traded REITs with Ameriprise Financial Services; Commonwealth Financial Network; Lincoln Financial Advisors Corp., Royal Alliance Associates; and Securities America. The five firms agreed to pay a total of $6.1 million in restitution to investors, as well as fines totaling $975,000.

In February, Massachusetts reached a similar settlement with LPL Financial, which agreed to pay at least $2 million in restitution and $500,000 in fines related to sales of non-traded REIT investments.

The REIT investigations “heightened my concern that the senior marketplace is being targeted for the sales of these high-risk, esoteric products,” said Massachusetts Secretary of the Commonwealth William F. Galvin in a statement yesterday.

“While these products are not unsuitable in and of themselves, they are accidents waiting to happen when they are sold to inexperienced investors by untrained agents who push the products to score … large commissions.”

More Investors Burned by Structured Products

Structured investments have rendered a countless number of investors financially ruined – many of whom would never have been invested in the exotic products if not for the recommendations of their financial advisor.  The 2008 financial crisis cast a new light on the potential problems of structured products, from so-called principal-protected investments issued by Lehman Brothers to reverse convertible notes from Morgan Stanley. The result was the same: Investors lost big.

Jargon-laden literature, illiquidity, counter-party risk and lack of transparency all make structured products a complex and often unsuitable investment for the average investor. Despite these characterizations, many financial advisors continue to sell structured products because of the large mark-ups and commissions they bring – not because they are in the best interests of a client.

In the case of Morgan Stanley, a review by the Financial Industry Regulatory Authority (FINRA) into sales of the firm’s structured products – which included principal-protected investments, leveraged exposure, yield enhancement, and access investments – revealed that in many instances the true risks of the structured products were never disclosed to clients.

FINRA’s findings were officially documented in a Letter of Acceptance, Waiver and Consent (AWC) in which Morgan Stanley signed on Dec. 7, 2011, and agreed to pay a $600,000 fine to settle the violations outlined. Among the violations cited: Supervisory deficiencies, as well as unsuitable recommendations of structured products to retail customers.

In the AWC letter, FINRA states that Morgan Stanley failed to create “reasonable systems or procedures to notify supervisors whether structured product purchases complied with the firm’s internal guidelines.” Instead, Morgan Stanley placed the responsibility with branch supervisors.

“During the Review Period, Morgan Stanley had no reports or tools for sales supervisors or compliance personnel that were specific to structured products, or which highlighted and detected single concentrated structured product purchases. As a result, of the 224,000 structured product purchases between September 2006 and August 2008, more than 28,000 were in net amounts that exceeded 25% of the customer’s disclosed liquid net worth and more than 2,600 were effected by customers with slated net worth less than $100,000,” the AWC letter said.



Complex Investment Products in Hot Water With FINRA

Brokerage firms and registered reps selling private placements, inverse and leveraged exchange traded funds (ETFs), structured notes and other complex investment products have been put on notice by the Financial Industry Regulatory Authority (FINRA). In a newly issued regulatory notice, FINRA outlined certain due-diligence and supervisory policies and procedures that firms must have in place when selling such products and that the investments themselves can be expected to face greater regulatory scrutiny in the future.

“Registered representatives should compare a structured product with embedded options to the same strategy through multiple financial instruments on the open market, even with any possible advantages of purchasing a single product,” Regulatory Notice 12-03 said in part.

As in previous notices issued by FINRA, Notice 12-03 reiterated the fact that firms should consider whether less complex products can achieve the same objectives for investors. The notice further stated that post-approval follow-up and review are particularly important for any complex investment product.

In recent years, regulators have issued a number of enforcement and disciplinary actions in cases involving complex investments. Two high-profile cases occurred in 2009, when the Securities and Exchange Commission (SEC) filed fraud charges against Medical Capital Holdings and Provident Royalties LLC over the private placements issued by both entities.

Several state regulators, including Massachusetts, also have filed regulatory actions against various broker/dealers that sold Medical Capital and Provident private placements to investors.

Joey Wade Dean Faces Allegations Over Structured Notes

Former Morgan Stanley broker Joey Wade Dean is facing regulatory action from the Financial Industry Regulatory Authority (FINRA) in connection to sales of unlisted structured notes.

The action, taken by FINRA on Sept. 10 and outlined on the regulator’s Broker Check Web site, alleges that Dean made significant misrepresentations and omissions regarding the products, as well as failed to disclose certain facts to investors.

Many of the investors apparently were elderly. According to FINRA, Dean told customers that their principal investment was protected and guaranteed a fixed annual rate of return. That didn’t happen. Instead, when the structured notes ceased paying income, Dean, without authorization from customers, sold their shares to raise cash so that they could continue to make withdrawals.

Structured Notes: What You Don’t Know Can Deplete Your Investment

Structured notes are booming, with sales reaching $45 billion just this year. Despite their growth, structured notes can be a risky venture for investors, especially as more and more brokerages push out structured products with the promise of equity returns and less risk.

As reported Nov. 13 by the Wall Street Journal, some financial advisors are urging their clients to consider structured notes as a way to get back into stocks and avoid taking on too much risk.

Before jumping on the structured notes bandwagon, however, investors need to first consider a few issues. To begin, most of today’s structured notes are not 100% “principle protected” products. Instead, they typically offer only partial or limited protection, meaning they provide a fixed amount of contingent protection. Losses are covered only up until the point that the underlying asset drops below a certain level. Once that happens, the protection is canceled and investors bear the brunt of the losses.

Consider UBS AG’s Return Optimization Securities with Contingent Protection, which was priced in July. According to the Wall Street Journal article, investors receive 100% principal protection as long as the Standard & Poor’s 500-stock index hasn’t fallen more than 30% at the end of the product’s three-year term. If the index does fall more than 30%, investors pay the price by suffering all of the losses. If the markets fall by less than 30%, investors get back their principal at the end of product’s term. If the index rises, investors earn 1.5 times the upside, up to a cap of 58.6%, which they get if the index is up 39%. Fees, also called the “underwriting discount,” are 2.5%, says the WSJ.

The kind of protection might not work for all investors. As reported in the Wall Street Journal article, since 1926, a structured note that protected against a drop of 30% in the S&P 500 would have pierced the downside cap 7% of the time, leaving the investor exposed to the entire loss, while protecting them from a loss 17% of the time on a rolling 36-month basis.

Craig McCann of Securities Litigation & Consulting Group is skeptical of structured products. According to McCann, the vast majority of structured products turn out to be worth substantially less than their face value. Moreover, structured notes can be difficult to sell during a market rout. Investors also have to worry about counterparty risk.

Regulators Take Aim At Reverse Convertibles

Complex investments known as reverse convertibles face growing scrutiny from regulators for their hidden risks, lack of transparency and, in some instances, because of the manner in which they are represented to investors by certain brokers.

As reported in a June 24 story by Bloomberg, brokers for JPMorgan Chase & Co., Royal Bank of Scotland Group Plc, and Barclays Plc have been charging fees on some structured notes that equal or exceed the securities’ highest possible yield.

“It seems inconceivable that the commission could be more than the potential return to clients,” said Durraj Tase in the Bloomberg article. Tase, who is an adviser with First Liberties Financial in New York, added: “If you are paying more fees than your potential return, as an adviser, I would not be able to suggest that note.”

On June 15, RBS gave brokers a 2.75% commission to sell a three-month reverse-convertible note with a 2.56% potential yield, according to the Bloomberg story. In May, JPMorgan charged 5.25% in fees and commissions on a three-month Citigroup-linked note that paid 5% interest, and Barclays offered brokers a 2% commission on a security paying 2% interest.

In February 2010, the Financial Industry Regulatory Authority (FINRA) issued an alert to investors on the risks associated with reverse convertibles. Among things, FINRA warned that reverse convertibles expose investors not only to risks traditionally associated with bonds and other fixed income products – such as the risk of issuer default and inflation risk – but also to the additional risks of the unrelated assets, which are often stocks.

In the case of JPMorgan’s reverse convertibles, investors are exposed to losses if Citigroup declines by more than 20%.

If you have suffered losses in Reverse Convertibles, please contact our securities fraud team. We can evaluate your situation to determine if you have a claim.

FINRA Rules In Favor Of Investor In Lehman Principal Protected Notes Case

UBS AG faces dozens of arbitration claims from U.S. clients who bought 100 percent principal protected notes issued by Lehman Brothers Holdings that turned out to be virtually worthless after the company filed for bankruptcy in September. Now, in one of the first cases to be heard by the Financial Industry Regulatory Authority (FINRA), an arbitration panel has awarded an investor $200,000, ruling that her UBS broker inappropriately sold her the risky investments.

As reported Dec. 5 by the Wall Street Journal, the case serves as one of the first that FINRA has ruled upon concerning Lehman principal protected notes and could be a sign of how future cases may unfold.

Steven Caruso, an attorney with Maddox Hargett & Caruso, said in the article that hundreds or thousands of additional arbitration cases are expected to be filed in connection with Lehman principal protected notes. Caruso’s firm alone will represent roughly 100, according to the Wall Street Journal.

Lehman principal protected notes were structured notes that many banks and securities firms represented as low-risk investments. What they 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 found themselves with investments that traded for pennies on the dollar.

If you have suffered 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.

Top of Page