Investigations

Structured Products Arbitration

Zamansky LLC has filed the leading investor securities arbitration case involving the multi-billion dollar market of so-called “structured products” and we are investigating many Wall Street firms who have sold structured investments to retail investors.

Structured products are designed to facilitate highly customized risk-return objectives. This is accomplished by taking a traditional security, such as a conventional investment-grade bond, and replacing the usual payment features (e.g. periodic coupons and final principal) with non-traditional payoffs derived not from the issuer’s own cash flow, but from the performance of one or more underlying assets.

It’s become clear that many retail investors have suffered losses associated with structured products.  Many brokerage firms peddled structured products using monikers such as PACERS, STRIDES, SPARQS, and ELEMENTS.

One dubious structured product developed by Citigroup is called the ELKS, or equity linked security.  Citi’s ELKS (equity linked security) product is a risky derivative instrument where an investor is offered a specified return on a structured security tied to an individual stock. Providing the stock maintains a minimum value, the guaranteed return is paid. If the stock ever falls below the minimum value (sometimes around 80 percent), the ELKS immediately convert into shares of that stock. Then if the price of the underlying stock declines, the investor could receive a stock worth much less than the initial investment.

Here’s the catch: ELKS offer potentially higher returns, but the downside risk is unlimited if the stock goes south. If the underlying stock happens to dramatically increase in value, the investor only gets the guaranteed return.

For Citigroup, it’s a classic case of “heads I win, tales you lose.” The bank charges investors an upfront commission to buy ELKS and likely earns additional profits through hedging. Not surprisingly, brokerage firms were aggressively peddling structured derivative products like ELKS to unsophisticated retail investors a few years back, prompting FINRA to warn member firms of concerns that customers didn’t understand the inherent risks.

There’s evidence that FINRA’s warnings weren’t heeded. We represent a retired couple over 80 whose Citi broker last year bought $300,000 worth of ELKS on their behalf. The ELKS were highly unsuitable for retirees simply looking to preserve capital. The highly volatile stocks our client’s ELKS were derived from included Yahoo!, Cemex and Sandisk. The couple has lost nearly a third of their principal as the underlying stock’s value plummeted.

The vast majority of structured products are from high investment grade issuers only – mostly large global financial institutions such as Barclays, Deutsche Bank or JP Morgan Chase. These products come with hidden liquidity risks, not to mention the credit quality of the issuer.  So in other words, without good credit, the investor stands to lose based on the ability of the Wall Street firm to pay-up on the promised return – a fact that comes into question as more financial services firm face questions about their capitalization.

Because of these risks, structured products are not suitable for most retail investors and for many institutional investors they may have unwittingly become exposed to hidden risks. Zamansky LLC offers free consultations.

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