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Articles Tagged with Lehman Principal Protected Notes

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Principal Protected Notes, or PPNs, are structured investments, meaning they connect the performance of commodities, equities, currencies and other assets to fixed income notes and CDs. PPNs are legitimate investments, though they have received a lot of negative attention lately. PPNs may have a full principal protection, but only partial principal protection is possible as well. In addition, PPNs can pay at their maturity in different ways, some paying a variable sum and others in coupons connected to a security or index. While PPNs are appropriate for many investors, there are risks associated with them.

Principal Protected Notes and the Lehman Brothers Debacle

The now infamous class action suit against Lehman Brothers has its roots in the claim that the risks associated with PPNs were not disclosed to investors. When Lehman Brothers filed for bankruptcy, the principal on the PPNs — for which Lehman was the borrower — became unprotected and investors were left with unexpected losses. According to claimants in the case, they were led to believe that as long as they held them to maturity, their PPNs were 100 percent principal protected. Claimants also say they were told that as long as their underlying indices maintained their worth, the PPNs were principal protected. Furthermore, the risks associated with PPNs were not disclosed and customers were not notified of the decline of Lehman Brothers which could affect the value of the investments.

The case against Lehman Brothers deals primarily with broker misconduct in misleading investors about the safety of their investments. However, if other allegations are true and firms truly pushed PPNs at the same time that they were reducing their own PPN holdings, it is a question outright broker fraud as opposed to failure to disclose.

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Once again, Wall Street insiders win and retail investors lose.

The outside advisers handling Lehman Brothers’ bankruptcy – mostly bankers and lawyers – have made over $1.4 billion for their services since Lehman Brothers went bankrupt three years ago.   If you’re a Wall Street insider, Lehman Brothers, which is bankrupt and out-of-business, is a fantastic place to work.

Meanwhile, investors holding Lehman Brothers structured notes are slated to get back only about one fifth of the money they invested in the notes when the Lehman Brothers bankruptcy litigation finally winds up.  Financial advisers at UBS and other brokerage firms peddled Lehman Brothers structured notes with great-sounding names like “100% principal protected” notes and “Return Optimization” notes.   But for investors getting back only twenty cents on the dollar, their principal wasn’t protected and their returns weren’t optimized.

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Both Lehman Brothers and UBS have had more than their fair share of bad press over the last three years, but are they cut from the same cloth? A recent article in Forbes makes the argument that they are. September marked the three-year anniversary of Lehman Brothers’ bankruptcy and the arrest of a UBS trader in London for fraud. When the world financial markets were shattered by the collapse of Lehman in 2008, many investors were left with annihilated life savings and retirement accounts.

Lehman Brothers, UBS and Wall Street Greed

Though it may appear that the most recent UBS incident and Lehman Brothers’ collapse are different events, according to Forbes’ article, “The players may be different but the rules are the same.” The “Delta One” trading desk used by the UBS trader and ETFs he was trading have a similar concept to the Lehman Brothers Principled Protected Notes sold by Lehman and UBS and both were excessively risky. Furthermore, UBS and Lehman worked cooperatively to dump the PPNs on investors, causing them significant losses.

Since the fiasco began, claimants been victorious in almost all securities arbitration cases against UBS and recovered their losses that resulted from the Lehman Structured Product Notes. However, criminal charges have not been brought against any Lehman executives, a measure of justice that is yet to be realized. According to an article in The New York Times, this is a case in which “brokers selling complex securities that they once contended were safe and sound have saddled individual investors with billions in losses since the credit bubble burst. Remember auction-rate securities? Those were peddled to investors as just as good as cash — until they no longer were after that market seized up in 2008.”

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