Erez Law is currently investigating brokers across the country who recommended their clients invest in structured notes from companies including autocallable securities, callable yield, and other structured notes, which have suffered significant declines when the market crashed due to the COVID-19 pandemic (the coronavirus of the winter and spring of 2020).
It is alleged that brokers recommended their clients invest in autocallable securities, callable yield, and other structured notes and many have suffered investment losses due to the worldwide pandemic.
Structured products are complex securities derived from or based on a single security or index, basket of securities or indices, a debt issuance, a commodity and/or a foreign currency. Most structured products pay an interest or coupon rate based on certain defined parameters. Structured products typically consist of a note and a derivative, most often an option. While the note pays interest, the derivative defines the payment at maturity. Despite the fact that structured products most often involve options, they are typically marketed as debt securities. Structured products can offer a form of principal protection and frequently cap the upside participation in the underlying investment. Additionally, structured products do not trade on an exchange and are generally not liquid investments. Structured products are issued by brokerage firms and are registered with the SEC. Structured CDs are issued by banks and are not registered with the SEC.
An autocallable security is a popular structured product that pays a high coupon if the underlying (typically equity indexes or single stocks) passes an upside barrier, at which point it automatically matures and the investor’s principal is returned. However, the position is funded by the investors implicitly selling a downside put to the bank, which places their capital at risk should the index fall below a second barrier. These types of structured products are generally callable at par plus accrued interest for part of a quarter, typically after just one year. Since the issuers would call the notes unless the interest they were likely to pay were below market rates, investors were virtually certain to not be compensated for the risk of these structured products.
Many of these investments are an opaque and complex wager on the yield curve. The yield curve is a curve showing interest rates at different lengths of time. Generally, If the yield curve flattened and the difference between two points on the yield curve did not exceed a certain threshold, the structured products sold would cease paying the same level of interest or any interest and their value would decline.
Additionally, given that the securities are not listed on an exchange and therefore highly illiquid, investors such as the couple would have to sell the structured products at significant discounts if they sold prior to maturity.
These investments are not suitable for conservative investors, including the elderly and retired individuals looking for a stable source of income and to sustain themselves on their investments and without any way to earn additional income if their investments were lost.
Unfortunately, brokers may not have explained to these investors the potential risks to their investments and now these investors have now suffered significant investment losses in the wake of the global coronavirus pandemic.
Brokers at brokerage firms across the country did not disclose the significant risks involved with investments in autocallable securities, callable yield, and other structured notes.
Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, brokerage firms across the country may be liable for investment or other losses suffered by its customers.
Erez Law represents investors in the United States for claims against brokers and brokerage firms for wrongdoing. If and have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.