Posts Tagged ‘principal protected notes’

Principal Protected Notes, Lehman Brothers and UBS Financial Services Arbitrations

June 14th, 2011
Head office of Lehman Brothers in Frankfurt, G...

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A recent class action suit against Lehman Brothers as well as an enforcement proceeding against UBS Financial Services by New Hampshire has encouraged investors to hire investment recovery litigators and pursue claims against firms selling Lehman Brothers principal protected notes in an attempt to recoup their financial losses. According to New Hampshire’s claim, UBS engaged in broker malpractice by failing to disclose the risky nature of principal protected notes (PPNs). As a result, New Hampshire investors lost 2.5 million.
Principal Protected Notes
Principal protected notes (PPNs) are structured investments that have been around for years. Like all structured investments, PPNs connect CDs and fixed income notes to the performance of currencies, commodities, equities and/or other assets. Structures investment products are legitimate investments, and principal protected notes are a legitimate form of them.
Structured investments may have partial or full principal protection. Some pay a variable sum at their maturity. Others pay by coupons that are connected to a particular index or security. Given their risk and return reports, structured investments in general are appropriate for the portfolios of many investors.
In short, they are unsecured promissory notes connect to referenced securities, and as such they are not without risks. Unfortunately, according to claimants, investment firms committed broker malpractice by marketing these products to customers as safe investment alternatives.
Marketing of PPNs to Retail Investors
Beginning in 2005, PPNs became a particularly popular type of structured investment for retail customers. Noting their increased sales to non-institutional customers, the Financial Industry Regulatory Authority (FINRA) expressed concern that brokers were committing a breach of fiduciary duty by marketing principal protected notes to retail customers as “conservative” investments with “predictable current income.” In fact, the agency issued a notice to brokerage firms in September of 2005 that clear guidance regarding the risks involved in these financial products should be given to retail customers.
PPNs, Lehman Brothers & Bankruptcy
When PPNs mature, investors typically receive a return on the principal from the borrower. In this case, the borrower was Lehman Brothers. Unfortunately for investors, when Lehman Brothers filed for bankruptcy, even the principal on these notes became unprotected. Lehman’s PPN obligations on the notes were unsecured–and behind secured notes in the creditor bankruptcy line up.
The Case Against Lehman Brothers
Unsurprisingly, investors are now seeking to recover their financial losses. Although the specific allegations of claimants vary, all assert that Lehman Brothers, selling brokerages like UBS Financial Services and others, committed broker malpractice by falsely marketing PPNs as conservative investment product alternatives.
Specifically, claimants allege, these PPN products were depicted as 100 percent principal protected if investors held them to maturity.
Brokers also presented the PPNs as principal protected if the indices underlying them held their value. Furthermore, firms and brokers did not warn customers of the risks involved in investing in PPNs, nor did they warn them about what would happen if the underlying backer of the notes, Lehman Brothers, defaulted. Customers were also not made aware of the Lehman Brothers’ decline and that its fall could affect their investment’s value, making it in effect worthless.
It’s also been alleged that firms continued to push PPNs after Bear Stearns collapse, a failure which should have been a clear indicator or “red flag” of the risks involved in investing in banks that hold large numbers of subprime mortgages. It’s also been alleged that firms pushed PPNs on retail customers at a time when they themselves were reducing their PPN holdings. The accuracy or falsity of these claims has yet to be determined. But if firms did indeed recommend PPNs while reducing their own holdings, litigators are likely to claim broker fraud rather than simply failure to disclose.
Did your financial advisor mislead you into investing in PPNs, causing you to suffer financial loss as a result? If so, you need the advice of an investment recovery counsel. Contact Carlson Law in San Diego at 619-544-9300 today for a free consultation.

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Posted in Broker Fraud, Fiduciary Duty Breach, Investment Fraud, Negligent Misrepresentation, Securities Arbitration, Securities Fraud, Securities Law, Securities Litigation, Stock Fraud, Stock Loss | Comments (2)