Investors Don't Understand Complex Structured Securities

84 year old Leona Miller, a retired beautician, got into structured notes after looking for a safe investment that could provide her a steady stream of income. According to Bloomberg Businessweek, her Wachovia broker recommended she buy $20,000 worth of bonds and after only two months she had lost 30% of her investment. What she had bought was a structure note, a bond combined with a derivative. It was a reverse convertible note with a put option tied to Merck stock. When Merck’s stock dropped from $40 to below $32, it triggered the put option allowing the issuer to pay her off in Merck shares then worth $26. She had no idea about the risk involved or how it worked. All she knew was she had heard of Merck, because of the medicine she took.

With the sale of structured notes booming, the Securities and Exchange Commission (SEC) is examining the complex products after retirees and pension funds claimed they lost money on investments they didn’t understand, such as auto-callable notes, reverse convertibles and principal-protected notes. Data compiled by Bloomberg indicates nearly a 60% rise in sales of structured notes for the last year. The problem for all investors is that sales of these complex products are being made without disclosing the risk involved or how the investment works. Often the brokers selling the investments know little about them and individual investors are incapable of understanding the complexity of these opaque structured notes, which are sold to them with minimal disclosure, if any, and promises of downside protection.

If you have suffered losses from these complex investments, please contact our securities law firm for a free, confidential consultation at 1-800-259-9010. Cases are handled on a contingency basis.

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