The White Law Group is investigating the appropriateness of structured product investments sold by various broker-dealers (including Citigroup’s ELKS structured product), to retail investors.
Structured products are complicated investments that are only appropriate for sophisticated or institutional investors. Structured products are designed to facilitate highly customized risk-return objectives by taking a traditional security, such as a conventional investment-grade bond, and replacing the usual payment features (e.g. periodic coupons and final principal) with non-traditional payoffs derived not from the issuer’s own cash flow, but from the performance of one or more underlying assets.
It’s become apparent that many retail investors have suffered losses associated with structured products that were sold to them by their financial advisor. Many brokerage firms peddled structured products using monikers such as PACERS, STRIDES, SPARQS, and ELEMENTS.
One example of such a structured product is one developed by Citigroup called ELKS, or equity linked security. Citigroup’s ELKS (equity linked security) product is a risky derivative instrument where an investor is offered a specified return on a structured security tied to an individual stock. Providing the stock maintains a minimum value, the guaranteed return is paid. However, if the stock ever falls below the minimum value (sometimes around 80 percent), the ELKS immediately converts into shares of that stock. Then if the price of the underlying stock declines, the investor could receive a stock worth much less than their initial investment.
While ELKS offer potentially higher returns, the downside risk is unlimited if the stock price declines. Also, if the underlying stock increases dramatically in value, the investor only gets the guaranteed return (and does not benefit from the dramatic gain).
Other examples of structured products sold by brokerage firms include UBS’ PERLES structured product (PERformance Linked to Equity Securities), and Morgan Stanley’s Performance Leveraged Upside Securities (or PLUS).
The broker-dealers that sell these structured products charge investors an upfront commission to buy them and likely earn additional profits through hedging of the investments and the underlying stocks. Brokerage firms were aggressively selling structured derivative products like ELKS to unsophisticated retail investors a few years ago, prompting FINRA to warn member firms of concerns that customers didn’t understand the inherent risks (see, for example, FINRA Notice to Member 05-59).
If you have any information that may assist us in our investigation into possible securities fraud involving the sale of structured products by financial advisors, please contact The White Law Group at 312-238-9650.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions. For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.