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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In an April 12, 2011, article from InvestmentNews.com states that Citigroup Inc., the third-biggest U.S. bank, was ordered to pay more than $51 million to a group of investors in its MAT and ASTA municipal-bond hedge funds, which regulators began examining more than two years ago.

The Financial Industry Regulatory Authority arbitrators, which oversees U.S. brokerages, includes $17 million in punitive damages, according to a copy of the panel’s decision on Finra’s website. It’s the third-largest arbitration award by Finra and predecessor NASD since 1988, according to Securities Arbitration Commentator Inc., a Maplewood, New Jersey-based legal publishing and research firm.

The SEC or U.S. Securities and Exchange Commission has questioned former Citigroup brokers as part of a probe into whether the bank misled investors about risks associated with certain debt funds, people familiar with the matter said last year. Citigroup disclosed the inquiry into the MAT and ASTA funds in August 2008, after the funds tumbled to values ranging from 10 cents to 60 cents on the dollar amid souring credit markets early that year.

“We are disappointed with the decision, which we believe is not supported by the facts or law, and we are reviewing our options,” Danielle Romero-Apsilos, a spokeswoman for the New York-based bank, said in an e-mailed statement.

The FINRA arbitrators didn’t explain the reasoning behind their ruling. They ordered Citigroup to pay $21.7 million to patent attorney Gerald Hosier, $8.5 million to Brush Creek Capital LLC, which is owned by Hosier’s family, and $3.9 million to venture capitalist Jerry Murdock Jr., the ruling shows. Among their claims, plaintiffs had accused the bank of breaching a fiduciary duty, contract violation, fraud, breaking Finra rules and supervisory failures.

It was noted in the InvestmentNews.com article that Citigroup said in a regulatory filing last month that “several” investors in funds including MAT and ASTA had filed lawsuits and arbitration claims against the bank, and that many of the disputes are already resolved. The SEC is examining the marketing, management and accounting treatment of the funds, the company said, adding that it is fully cooperating.

If you feel you have been an alleged victim of  Citigroup, Inc., or it’s brokers, or you have found yourself in a similar situation, 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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