SEC Warns Investors of the Dangers of Structured Products

Almost three years after the historic bankruptcy of Lehman Brothers, the Securities and Exchange Commission shows concerns that investors continue to be unaware of the potential risks of investing in structured products.

Just last month, the SEC issued a notice reminding investors to carefully review the terms, risks, fees, and other not-so-apparent disclosures before deciding whether to invest in structured products.

Structured products in general continue to be marketed as safe investments with attractive rates of return.  This sales pitch was invalidated when investors who purchased Lehman structured notes through UBS suffered dramatic losses in their portfolios as a result of these investments.

The SEC warns in its regulatory pronouncement that even though these products often have reassuring names like “principal protection” or “absolute return,” investors could still stand to lose all of their money.  This is the case because structured notes are usually nothing more than unsecured loans to the issuer of the note and have the potential to lose all of their value if the issuer goes bankrupt. In other words, financial institutions effectively borrow money from Main Street investors with no collateral and on terms favorable to the borrower.

But the problem is far more severe. Main Street investors are not only tricked into making unsecured loans to financial institutions; those institutions also charge investors hidden costs and fees in the process.  Put differently, it is like having somebody borrow money from you and then having that person charge you a fee for accepting your money.

The SEC acknowledges that “even if the [structured notes] sales material suggests otherwise….structured notes can have hidden or imputed costs, which in some cases may be relatively high.” The SEC also recognizes that these costs generally “are not transparent to investors.”

Another component of the structured notes highlighted by the SEC in its regulatory pronouncement is the fact that in many instances, investors can find themselves tying up their principal for many years and during this time not receive any profit. Investors could bind their money “for upwards of a decade with the possibility of no profit on [their] initial investment….and, in the meantime, inflation could erode [the investors’] purchasing power.,” according to the SEC.

This scenario continues to occur because structured products are just too complicated for ordinary investors to understand and evaluate and too profitable for Wall Street.  Furthermore, the potential return on structured products’ investments varies significantly based on the method the issuer uses to calculate gains or losses. Investors can find a useful illustration of one of these methods (shark fin payouts) in the SEC structured products warning.

In sum, structured products continue to be investment vehicles financial institutions utilize to get unsecured loans from Main Street investors; are packed with hidden fees and costs, and are designed in such a way that the odds are greatly stacked in favor of financial institutions.

Vernon Litigation Group is a Naples, Florida law firm that represents investors with more than $10 million in Lehman notes claims, including Yield Optimization and 100% Principal Protected Notes, and has conducted an extensive nationwide investigation on structured products. Vernon Litigation Group’s investigation of structured products was featured earlier this year in AARP Magazine. The attorneys at Vernon Litigation Group collectively have more than 30 years of experience representing investors who are victims of stock fraud and stock losses due to misconduct. Vernon Litigation Group securities attorneys are experienced in securities arbitration and assist clients in recovering losses caused by all manner of financial fraud and negligence.

For more information on whether you have a claim involving a structured product, contact the Vernon Litigation Group law firm at 239-649-5390 or Toll-Free at (239) 319-4434 or email

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