Structured Product Lawyer Managing Claims as Part of FINRA Arbitration
In recent years the sale of structured products by Wall Street firms to retail and institutional investors has skyrocketed. Since most investments were delivering poor returns, brokerage firms pushed complex and opaque structured products. These products, in theory, offer an opportunity for larger returns and many of them purport to protect principal, but they present hidden risks and can cause substantial losses. If you have sustained a structured product loss, our structured product attorney will thoroughly investigate your claim and develop the best tactics and strategies to recover your losses.
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What are Structured Products?
Structured products are complicated and difficult for the average retail investor to understand. Brokerage firms rarely provide investors with “plain English” disclosure documents outlining the features, risks and details of the structured product. These products are not suitable for all investors, particularly retirees and other conservative, low-risk investors.
The most common structured product is a “structured note” which is a combination of a bond and a derivative, such as a call or put option, on a particular index, such as the S&P 500. The structured note is a “debt” or IOU from an investment bank, using derivatives to create the desired exposure to one or more investments. The investor’s return and potential loss varies depending on the structure of the note, the amount of “principal protection” available, and the performance of the index over time.
Other common structured products include “reverse convertibles,” which are short-term notes with principal repayment linked to the performance of a stock or a group of stocks. If the underlying stock’s price falls below a pre-specified level during the term of the note, investors may receive substantially less than the face value of the notes. Reverse convertibles tend to pay higher coupon rates than traditional notes, but investors risk large losses should the price of the stock drop sharply.
The Risks of Structured Products
It is often said that no one “buys” structured products but, rather, they are “sold” to individual investors. A rational investor would never seek to buy a risky and costly derivative security with limited upside potential and plenty of downside risk. Most investors prefer to buy relatively risk-free stocks based on the simple investment principle of “buy low, sell high.” Brokers, however, earn paltry commissions on buying and selling stocks. They prefer to sell investments that generate higher fees, such as structured products, which often place their clients at risk for substantial losses.
The most significant “risk factor” in purchasing a structured note involves the “credit risk” of the issuing investment bank. Because structured notes are debt obligations from the “issuer,” an investor bears the risk that the investment bank may default on its debt. Consider, for example, when Lehman Brothers filed for bankruptcy in September 2008. Investors who owned Lehman structured products incurred near-total losses on their investment. This “issuer risk” is the most notable risk and is present regardless of the performance of the underlying or referenced index or security.
Another substantial risk in purchasing structured products involves the liquidity or illiquidity of the structured note. Structured products rarely trade after they are issued and therefore are functionally illiquid. There is typically no active “secondary” market in which an investor could sell a structured product before maturity. It is possible that the original issuer could repurchase the note, or that the brokerage firm which sold the note would arrange a sale to another buyer. However, under these circumstances, an investor is likely to take a large discount on the purchase price to sell the note before maturity.
There is also a risk for an investor regarding the questionable “daily pricing” of the note and the value as it appears on the monthly account statement issued by the brokerage firm holding the note. Since most structured notes never trade after issuance, pricing is usually a guess or an estimate by the firm. Thus, pricing often does not reflect the “actual” value which the note would receive in the secondary market.
Until recently, Apple bonds and structured notes were the second leading “reference” index or security following the sale of structured products linked to the S&P 500. JPMorgan & Co. was the largest issuer of these products, selling $65.5 million. The value of these structured products, often called reverse convertibles, is linked to the performance of Apple stock. With the plummet of Apple’s stock price, investors are now facing the painful possibility of steep financial losses.
When Can Investors File Claims to Recover Structured Product Losses?
While many structured products are legitimate investments, and while investing in structured products can be profitable for the right investors under the right circumstances, retail investors who are sold these products frequently suffer significant losses. Our lawyers may be able to file a claim to recover your structured product losses if:
- You Received Inaccurate or Misleading Information – Due to the high-risk nature of structured products, investors often receive inaccurate or misleading information before they invest. If your broker or advisor misled you into a losing investment, you may have a claim for investment fraud.
- The Risks of Investing Were Not Fully Disclosed – In addition to providing inaccurate or misleading information, failing to fully disclose the risks associated with a structured product is also a form of investment fraud. If you were not informed of a structured product’s illiquidity or the credit risk associated with your investment, this could support a fraud claim as well.
- Investing in Structured Products was Not Suitable for Your Portfolio – Structured products are not suitable for most retail investors. If you suffered losses after receiving an unsuitable investment recommendation, you should speak with one of our lawyers about filing a claim for FINRA arbitration.
- Your Broker Had a Conflict of Interest or Ulterior Motive – Issuers often offer substantial commissions to brokers who promote their structured products. If your broker recommended investing in a structured product based on his or her best interests rather than yours, this could also give you a claim for fraud.
- The Structured Product Itself was Unsound – Structured products can take many different forms, and issuers can present varying levels of risk to investors. Before recommending investments to their clients, brokers and advisors must do their due diligence. If your broker or advisor recommended a high-risk structured product, and if your broker or advisor should have identified red flags with the product or issuer but failed to do so, you may have a claim.
5 Facts about Structured Products Your Broker Won’t Tell You
When trying to sell their clients structured products, brokers will often provide only the information that they think is necessary to make the sale. As a result, many investors do not learn what they really need to know until it is too late. For example, here are five facts about structured products that your broker might not tell you:
- Investing in structured products can lead to the complete loss of your principal
- Fluctuations in the price, level and yield of the investments underlying the structured product can greatly increase your risk and restrict your profit potential
- Changes in the issuer’s credit standing can also significantly impact the profit potential of your investment (or lead to complete loss of principal if the issuer fails)
- Your ability to sell (or liquidate) your position in a structured product once you invest will be limited at best
- Regardless of whether your investment ultimately leads to gains or losses, your broker will earn a substantial commission for making the sale
Our Structured Products Lawyer Can Provide Legal Advice and Assistance to Help You Recover Compensation
Investors who have been led to believe that structured products are a safe and suitable investment and have suffered losses can recover damages through the FINRA arbitration process. Zamansky LLC has recovered millions of dollars in stock broker fraud and securities arbitration cases against investment firms. Our law firm handles all types of structured product cases, including:
To learn more about how our structured products lawyer can assist you with a structured products matter, contact us today to schedule a free, no-obligation consultation.