Complex Derivative Securities Fraud
A complex derivative security product is a security whose price is based upon or derived from one or more underlying assets. Most derivatives securities highly leveraged, and because they are managed, they are generally associated with very high expenses. Derivative products can go by many names, including reverse convertibles and principal protected notes or enhanced notes. In many cases, these securities are not “principal protected” and the only thing enhanced about them are the fees they generate for stockbrokers, securities broker dealers and investment managers.
For example, most recently a large broker-dealer or wire house, underwrote a series of principal protected notes valued at $1 billion. In connection with this offering, as underwriter, the securities broker dealer, and the stockbrokers selling the underwriter obtained approximately 6% of the offering or $60 million in commissions and fees. Of those net funds raised, in this case, approximately $940 million, only half or approximately $470 million was invested in an actual portfolio of securities, in this case a highly leveraged portfolio of stocks, and the remaining approximate $470 million was invested in a series of US Treasury securities, with the theory that even if the stock portfolio lost all its value, after a period or approximately ten or fifteen years, the Treasury securities, would sufficiently increase in value to give or return to investors their principal investment, of course without any interest. If the leveraged securities contained in the portfolio increase in value, generally the investor’s returns are capped at a certain amount. The remaining returns generally belong to the fund’s adviser, and whether the value of underlying securities go up, down or sideways, the fund adviser or manager gets paid annual fees.
The aura of safety evoked by the names of these products, i.e. “principal protected” make them easy for retail stockbrokers to sell to customers. Accordingly, products are a win, win, win for the stockbroker, the broker-dealer/underwriter, and its generally affiliated fund advisors and managers. These same funds may be a lose, lose, lose for investors, who pay exorbitant management fees, may receive little or no interest, and have to wait a decade just to get their money back.
How Complex Derivative Products Imperil Seniors’ Retirement Security
In a study entitled “How Safe Are Your Savings? How Complex Derivative Products Imperil Seniors’ Retirement Security,” written by John F. Wasik of Demos, a non-partisan public policy research and advocacy organization with its headquarters in New York City, in 2010, alone banks and securities brokers sold more than $52 billions’ worth of these high-risk complex investment products to customers whom cannot afford major losses. In that same year, according to the report, individual investors lost approximately $113 billion from these complex investments. According to the report, derivatives were once sold only to sophisticated institutional investors, who would have but a small exposure among a multi-billion-dollar portfolio. However, in the past few year, these products have been repackaged as structured products — basically bets placed on the performance of other financial instruments — as a means to preserve principal for mom and pop investors. Moreover, the report says structured products are frequently sold to senior citizens.
Guiliano Law Group
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AboutNicholas Guiliano, Esq.
Nicholas J. Guiliano has more than 25 years of securities related experience, and has represented more than 1,000 public customers in claims against brokerage firms for fraud in connection with the sale of securities principally in arbitration before the Financial Industry Regulatory Authority (“FINRA”) Dispute Resolution, Inc. (formerly known as The National Association of Securities Dealers (“NASD”) Dispute Resolution, and the New York Stock Exchange (“NYSE”) Department of Arbitration.LEARN MORE