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Jun/11

12

Report Says That Structured Products Are ‘Absurdly Destructive’ for Retail Investors

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In a June 10, 2011, article in InvestmentNews.com, Liz Skinner writes that structured notes and other derivatives products have been marketed by Wall Street as safe and secure investments. Of course, Skinner writes, there’s safe and then there’s safe. Retail investors of all stripes have lost at least $113 billion by purchasing these purportedly safe instruments, according to a new study conducted by the nonpartisan policy center Demos and The Nation Institute, a media think tank.

“In my three decades of Wall Street experience, I have not seen any other product as absurdly destructive as retail investments linked to structured products,” securities arbitration consultant Louis Straney wrote in the report.

Considering financial institutions appear to be ramping up the sales of these products,that’s worrisome. Indeed, structured notes with principal protection are among the most popular products being pitched to income-oriented investors, the study said. These investments combine a zero-coupon bond and an option whose payoff is linked to an underlying asset, index or benchmark, or a basket of benchmarks. The notes, which pay off based on the performance of the linked index, can provide reasonable returns and upside potential — certainly attractive given today’s puny money market and CD rates.

Liz Skinner writes that last year, banks and brokers sold more than $52 billion in structured notes, according to the study. In the past, the notes were sold strictly to sophisticated institutional investors. In recent years, however, structured notes have been repackaged and sold to retail investors — often, senior citizens —as a principal protection tool. But as the name implies, structured products can be complex. Last week, regulators warned investors that structured notes with principal protection often come with confusing terms, low guarantees and can tie up money for as long as a decade. The alert from the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc. stressed that the investments are not risk-free.

The SEC said principal-protected notes vary wildly by issuer and that investors tend to ignore or don’t understand what is spelled out in prospectuses. Also, the commission warned that principal-protected notes do not always protect principal. Some issuers of principal-protected notes guarantee only a certain amount of the principal — in some cases, as little as 10%. Sometimes, the principal is protected only if a contingency stipulated in the prospectus is met. Other sellers of the notes do guarantee 100% of principal. But even that’s not a lock. If the issuer of the note goes bankrupt, the investor likely will lose all or most of the money invested.

The InvestmentNews.com article goes on to say that in April, for example, UBS Financial Services Inc. agreed to pay $10.7 million in fines and restitution to settle Finra allegations that its advisers misled investors about the “principal protection” feature of structured notes issued by Lehman Brothers Holdings Inc. that it sold a few months before that firm collapsed. In its complaint, Finra said that some UBS advisers didn’t understand the complexity of the 100% principal-protected notes that Lehman issued and failed to tell investors that they were unsecured obligations. In settling the case without admitting wrongdoing, UBS said that it was pleased to have the matter resolved and that most structured-product sales had been done properly.

Skinner writes that the Securities Industry and Financial Markets Association, which represents most Wall Street firms, did not respond to a request for comment Thursday about the suitability of structured products for retail investors.

They Are A Scared Group

The $113 billion that the report said individuals have lost includes more than just investments in principal-protected notes. It also included auction-rate securities, as well as certain municipal bond hedge funds (as reported by regulators or lawyers monitoring losses).

“Ninety-nine percent of the $113 billion cited is not to be attributed to the structured products industry, in particular principal-protected notes, which by and large have performed superbly in this volatile market environment,” said Keith Styrcula, spokesman for the Structured Products Association.The only losses from structured notes have been those from the Lehman bonds — probably less than one billion dollars in the U.S., he said.

Abuses relating to structured products and/or derivatives have been reported in about a third of the 50 states. The director of Alabama’s securities commission, Joe Borg, said he’s looking into cases involving income-oriented investments that lost money.

“There’s no doubt that structured products are targeted toward older folks,” Mr. Borg wrote in the report. “There’s the issue of outliving their money when it is tied up in low-yielding CDs and bonds. They’re a scared group.”

If you feel you have been an alleged victim of  your broker/brokerage selling you unsuitable structured notes, please call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com.

Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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Apr/11

12

UBS Ordered by FINRA to Pay Out $10.75M to Clients

Comments off · Posted by admin in FINRA

Article after article has been written recently about the UBS Financial fine from FINRA.  In an April 11, 2011, article in InvestmentNews.com we get even further insight into the situation from Liz Skinner’s article.  Ms. Skinner wites that UBS Financial Services Inc. has agreed to pay $10.75 million in fines and restitution to settle Finra allegations that its advisers misled clients about the “principal protection” feature of a Lehman Brothers Holdings Inc. bond product sold a few months before that firm filed for bankruptcy.

FINRA or the Financial Industry Regulatory Authority Inc. said some UBS advisers didn’t understand the complexity of the 100% Principal-Protection notes that Lehman issued and failed to tell investors they were unsecured obligations. From March to June 2008, UBS Financial advertised the notes as if the principal was guaranteed as long as customers held the product to maturity, the self-regulator said. The principal isn’t guaranteed under a default.

It is widely known that Lehman Brothers filed for bankruptcy protection in September, 2008.

FINRA said that the structured notes also were “unsuitable” for some customers who purchased them, including those with “moderate” and “conservative” risk profiles.“In cases, UBS’ financial advisors did not even understand the complex products they were selling, and as a result, they neglected to disclose necessary information to customers about the issuer’s credit risk so investors would understand the magnitude of the potential losses,” Brad Bennett, Finra’s enforcement chief, said in a statement.

“UBS is pleased to have resolved this FINRA matter, under which UBS is required to reimburse a limited number of investors who purchased certain Lehman principal protection notes during a discrete 3 1/2 month period of time,” UBS said in a statement. “The significant majority of UBS’s Lehman structured product sales were conducted properly and any client losses were the direct result of the unprecedented and unexpected failure of Lehman Brothers in 2008, which affected all Lehman investors.”

The InvestmentNews.com article reinforces that UBS has agreed to pay $2.5 million in fines and return $8.25 million to customers to settle the case. It neither admitted nor denied the charges.

If you feel you have been an alleged victim of  UBS Financial Services Inc, or have become of victim of a similar situation, please call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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Apr/11

11

UBS Financial Services Fined $2.5 Million by FINRA & Orders UBS to Pay Restitution of $8.25 Million for Omissions That Effectively Misled Investors in Sales of Lehman-Issued 100% Principal-Protection Notes

Comments off · Posted by admin in FINRA

WASHINGTON — It was announced today in an article on FINRA’s website that The Financial Industry Regulatory Authority (FINRA) has fined UBS Financial Services, Inc., $2.5 million, and required UBS to pay $8.25 million in restitution for omissions and statements made that effectively misled some investors regarding the “principal protection” feature of 100% Principal-Protection Notes (PPNs) Lehman Brothers Holdings Inc. issued prior to its September 2008 bankruptcy filing.

 The article describes PPNs as fixed-income security structured products with a bond and an option component that promise a minimum return equal to the investor’s initial investment. 

It was noted that from March to June 2008 as the credit crisis worsened, UBS advertised and some UBS financial advisors described the structured notes as principal-protected investments and failed to emphasize they were unsecured obligations of Lehman Brothers, which eventually filed for bankruptcy in September 2008.

 FINRA announced in it’s findings that UBS:

  • failed to emphasize adequately to some investors that the principal protection feature of the Lehman-issued PPNs was subject to issuer credit risk;
  • 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 the use of that information with clients;
  • failed to establish an adequate supervisory system for the sale of the Lehman-issued PPNs, and 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;
  • created and used advertising materials that had the effect of misleading some customers about specific characteristics of PPNs

The article goes on to say that FINRA found that some of UBS’ financial advisors did not understand the product, including the limitations of the “protection” feature. Consequently, certain financial advisors communicated incorrect information to their customers. Also, certain advertising materials had the effect of misleading customers regarding the characteristics and risks of the PPNs, including the nature, scope and limitations of the 100% Principal-Protection Notes. The materials suggested that a return of principal was guaranteed if customers held the product to maturity; however, UBS did not adequately address the importance that credit risk could result in loss of principal.

Also, Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “This matter underscores a firm’s need to be clear and comprehensive in disclosing risks of the structured products it sells to retail investors. In cases, UBS’ financial advisors did not even understand the complex products they were selling, and as a result, they neglected to disclose necessary information to customers about the issuer’s credit risk so investors would understand the magnitude of the potential losses.”

UBS’s suitability procedures were also lacking. UBS did not have risk profile requirements for certain PPNs; therefore, the PPNs were sold to some investors for whom the product was not suitable, including investors with “moderate” and “conservative” risk profiles. Moreover, these particular investors were more likely to rely on UBS’ representations about the “100% principal protection” feature of Lehman PPNs because of their risk averse investment objectives.

 In settling this matter, UBS neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

If you feel you have been an alleged victim of  UBS Financial Services Inc, or have become of victim of a similar situation, please call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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