Bank of America Merrill Lynch’s (“Merrill Lynch”) brokerage unit offered Strategic Return Notes (“SRNs”) to customers, resulting in losses of as much as 95% of the principal invested. First issued in November 2010 and maturing November 27, 2015, the SRNs were designed to be linked to Merrill Lynch’s own proprietary volatility index (the “VOL”) which was designed to calculate the volatility of the S&P 500 Index. The SRNs, which were issued at $10 per share, ultimately matured at just $0.50 per share. Thus, investors in Merrill Lynch’s proprietary SRN’s were subjected to an enormous 95% loss on their principal investment.
In recent years, many investors have been solicited by their financial advisor to purchase so-called structured notes, which are often presented to customers as a higher-yielding, but still relatively safe alternative to fixed-income investments such as bonds. Structured notes are issued and backed by financial institutions. As hybrid products containing both a bond component and an embedded derivative, structured notes are designed to provide an investor with a return based on an equity index (or some other benchmark), as opposed to an interest rate typically associated with a traditional bond investment.
In theory, a structured note is supposed to provide an investor with an opportunity to earn enhanced income (in excess of the very low interest rates offered in the current environment on most bond investments), while also providing some downside cushion. In practice, however, many structured notes engineered by various investment banks and sold by their brokers have proved to be horrendous investments.