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Archive for September, 2018


Auto-Callable Structured Products – the Wall Street House Always Seems to Win

The Wall Street Journal, on September 12, 2018 (“FANG Stock Play Can Fall Short”), noted that investors looking to reap the gains of highflying technology stocks while avoiding risk – through the purchase of “auto-callable” structured note products – are finding they can’t do both.

These structured notes “are often sold to mom-and-pop investors seeking higher-yielding alternatives to government debt, which is reliably safe. Offering documents say that buyers can earn fixed payouts of as much as 25% of the purchase price annually without taking on the risk of outright common-share ownership. Yet many of these FANG-linked notes fail to produce returns anywhere near that stated range, according to an analysis of securities filings by The Wall Street Journal. Many times, the upfront fees that banks collected were higher than the total returns earned by investors.”

“That is partly because the notes – dubbed ‘auto-callable’ because a rise in the stock price contractually triggers their redemption – are often redeemed in less than a year, and sometimes in as little as a month. In many cases, the auto-callable provision leads investors to earn scant returns and receive their money back long before the stated term of the investment.”

As noted in the article, auto-callable notes “are unlike common shares, which offer purchasers unlimited potential gains as well as the risk of total loss. They are also unlike U.S. Treasuries, which pay out periodic ‘coupons’ and entitle holders to full repayment at maturity. Instead, the notes offer gains up to a certain, specified threshold and protect against only certain, specified equity losses. Typically, if the linked stock or basket of stocks trades below a designated barrier – say, 75% of its initial value – when the notes mature, investors can lose a share of their principal on par with losses on the stock or basket.”

The Wall Street Journal specifically notes that Citigroup Inc., UBS Group AG and Royal Bank of Canada are among the banks this year that have issued more than $1 billion of auto-callable structured notes that are linked to one or more of the four FANG stocks: Facebook, Amazon, Netflix and Google parent Alphabet.

So how does the Wall Street house win with these investments? Consider just the following 2 examples that were cited in this article:

“When Citigroup sold $16.3 million of auto-callable notes tied to Amazon.com shares in mid-February, the firm advertised a 10% potential annual coupon for three years. Three months later, Amazon shares were up more than 20% – but the note was called, meaning that investors who purchased it received a total payout of 2.5%” while Citigroup “collected 3.5% in fees.”

Similarly, “in March, UBS issued a $150,000 note tied to Netflix. It paid 20.58% annually as long as shares of Netflix weren’t above the effective purchase price on monthly review dates. After one month, the stock was up 5.9%. The note was called, paying a coupon of 1.7% of the purchase price” while UBS reportedly “collected 2.7% in fees.”

If you are an individual or institutional investor who has any concerns about your auto-callable or structured product investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Wedbush Securities Inc. and Edward William Wedbush

A judgment issued by the United States Court of Appeals for the Ninth Circuit became final in which the firm was fined $300,000. Mr. Wedbush was fined $50,000 and suspended from association with any FINRA® member in any principal capacity for 31 days. The United States Court of Appeals for the Ninth Circuit denied the firm and Mr. Wedbush’s petition for review. The sanctions were based on findings that, for five-and-a-half years, the firm committed 158 regulatory reporting violations. Specifically, the firm reported a total of 129 events late on Forms RE-3, Uniform Application for Securities Industry Registration or Transfer (Form U4) and Uniform Termination Notice for Securities Industry Registration (Form U5), and Rule 3070 Reports; reported 18 events inaccurately; and failed to file a total of 11 Forms RE-3, U4 and U5. The findings stated that the firm and Mr. Wedbush failed to reasonably supervise regulatory reporting, failed to effectively and reasonably implement the firm’s supervisory system related to regulatory reporting, failed to act decisively to detect and prevent future regulatory reporting rule violations and failed to implement corrective measures that were timely and sufficient to address the regulatory reporting failures.

The suspension is in effect from August 20, 2018, through September 19, 2018. (FINRA Case # 2007009404401)

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