December 24, 2012

Stockbroker Fraud Headlines: Securities Claims Against Lehman Underwriters Are Dismissed, NYSE Euronext Works on Kill-Switches Plan, and SEC Calls for Structured Products Ratings Roundtable

Securities Claims Against Lehman Brothers Holdings Inc. Underwriters Are Dismissed
The U.S. District Court for the Southern District of New York has thrown out the California Corporations Code claims made against the underwriters of two offerings of Lehman Brothers Holdings Inc. debt securities per the precluding of the 1998 Securities Litigation Uniform Standards Act. This, despite the fact that the securities case was brought by one plaintiff and lacks class action allegations.

The SLUSA’s enactment had occurred to shut a 1995 Private Securities litigation Reform Act loophole that let plaintiffs filing lawsuits in state courts circumvent the Act’s tougher securities fraud pleading requirements. It generally allows for federal preemption of state law class actions contending misrepresentations related to the buying or selling of a covered security. However, the court granted the motion to dismiss noting that even though the securities case was brought only on the State Compensation Insurance Fund’s behalf, it is still a covered class action within the act’s meaning.

NYSE Euronext Working on Kill-Switches Plan
According to NYSE Euronext (NYX) EVP and US equities head Joseph Mecane, the group is making headway with coming up with a concrete plan to implement kill switches that would shut trading should a technological error happen. The desire for such a tool comes in the wake of recent prominent trading errors that have demonstrated the technology flaws in the US equity markets.

NYSE Euronext, other SROs, buy-side firms, and brokerage firms have even formed an industry working group to tackle this matter. Speaking at a Senate Banking subcommittee hearing on computerized trading, Mecane said that among the details still being worked out are whether the kill switch should be implemented at the SRO level or clearing level. Another issue under discussion is about which parts of the process should be optional and/or obligatory.

SEC Recommends Structured Products Ratings Roundtable
According to a Commission study, the SEC should call a roundtable to look at three possible ways of dealing with issues related to structured finance products’ credit ratings, such compensation models, conflicts of interest, and other matters. The study was mandated by Dodd-Frank Wall Street Reform and Consumer Protection Act,

One possible approach would involve setting up a board that would create an “assignment system” for nationally recognized statistical rating organizations to provide ratings for these products. This would take issuers out of the NRSRO choice process, which could allow raters to feel not as pressured to conform with client preferences. A second route involves enhancing the 1934 Securities Exchange Act’s Rule 17g-5, which mandates that arranger-hired NRSRO’s figure out initial ratings for structured finance products so that certain measures can taken to make sure that other NRSROs rate the products. The third option involves looking at different alternative compensation models for credit raters.

IIn re Lehman Brothers Securities and ERISA Litigation, S.D.N.Y., 09 MD 2017 (LAK) (PDF)

Industry Group Nearing Concrete Plan On Kill Switches to Halt Erroneous Trades, Bloomberg BNA, December 19, 2012

Industry Group Nearing Concrete Plan On Kill Switches to Halt Erroneous Trades, Bloomberg BNA, December 19, 2012


More Blog Posts:
McGraw Hills, Moody’s, & Standard & Poor’s Can’t Be Held Liable by Ohio Pension Funds for Allegedly Flawed MBS Ratings, Affirms Sixth Circuit, Stockbroker Fraud Blog, December 20, 2012

Securities Law Roundup: Ex-Sentinel Management Group Execs Indicted Over Alleged $500M Fraud, Egan-Jones Rating Wants Court to Hear Bias Claim Against SEC, and Oppenheimer Funds Pays $35M Over Alleged Mutual Fund Misstatements, Stockbroker Fraud Blog, June 13, 2012

Alleged Cherry-Picking Scam Leads to SEC Charges Against California Hedge Fund Manager, Stockbroker Fraud Blog, December 19, 2012

July 28, 2011

Broker-Dealers are Making Reverse Convertible Sales That are Harming Investors, Says SEC

According to the Securities and Exchange Commission, the sales practices that broker-dealers engage in when structured securities are hurting investors. The SEC released this recent finding in a report this week. Structured securities products are derivatives whose value is determined from baskets of indexes, other securities, options, debt issuances, commodities, and foreign securities.

The SEC reached its conclusion after conducting a sweep examination of 11 broker-dealers. The Commission says that the financial firms may have guided clients toward complex products even though they were unsuitable for these investors. In certain instances, they also appear to have:

• Charged too high of prices
Failed to adequately reveal all risks involved
• Traded at prices that were not to the benefit of retail investors
• Committed possible supervisory deficiencies

At the heart of the SEC sweep examination were reverse convertible notes, which is a security that has an embedded put option. RCN are considered among the riskiest structured products. According to the SEC report, there were clients who purchased RCN’ even though these financial products not in line with their investor profiles or stated goals. Many of these RCN investors sustained significant financial losses.

The SEC report is recommending that broker-dealers:
• Implement procedures and controls to detect and stop structured securities-related abuses
• Reveal material facts about the structured product notes when offering them to investors
• Make sure that supervisors and registered representatives undergo specialized training before they sell structured securities
• Properly list structured securities products on client statements

It was just recently that the Financial Industry Regulatory Authority Inc. warned investors to exercise caution when evaluating whether to buy complex investment products.

Our securities fraud lawyers represent investors that have suffered financial losses because they were encouraged to purchase financial instruments that were inappropriate for them.

SEC blasts B-Ds over sales of reverse convertibles, Investment News, July 27, 2011

Staff Summary Report on Issues Identified in Examinations of Certain Structured Securities Products Sold to Retail Investors, SEC, July 27, 2011 (PDF)


More Blog Posts:

RBC Wealth Management Unit Ferris Baker Watts to Pay Investors Restitution Over Reverse Convertible Notes Allegations, Says FINRA, Stockbroker Fraud Blog, October 23, 2010

Increase of Structured Notes with Derivatives Sales Seduces Retirees, Reports Bloomberg, Stockbroker Fraud Blog, September 25, 2010

FINRA Fines H & R Block Financial Advisors (Now Ameriprise Advisor Services) over Sales of Reverse Convertible Notes (RCN), Stockbroker Fraud Blog, February 17, 2010

Continue reading "Broker-Dealers are Making Reverse Convertible Sales That are Harming Investors, Says SEC" »

May 30, 2011

SEC and FINRA Alerts Retail Investors About Structured Notes with Principal Protection

FINRA and the SEC’s Office of Investor Education and Advocacy has put out an alert called Structured Notes with Principal Protection: Note the Terms of Your Investment. The purpose of the alert is to let investors know about the risks involved in investing in this type of note while providing information that will allow them to better understand how the notes work.

These notes usually put together zero-coupon bond that doesn’t pay interest until maturity with a derivative product that has a payoff tied to an underlying asset, benchmark, or index that may consist of commodities, currencies, and spreads between interest rates. The investor can take part in a return tied to a specific change in the underlying asset’s value. That said, investors should be aware that the way these notes may be structured could cap or limit their upside exposure to the underlying asset, benchmark, or index.

Investors with structured notes with principal protection that hold them until they mature will usually get a return of at least part of their investment even if there is a decline in the underlying benchmark, index, or asset. However, protection levels aren’t all the same. Some products are guaranteed just 10%, and all guarantees are dependent on the company that made it and its financial strength.

The SEC and FINRA want investors to know that structured notes with principal protection can have complex pay-out structures, which can make it hard to accurately determine their potential for growth and their risk. Investors should also know that their principal could get tied up for up to 10 years and they may end up not making a profit on their initial investment.

The Alert recommends asking a number of questions before investing in a structured note with a principal protection:
• Is this product appropriate considering your investment objectives?

• What are the risks involved?

• What type of principal protection is offered?

• What are the conditions of the protection?

• Are there additional costs?

• How long is your money going to be tied up?

• Are you allowed to liquidate or sell prior to the maturity date?

• Is a call feature provided?

• Are there limits to possible gains?

• Are there tax implications?

• How does the pay-out structure work?

• What are your other investment options?


Usually, investors with structured notes with principal protection that hold them until they mature will usually get a return of at least part of their investment even if there is a decline in the underlying benchmark, index, or asset. However, protection levels aren’t all the same. Some products are guaranteed just 10%, and all guarantees are dependent on the company that makes it and its financial strength.

The SEC and FINRA want investors to know that structured notes with principal protection can have complex pay-out structures, which can make it hard to accurately determine their potential for growth and their risk. Investors should also know that their principal could get tied up for up to 10 years and they may end up not making a profit on their initial investment.

Related Web Resources:
SEC, FINRA Warn Retail Investors About Investing in Structured Notes with Principal Protection, SEC, June 2, 2011

Structured Notes with Principal Protection: Note the Terms of Your Investment


More Blog Posts:

Wall Street Targeting Older Investors With Structured Product Sales, Reports AARP, Stockbroker Fraud Blog, March 11, 2011

Increase of Structured Notes with Derivatives Sales Seduces Retirees, Reports Bloomberg, Stockbroker Fraud Blog, September 25, 2010

Moody’s, Fitch, and Standard and Poor’s Were Exercising Their 1st Amendment Rights When They Gave Inaccurate Subprime Ratings to SIVs, Says, Institutional Investors Securities Blog, December 30, 2010


Continue reading "SEC and FINRA Alerts Retail Investors About Structured Notes with Principal Protection" »

March 11, 2011

Wall Street Targeting Older Investors With Structured Product Sales, Reports AARP

Unfortunately, there are elderly investors who end up suffering financial losses because a broker placed their money in investments that are unsuitable for their needs. Many of these investors don't realize that they may have grounds for a securities fraud claim.

The AARP says that for many elderly Americans, the prospect of running out of money is scarier to them than the thought of dying—especially for those who are too old or sick to go back to work and rebuild their nest eggs. Although broker-dealers and investment advisers know how important it is for older investors to make sure that their money is placed in investments that are low risk, this isn’t always what happens, such as with structured products.

While highly profitable for sellers, structured products aren't always a great benefit to buyers who could stand to lose everything on an illiquid investment that has limited potential gain. Already, investors have lost about $164 billion in such risky investment. Yet structured product sales continue to grow.

This isn’t surprising considering that, according to securities arbitration consultant Louis Straney, sales commissions on structured products are at 3- to 10%. Last year alone, Wall Street sold $51.86 billion in structured products to US customers.

AARP says that for many investment banks and financial firms, older Americans are among their favorites as buyers for these loosely regulated instruments. Not only do many elderly investors have the money, but also, the pitch, “low risk to principal, and high yield,” is exactly what many retirees want. Unfortunately, many elderly investors may not fully understand exactly what they are investing in, opting instead to place their trust in brokers and financial advisers.

Losing one’s savings or retirement is no joke for the elderly, who now must worry about how to support themselves and pay for nursing and medical care. Also, financial worries can also take a physical and emotional toll on elderly victims.

Our securities fraud lawyers represent investors who have lost money because they were advised to place their funds in investments that were inappropriate for their needs and goals. We also work with senior financial fraud victims.

Related Web Resources:
How Safe Are Your Savings?, AARP, March/April 2011

Running Out of Money Worse Than Death, AARP, July 1, 2010

Fraud Target: Senior Citizens, FBI

Financial Planning for Seniors, ElderlyCare


More Blog Posts:
Increase of Structured Notes with Derivatives Sales Seduces Retirees, Reports Bloomberg, Stockbroker Fraud Blog, September 25, 2010

Structured Notes Becoming New “Investment Bubble” on Wall Street, says Institutional Risk Analytics Director, Stockbroker Fraud Blog, August 12, 2010

Brokers Renew Push for Investors to Buy Structured Products, Stockbroker Fraud Blog, June 12, 2009

October 29, 2010

Ex-Employee Accuses Bank of America of Securities Fraud Involving Complex Derivatives Products

A former Bank of America employee is accusing the investment bank of aggressively recommending complex derivatives products to investors while at the same time failing to tell them of the risks involved. In a letter to Securities and Exchange Commission Chairman Mary Schapiro, the whistleblower said that the sales of these structured notes were so important to the BofA’s brokerage unit during the economic collapse that workers were threatened with termination if they warned clients against investing in the products or did not meet their quotas.

The ex-employee writes that another employee’s job was threatened after he told clients to liquidate their notes because of the possibility that BofA might become “nationalized,” which would make the notes worthless. The whistleblower claims to have been notified that aggressive sale of the notes was the only way the brokerage unit could fulfill its revenue goals at that time.

Bill Halldin, a Bank of America spokesperson, says that the investment firm has not heard about any such complaint regarding these allegations. He maintains that the investment bank has a policy abiding by "applicable laws and industry practices" when conducting business.

Broker Misconduct
Broker-dealers are obligated to notify investors of risks involved in an investment. They must also make sure that any investment that they recommend is appropriate for a client. Failure to fulfill these duties of care can be grounds for a securities fraud case.

Structured Notes
These derivative-like contracts allow investors to bet on bonds, stocks, or other securities. While some notes are “guaranteed” and promise a return on principal upon expiration, there are still those, such has Lehman Brothers’ notes, that fail to meet that guarantee. This can leave the holders to deal with the financial consequences. Banks may also stop trading the notes at any time.

Related Web Resources:
Informer: BofA hawked risky deals to customers, NY Post, October 29, 2010

Informer: Bofa Hawked Risky Deals to Customers, iStockAnalyst

Bank of America Blog Posts, Stockbroker Fraud Blog

Whistleblower Lawsuits, Stockbroker Fraud Blog

Continue reading "Ex-Employee Accuses Bank of America of Securities Fraud Involving Complex Derivatives Products " »

September 25, 2010

Increase of Structured Notes with Derivatives Sales Seduces Retirees, Reports Bloomberg

According to Bloomberg, the sale of structured notes (also known as principal protected notes, or PPN) that come with derivatives to thousands of individual investors has driven up their sale by 58% to $31.9 billion through August. Unfortunately, investors are often lured into making such purchases without fully comprehending the risks, and this can result in significant losses. This year, the US Securities and Exchange Commission’s enforcement division began a group concentrated on investigating structured products.

Banks create structured notes products by bundling privately negotiated over-the-counter derivatives with bonds. Because the Commodity Futures Modernization Act excludes most trades between institutions from oversight, banks can sell OTC derivatives to individuals as long as they are put together with bonds into hybrid securities. Individual investors, even though they lack the background and knowledge to fully understand the risks involved, are targeted for these notes to increase banks’ profit margins. Also, because structured notes aren’t standardized, brokers are paid more to sell structured notes than they are for selling some of the other financial products.

Structured notes have grown in popularity since the Federal Reserve has maintained its target rate for overnight loans between banks at 0% to .25%. With US interest rates close to 0%, investors are buying up the bonds. Reverse convertible notes has paid 13% interest on average in 2010.

Granted, investors can obtain higher returns if their bets work out, and principal-protected notes and some of the other products are not as risky as stocks because sellers guarantee that investors won’t suffer losses if the market falls. However, because there are variables outside the scope of interest rate movements, investors can lose money. Institutional Risk Analytics Managing Director Christopher Whalen has said that structured notes will likely become the next investment bubble.

Retirees Duped by Derivatives With Structured Notes Sale Surge, Bloomberg, September 22, 2010

Structured Notes Becoming New “Investment Bubble” on Wall Street, says Institutional Risk Analytics Director, Stockbrokerfraudblog.com, August 12, 2010

Shepherd Smith Edwards & Kantas LTD LLP Investigates Claims for Purchasers of Structured Notes, GlobalNewswire, August 11, 2010

Continue reading "Increase of Structured Notes with Derivatives Sales Seduces Retirees, Reports Bloomberg" »

August 12, 2010

Structured Notes Becoming New “Investment Bubble” on Wall Street, says Institutional Risk Analytics Director

Bloomberg recently reported on a report by Institutional Risk Analytics Managing Director Christopher Whalen. According to the former Federal Reserve Bank of New York official, structured notes are about to become the “next investment bubble.” Whalen is the one who predicted a little over three years ago that the mortgage-backed securities market was going to collapse. Now, he says that investment firms are applying the same “loophole” that allowed auction-rate securities and collateralized debt obligations to be sold over-the-counter.

Structured notes are derivatives packaged with bonds. Their value comes in part from bets on interest rates. Accredited buyers purchase them through private deals, while the public can buy them in trades. StructuredRetailProducts.com says that structured note sales to individual investors in this country has gone up 72% to $29.6 billion in the last year.

As with ARS, the firms originating these illiquid structured notes are not obligated to “show clients a low-ball bid” or create markets in these OTC structured assets. Whalen says that even as the larger financial firms are making it appear that they are abiding by the new Dodd-Frank law (which does not allow proprietary trading and limits private-equity fund investments), they are now concentrating on structured assets that are based on Treasury bonds, corporate debt, or nothing at all.

Whalen says that it is the individual investors that will lose money on structured notes when the benchmark interest rates go up. Among the the other reasons why structured notes worry Whalen:

• They come with high risk yields.
• They are not regulated.
• They frequently come with minimal disclosure.

According to Whalen, there are already two hedge funds set up for when the rates start to rise and “distressed” retail investors will want to sell.

Individual and institutional investors that believe their financial losses are a result of broker-dealer misconduct or misleading information should explore their legal options.

Related Web Resources:
Structured Notes Are Wall Street's `Next Bubble,' Whalen Says, Bloomberg, August 9, 2010

Chris Whalen Gives 6 Reasons Why The Next Bubble Will Be In Structured Notes, Business Insider, August 10, 2010

Institutional Risk Analytics

Obama Signs Dodd-Frank Reform Bill, Journal of Accountancy, July 21, 2010

Continue reading "Structured Notes Becoming New “Investment Bubble” on Wall Street, says Institutional Risk Analytics Director" »

June 12, 2009

Brokers Renew Push for Investors to Buy Structured Products

Brokers are once again getting behind structured products, hoping that investors will bite. While sales of structured products during 2008’s 4th quarter—at $5.8 billion—was down 75% from the year’s 1st quarter, sales are starting to go up. One reason for this is that certain structured products, such as return-enhanced notes and principal protected notes, are considered safer than reverse convertibles, which led to some of the worst losses for investor.

Ideally, structured products are supposed to provide sturdy profits, while limiting losses, and brokers like them because the commissions are high. However, representatives must still account for why these products haven’t delivered the way investors were told they would. Many investors that bought structured products from Lehman Brothers, such as the Lehman principal-protected notes, incurred some large losses. Some of these notes were bought through a UBS Financial Services office in Houston, Texas.

Until the bear market struck, structured products did incredibly well, and sales almost doubled to $105 billion in 2007 before dropping to $70 billion last year when structured products, collateralized debt loans, and credit default swaps played a huge role in the global financial collapse.

Reverse convertibles are considered the most high-risk structured product—short-term bonds with a large interest that can seriously hurt investors if the underlying stock drops dramatically. Investors can end up with shares with a value far below the principal. For example, 78-year-old Dominic Annino says he invested $300,000 in IndyMac shares and JetBlue shares and lost money after the stocks fell. He filed an arbitration complaint with FINRA and claims that the broker that sold him the Wells Fargo reverse convertibles never fully explained to him what he was getting himself into. Still, brokers are hoping that last year’s stock market fiasco won’t discourage investors from trying structured products again.

Twice Shy On Structured Products? Wall Street Journal Online, May 28, 2009

Understanding Structured Products, Investopedia

Continue reading "Brokers Renew Push for Investors to Buy Structured Products" »