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Archive for the ‘Lehman Brothers’ Category

Lehman Brothers structured products

Structured products in Asia have slunk into the shadows ever since Lehman Brothers introduced the words “counterparty risk” to thousands of retail investors.

But the investment class still offers value to those who know how to use it, while those selling the products have embraced simplicity and education in an effort to improve understanding among investors.

Structured products – synthetic investments that give holders exposure to an underlying asset or strategy without having to actually own the underlyings – fell into disfavour in 2008 when Lehman Brothers, which had been one of the major issuers of structured products, filed for bankruptcy.

In an instant, structured notes that had been backed by Lehman Brothers’ credit lost value, even if the notes had offered principal protection.

Several of those products were sold to retail investors, many of whom had not understood that their principal would be at risk if Lehman went under. A number of distributors were reprimanded.

The structured products industry responded by turning back the clock, shifting away from complex structures towards simpler products. There was a much stronger push to improve investor education and an emphasis on suitability – making sure that customers are sold only products that are appropriate to them.

Sales of structured products also shifted away from retail and moved more into the realm of private banks and high net worth individuals.


Lehman to Exit Bankruptcy – Creditors to Receive Little or Nothing

Lehman Bros. Holdings Corp., now just the odds and ends of the global financial behemoth that collapsed in September 2008, received court approval Tuesday to exit bankruptcy early next year.

Lehman may now wind down its remaining operations, U.S. Bankruptcy Judge James Peck said at a hearing in New York. Once a mammoth investment bank and brokerage, Lehman is now a collection of assets including real estate, private equity and banking investments.

Lehman proposed to the court Tuesday that its bankruptcy exit occur no earlier than Jan. 31, giving it time to prepare to stand on its own and paving the way for payouts to creditors to start in 2012.

Unsecured creditors will receive about 21 cents to 28 cents on the dollar, depending on the type of security they held. Shareholders, whose stock in the company hit a high of $86.18 in February 2007, according to Reuters Data, will receive nothing.

Lehman Bros. Update

The trustee liquidating Lehman Brothers Holdings Inc’s brokerage unit asked a bankruptcy judge for permission to set aside $18.3 billion of assets to be returned to customers beginning early next year.

That payout would represent more than three-fourths of the $23.7 billion of assets that James Giddens, the trustee for the Lehman Brothers Inc unit, said he has under his control.

Of the $23.7 billion, $12.7 billion are securities and $11 billion is cash. Lehman was the fourth-largest U.S. investment bank prior to its Sept. 15, 2008 bankruptcy, the largest Chapter 11 filing in U.S. history.

Regulators Continue to Examine Lehman Bros. Principal Protected Note Sales

Financial Regulators in 10 states including Florida, Texas, New Hampshire and Missouri, are examining whether brokers improperly sold structured notes; securities that package debt with derivatives which are typically offered to individual investors.

This financial product was marketed to customers as a solid and secure investment.  They are called a ‘100 percent principal protected absolute return barrier notes,’ complex debt instruments whose pay-offs are linked to the performance of reference stocks, indices, commodity prices, interest rates, or exchange rates.

The regulators are investigating whether investors received adequate disclosure of the risks associated with this product from their financial advisers. Investors in these securities have suffered billions of dollars in losses since the financial meltdown in 2008.

Brokerage firms often issued these securities; many investors Lehman Brothers Principal Protected Notes marketed by Lehman Brothers, Citigroup, Merrill Lynch, UBS and Wachovia. Those notes are now virtually worthless.

Lehman Brothers Proposes End To Bankruptcy

Lehman Brothers Holdings Inc defended on Tuesday a proposed plan to end the largest bankruptcy in U.S. history, but said it will alter certain language to resolve objections from the U.S. Trustee.

Lehman filed court papers in U.S. Bankruptcy Court in Manhattan asking Judge James Peck to approve the outline for its $65 billion payback plan in the face of 18 objections from various parties, including one from the office of U.S. Trustee Tracy Hope Davis.

If Peck green-lights the outline at a hearing scheduled for Tuesday, it will be sent to creditors for a vote. Lehman, which has negotiated nonstop with creditor groups in an attempt to gain widespread support for its plan, hopes to end its bankruptcy and begin paying back creditors by early 2012.

The trustee argued in an August 11 objection that the outline was too vague on certain issues, including the post-bankruptcy role of the committee installed to oversee fee requests from professionals in the case.

Lehman said it will add language explaining that the committee will continue to exist post-bankruptcy and will be disbanded after professionals submit their final fee applications.

UBS Fined By FINRA For Lehman Principal Protected Note Meltdown

The Financial Industry Regulatory Authority imposed a $2.5 million fine on UBS AG’s (UBS) wealth-management services unit and ordered $8.25 million in restitution in settlement of charges that it had misled investors about the risk of default in certain Lehman Brothers Holdings Inc. notes.

In the months leading up to Lehman’s collapse, UBS Financial Services Inc. advertised the investment bank’s so-called principal-protection notes without emphasizing that the debt was still unsecured, Finra said. Lehman eventually filed for bankruptcy in September 2008.

PPNs are fixed-income securities with a bond and an option component that promise a minimum return equal to the investor’s initial investment. They don’t guarantee the principal in the event of a default.

“This matter underscores a firm’s need to be clear and comprehensive in disclosing risks of the structured products it sells to retail investors,” Finra enforcement chief Brad Bennett said. “In cases, UBS’s financial advisers did not even understand the complex products they were selling, and as a result, they neglected to disclose necessary information to customers about the issuer’s credit risk so investors would understand the magnitude of the potential losses.”

FINRA Issues Regulatory Notice Aimed at Principal Protected Notes

FINRA has issued a regulatory notice this month that stresses the need for brokerage firms to disclose the risk to investors in so-called Principal-Protected Notes. The notice, which may be viewed here, cautions firms from overstating the level of protection inherent in this structured product.

When marketing this product, firms may overstress the principal protection feature of the product without adequately disclosing the fact that such a feature is contingent on the continued credit worthiness of the guarantor. Principal protection is often rendered moot in cases where the guarantor files for bankruptcy – case in point: Lehman Brothers.

Many investors were sold Lehman Principal Protected Notes through their respective brokerage firms. When Lehman Brothers filed for bankruptcy, these notes were effectively rendered worthless. This came as a surprise to many investors who thought they had purchased a product which guaranteed capital preservation.

A number of Financial Industry Regulatory Authority (FINRA) arbitration claims have been filed against brokerage firms who marketed and sold Lehman PPNs. One such arbitration claim has resulted in a favorable award an investor sold Lehman PPNs by their broker, UBS. Such an award provides hope that future claims may prove equally equitable for investors.


UBS Held Liable In Lehman PPN FINRA Arbitration

According to the WSJ today:

In what will likely be a closely studied ruling, a retail investor was awarded $200,000 after a Financial Industry Regulation Authority arbitration panel decided the investor’s UBS AG (UBS) broker inappropriately sold her risky Lehman Brothers principal protected notes.

The case is one of the first involving the Lehman notes to be heard by a Finra arbitration panel. While the arbitration ruling won’t set a precedent, it could be an indicator of how future rulings on similar cases will play out.

There are “many pending similar cases,” said Jacob Zamansky, of Zamansky & Associates, who represented the investor in the arbitration case. Zamansky stated he is representing a dozen clients in a similar situations around the country.

As in most arbitration awards, the three-person arbitration panel didn’t give reasons for its findings. Other panels that hear similar cases don’t have to follow precedent so they could rule in different ways on nearly identical cases. Still, the case will likely be cited by other plaintiff lawyers.

The case, submitted for arbitration a year ago, was brought against UBS Financial Services, a unit of UBS, which is also being investigated by numerous regulators for alleged issues around its selling of these notes. Zamansky’s client was seeking $300,000 in compensatory damages because the broker recommended structured products. Zamansky argued that the notes were “speculative derivative securities” and were “unsuitable” for unsophisticated investors, according to the Finra claim statement.

The broker purchased two notes for his client: a $225,000 guaranteed principal protection note and a $75,000 return optimization note. The panel ruled that the client should be compensated $150,000 plus interest and attorney fees on the principal protected note; there was no compensation for the $75,000 note.

UBS said in a statement it “is disappointed the arbitration panel in this case awarded the claimant any damages, even if it was the only half the compensatory losses she was seeking. UBS maintains that any client losses were the direct result of the unexpected and unprecedented failure of Lehman Brothers, which affected all Lehman bondholders.”

Lehman Structured Product and Lehman Principal Protected Notes (PPNs) – Recovering and Valuing Losses

If you own a Lehman Brothers structured product issued in Europe, the basic components you are ultimately invested in are a bond and an option. The bond is a zero coupon, which means it is issued at a price well below par. The value you have in the bond is whatever price you have bought it at, minus a bit more if the issue is newly launched and minus a bit less if it is nearing maturity. The bond will have been issued by and in the name of Lehman Brothers.

In addition, there is an option that will have been bought from a counterparty. That counterparty may have been the options desk at Lehman, or it may be the same desk at another bank. If that option – based on the performance of an underlying, typically an equity index, such as the FTSE – is in the money, ie it is performing better than anticipated, then the counterparty will owe money to the investor.

Valuing the option that is closed out as a result of the Lehmans bankruptcy is based on the probability of that option being at an expected level at expiry. This is hi-tech mathematics, but the important element for the investor is that these proceeds will have been put to one side by the counterparty, either in cash or liquid securities like US Treasuries. As the money is specifically put to one side it ranks as a secured obligation of the counterparty.

Once the zero coupon bond and the option have been valued, they are then packaged into a total amount that is then multiplied by the market value of Lehman bonds. Taking Lehman bonds at 50 – the level they were quoted at earlier this week – and the zero coupon at 68 and the option at 10: the bond plus option equals 78, multiplied by 50% leaves the investor with a return of 39.

One oddity of the structured product is that the money from the option – if there is any – is secured, and the money from the bond is unsecured. As a result, the option proceeds rank further up the creditor priority chain on bankruptcy.

This is all conditioned by any steps taken by the regulators in Europe. Apparently, the Nordic, German and Swiss regulators, as well as the UK Financial Services Authority are looking into ways to ensure that retail investors may be protected against the worst of the losses. They will try and look after the ‘mom and pop’ investor as well as they can.

In Asia, the Hong Kong Securities and Futures Commission and the Monetary Authority of Singapore have told investors owning Lehman Minibond paper that they could receive substantially less than their initial investment and that the separately kept collateral and the swap agreements that back the notes are subject to security in favour of the trustee, who is required to act in the best interests of the investors.

NH Pursues UBS – Lehman Principal Protected Notes

Mark Rufo said he thought he had found a “good conservative investment” for his 88-year-old mother when, in 2007, he put $26,000 of her money with UBS Financial Services in Concord.

The Nashua lawyer bought Asian Currency Basket Principal Protected Notes. Asian currencies appeared stable at the time, especially compared with the debacle of a decade earlier. In addition, Rufo said, he was assured by both the name of the investment and his broker that the principal would be protected.

Last Sept. 10, as the stock market started heading south, he checked with his broker, who he said assured him that he wasn’t exposed. Two days later, he learned about Lehman Brothers was facing bankruptcy.

“Boy, I’m glad I’m not tied up with Lehman Brothers,” Rufo said he told to himself. Minutes later, his broker told him that actually he was – or at least his mother was – because it was Lehman that was backing the principal.

Rufo said he asked the broker how much was left in the currency basket that he had purchased, and he said he was told, “There aren’t really any Asian currencies in the basket. There are derivatives.”

When the broker couldn’t adequately explain to Rufo the nature of these derivatives, Rufo said he replied, “If a year ago, if you said, ‘Mark, I want you go buy something I don’t understand, I wouldn’t have bought it.”

Multiply the Rufo case – which is in Merrimack County Superior Court – by 42, and you have the cease and desist order case filed June 4 by New Hampshire Bureau of Securities Regulation against UBS.

The bureau alleges that state investors lost $2.5 million in various structured products backed by Lehman Brothers, which filed for bankruptcy on Sept. 13, 2008. By not adequately disclosing these risks, UBS engaged in “dishonest and unethical business practices,” the bureau charges.

“UBS presented these notes as simple, safe investments when in fact they are highly volatile and are subject to shifting market conditions,” said Jeff Spill, the bureau’s deputy director for enforcement. “The safety of these products was exaggerated. We believe UBS engaged in unfair and unlawful sales practices when presenting these investments.”

UBS, however, said in a disclosure that it did point out the risk in the prospectus and “followed all regulatory requirement, well-established sales practices and client disclosure guidelines.”

According to the bureau’s complaint, UBS, through its “structured product working group,” developed the idea behind the products and put them out to bid to companies like Lehman. In addition, UBS acted as an agent for Lehman-issued structured products.

The Northeast consultant for the structured product group acted as a consultant out of the Manchester and Concord offices of UBS, according to the securities bureau.

UBS’ local offices were “pushing” the sale of such products, selling 65 products to 42 investors, according to the complaint. UBS continued to “push” the sale, even after the near failure of Bear Stearns earlier in 2008 made it clear how risky such products were when backed by companies with large subprime loan portfolios.

Lehman went on to report billions of dollars in losses, and e-mails circulated in UBS’ Maine and New Hampshire offices noted in June that “Lehman is smelling a bit to me.”

The bureau said it was told by UBS’ structured sales consultant that agents were told to make clear the risks involved with Lehman Brothers, but a local branch manager in New Hampshire said the office never received such instructions, according to the complaint.

The complaint also says that sales reps were rewarded with bonuses for the sales of such products, and the average commissions were sometimes three times the amount that on regular securities sales.

In addition to a potential cease and desist order, the company faces a $2,500 fine for each violation.‘Pattern’ of investments
This is the second securities action taken by New Hampshire securities regulators against UBS in as many years.

In 2008, the bureau alleged UBS had been advising the New Hampshire Higher Education Loan Corporation – the state’s largest student loan provider — to stay in the failing auction rate securities market at the same time UBS was preparing to extract itself from the market prior to the market’s collapse.

When UBS and other banks decided to stop supporting auctions in February 2008, the market froze and investors were unable to access their money, the bureau alleged. As a result, NHHELCO lost a large sum and was unable to provide loans for thousands of students, according to the bureau.

In April 2008, New Hampshire was part of a global settlement in which UBS paid $22.1 billion to repurchase auction rate securities from damaged investors or provide liquidity to the market. In addition, UBS paid $150 million in fines.

In a letter to the UBS chief executive Oswald Grubel, securities bureau director Mark Connolly charged that both allegations were part of a “pattern” of presenting volatile investments as safer than they actually were to investors. Connolly asked Grubel to intervene and settle the matter.

UBS has until July 3 to formally contest the charges, which could result in a hearing. In its statement, after the allegation, UBS said it would “defend itself vigorously in this matter.”

That’s two days after the July 1 hearing scheduled in Rufo’s case. UBS is arguing that the case go to mediation, Rufo said, but that process was “pretty much a racket controlled by the big brokerage houses.” Rufo said that when he first talked to UBS officials, all he wanted was his mother’s principal back, but in reality it was more a matter of principle.

“The money isn’t going to make any difference to her, because I can take care of her, but maybe there is some other 88-year-old mother out there who doesn’t have a son as a lawyer. I wouldn’t be able to do this if I wasn’t in the profession. If I went to a lawyer who charged by the hour, it wouldn’t be practical.”

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