Lehman Brothers principal-protected notes and structured notes, which were typically pitched by brokers as safe investments that protected investors from losing their principal, today are mostly illiquid and trading for pennies on the dollar. According to a spokesman from SecondMarket, Lehman principal-protected notes are selling for 10 to 14 cents for every dollar of principal invested.
The tragic part of these cases is that the investors who are getting hammered are not big risk-takers. They are typically conservative investors who were motivated by a sales pitch that focused on the safety and security of these very complex products. With respect to the product itself, the recent massive uptick in sales of principal-protected notes is a classic case of major brokerage firms pushing their sales forces to dump these products onto their own retail customers as they come off the “underwriting assembly line.”
Litigation and Arbitration claims will further reveal the extensive conflicts of interest that existed between the best interests of the brokerage firms and the best interests of their retail clients who trusted the firms. Litigation and Arbitration will also likely reveal that a number of financial advisors did not have a genuine understanding of this product they were selling to retail customers.
Unfortunately, it doesn’t appear that these investments will benefit from government efforts to shore up the financial markets because these principal-protected and structured notes were frequently tied to derivatives. The government announced in October that derivative products aren’t eligible for government backing.
The banks and brokerage firms who sold these products — primarily UBS (UBS), Merrill Lynch (MER), Barclays (BCS), and Wachovia (WB) — misrepresented the safety of these Lehman notes and neglected their duties to investors. According to Bloomberg, investors held more than $8 billion in Lehman structured notes as of September, with $2.8 billion of those sold in 2008.
Christopher T. Vernon, Attorney at Law