Structured Investment Products: Buyer Beware
For years, structured investment products (SIPs) were marketed by Wall Street as a way for risk-adverse investors to take advantage of stocks or other investments while maintaining some protection in the event of losses. Now, however, in the aftermath of the subprime crisis and the ongoing turmoil in the financial markets, many investors - especially those holding Lehman Brothers Return Optimization Securities or 100% Principal Protected Notes - are learning that some of the products fail to live up to their hype.
Structured investment products can take several forms. Generally, however, an SIP is an investment strategy that combines derivatives with other derivatives, including a single security, a pool of securities, options, indices, commodities, debt issuances, foreign currencies and swaps.
According to the Wall Street firms that invented them, the purpose of the products is to give investors access to commodities, stocks or other investments without actually having to “own” those assets.
In most instances, what investors do own is the unsecured debt of the issuer.
With Lehman Brothers’ Sept. 15 bankruptcy, the negative side of structured investment products is just now surfacing. The insolvency of Lehman means investors holding certain Lehman structured products stand to lose a substantial portion of their investment. Case in point: Lehman’s Return Optimization Securities and 100% Principal Protected Notes.
As reported Nov. 11, 2008, in the Wall Street Journal, some Lehman structured products are now trading for less than seven cents on the dollar, leaving U.S. investors who hold the products angry and broke. Many are now heading to court, filing class-action lawsuits against Lehman and the brokerages that sold them the products and failed to reveal their many risks.
In Hong Kong, where thousands of investors in Lehman notes face the prospect of losing their entire investment, about 200 individuals recently marched through the city’s financial district, holding signs that read: “Major bank fraud” and “My money gone, I don’t want to live.”
According to the Wall Street Journal article, the problems surrounding Lehman Brothers Return Optimization Securities and the 100% Principal Protected Notes could be just the starting point of what lies ahead. From January 2008 through early November, nearly $34 billion worth of structured investment products were sold to small U.S. investors.
What makes the issue even more disturbing is the fact that many of the investors in structured products are retirees or individuals nearing retirement age. They invested in principal-protected notes because they thought the products would, at the very least, give them back their original investment at a set maturity date. Moreover, many investors say their brokerage represented products like Lehman’s Return Optimization Securities or 100% Principal Protected Notes as a much safer investment than, say, stock investments.
Charles Brooks is one of those investors. Featured in the Wall Street Journal article, the Pennsylvania-based physician invested approximately 3% of his portfolio in two of Lehman’s structured investment products. When Lehman Brothers went bankrupt in September and he tried to sell the notes, the doctor was told to expect about seven cents on the dollar.
At 65, Dr. Brooks should be thinking about retirement. Instead, he may need to postpone that idea altogether.
Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
November 11th, 2008 at 11:40 pm
I lost $250,000 in Lehman ppn’s sold to me by UBS as safe and protected. I am a retired 73 year old physician and this represented close to 10% of my IRA on which retirement is based. I was never told these were Lehman products until they started going south in value. Even then I was assured they were principal protected.