Lehman Brothers Principal Protected Notes Not So Protected

Although this story is still relatively nascent, I have to imagine the next big scandal to engulf Wall Street will involve Lehman Brothers principal protected notes.  Lehman Brothers principal protected notes were drummed up behind Wall Street’s closed doors and used as a way to dupe investors and raise capital without diluting shareholder equity.

See, over the past few months Wall Street had trouble selling traditional bonds at attractive interest rates.  So instead, as sub-prime losses mounted, they concocted structured products that masked the risk by tying them to other securities, indexes or some other basket of stocks or bonds.  Indeed, Lehman Brothers was one of the most prodigious issuers of principal protected notes and UBS was one of the biggest brokers selling them.

The selling points of Lehman Brothers principal protected notes were that the principal was “100 percent guaranteed” and they had “uncapped appreciation potential.”  This was as close - investors were told by their brokers - to a “sure thing” that ever comes along.  But the problem was that the guarantee was only good so long as the issuer remained solvent.  And we now know how that story goes.

The market for Lehman Brothers principal protected notes and structured products is extremely large and estimated to be around $114 billion.  And much of that was created over the past year during a period when Wall Street was in dire need of capital and writing down sub-prime losses.  In the past twelve months alone, brokers sold $70 billion worth of these securities.  Naturally, three-fifths of the market was consumed by retail investors and based on the ones that have contacted Zamansky & Associates, they were risk-averse retirees who needed their savings to get by.

While holders of Lehman Brothers principal protected notes have fared the worst, we are also hearing from investors that have been left holding principal protected notes including “Suns” (Stock Upside Note Securities), “Prudents” (Prudential Research Universe Diversified Equity Notes) as well as Merrill Lynch’s “Mitts” (Merrill’s Market Index Target - Term Securities), Citigroup’s “Sequins” (Select Equity Indexed Notes) and Morgan Stanley’s Propels (Protected Performance Equity Linked Security).

Lehman Brothers principal protected note investors have experienced extraordinary losses and are filing claims for misrepresentation, omission of material facts, unsuitability and negligence.  In some cases, investors have claimed they were not even sent a prospectus.  Instead, they got a link to the SEC’s website.

Obviously, losses were severe when Lehman Brothers declared bankruptcy.  This raises some questions about one of the biggest concerns on the minds of regulators at the Federal Reserve and Department of Treasury: counterparty risk.  But who actually is considered counterparty?  Apparently financial regulators hold little regard for counterparties when they are individual investors on the other side of a Lehman Brothers transaction.

Look for Lehman Brothers principal protected notes to be a headline grabber in the weeks to come.  If you have lost money in a Lehman structured note, or principal protected note or structured product issued by another brokerage firm please call Jake Zamansky for a free consultation.  For contact information, click here.

Broker’s World: Citi Readies Brokers For Client Settlements

The Piety of Henry Blodget

Henry Blodget and I have a history, there’s no denying that. Back in 2001 I sued him and his former employer Merrill Lynch for fraudulently touting tech stocks that Mr. Blodget privately confided were “POS,” “pieces of junk” and “pieces of crap.” My case caught the attention of former New York Attorney General Eliot Spitzer and ultimately led to the $1.4 billion global settlement and Mr. Blodget’s lifetime ban from the securities industry.

Although countless investors lost hundreds of millions of dollars because of his bogus research reports (and he was allowed to keep most of the millions of dollars he was paid to write them), Mr. Blodget has refused to fade from the limelight he once enjoyed. He has successfully transformed himself into a prolific journalist, penning commentaries in august publications such as the New York Times and running various websites including Clusterstock, which specializes in stock research. Given his disgraced past, that takes real cajones.

Last week Clusterstock launched a mild broadside at yours truly, questioning my transparency though essentially conceding the merits of my argument regarding a blog post I wrote on some failed Citigroup hedge funds. The site says Mr. Blodget agrees that “it is possible” that I’m correct in speculating that Citi’s brokers were likely instructed to market the collapsed hedge funds as conservative investments “but he would like see evidence of this.”

Mr. Blodget understands full well how the game is played, particularly since Merrill’s brokers dutifully peddled his research to clients, even when they began to openly question the integrity of his analysis. Furthermore, the Wall Street Journal recently quoted a Smith Barney broker as saying, “”That’s why they bought it,” said the broker whose clients, many of them wealthy retirees, invested in the Falcon fund. “These kinds of clients weren’t looking for a home run.”

Interestingly, Mr. Blodget remained mum on my comment that Citi was positioning its own brokers as fall guys, when in all likelihood they were merely following the direction of the company’s wealth management executives. I’d expect this comment to strike a particular nerve given that Mr. Blodget took the fall for Merrill’s conflicted research while his senior managers was given a free pass. As I noted in my earlier post, Wall Street’s senior executives almost never are held accountable for the wrongdoing under their watch.

Finally, there is Mr. Blodget’s issue with my transparency:

Since Zamansky is taking a stand for “transparency,” Blodget thinks it might also have been appropriate for Zamansky to disclose that he is in the business of suing companies based on allegations like the ones above.

Setting aside the irony of Mr. Blodget requesting transparency, my interests in the Citi hedge fund post were patently obvious. But in deference to Mr. Blodget’s new found piety, I must point out that in my blog post I referenced angry calls from investors who are my clients. If that wasn’t clear enough, my biography is clearly posted on Seeking Alpha, a financial blog aggregator which is where Mr. Blodget originally saw my post. And finally, my blog post first appears on my law firm’s website.

Most people in the industry know – Mr. Blodget certainly one of them – that I represent investors who have been harmed and abused by Wall Street.

Suffice to say, I never thought I’d see the day when I’d be holding myself accountable to Henry Blodget. Perhaps that explains the pigs I’ve just seen flying past my office window.

Wall Street Might Make Hot Air Look like Change