Single Stock Structured Products

The attorneys at Gana Weinstein LLP continue to investigate and file claims on behalf of investors relating to single stock structured products. While our firm has represented numerous investors in all manner of structured products recently banks have trended toward issuing structured notes based on a single stock.

As a background, structured products are a class of derivative products that derive their performance from market linked data. A structured product generally references a basket of securities such as a market index, commodities, interest rates, currencies, or a real estate loan portfolio. The variety of products and formulas that can be structured demonstrates the difficulty in formulating a single unified definition of a structured product – and also increases consumer confusion.

In recent years, banks of started issuing structured products that reference not a basket of securities or a broad index but instead a single stock. And usually not just any stock but instead a very volatile stock that exhibits large price fluctuations. Banks issue structured products trying to entice investors with promises of above market interest rate returns – often times between 7-15%. However, the banks know that the volatile stocks that the notes are linked to make it likely that the bank will be protected from paying the investor. In fact, banks know that its likely that an investor will simply turn over their funds to a bank and receive potentially little in return – like a casino.

Our firm has come across a number of examples that highlight the bad bet investors make in accepting broker recommendations to invest in these products. Our firm analyzed a structured note linked to the stock of Peloton that promised to investors 1.0625% interest monthly or 12.75% annually and another note linked to the stock of Zillow which promised a 12% annual interest payment paid monthly so long as the respective stock prices stayed above a referenced value. Both stocks could lose around 40% of their value before the interest payment would be eliminated entirely. In addition, if the stocks lost more than approximately 40% of their value then the investor would also lose their corresponding principal based upon the performance of the stocks and could lose their entire investment. Further, the notes were callable and could be cancelled by the sponsor. 

These products are very high risk and low reward propositions because the investor can only profit at most by 12-12.75% over the course of one year. Even if Peloton or Zillow doubled in value all the investor could achieve would be the interest payment as their profit and none of the price appreciation. Meanwhile the maximum loss is 100% of the investment if the stocks fell severely. Accordingly, the investor takes dramatic downside risks associated with the volatile stocks while having no chance to participate in the success of the stock. Meanwhile banks choose stocks that are likely highly overvalued and exhibit extreme volatility in order to make the purported protection of the note less likely to occur.

Our firm also analyzed a note in a technology ETF called ARK Innovation ETF “ARKK.” The ARKK structured note promised investors 8% to 10% annually paid monthly so long as ARKK’s stock price stayed above a referenced value - usually the price of the stock at inception. If the ARKK stock increased in value by the third month the note would be redeemed and the investor would profit by only two months of interest. However, if ARKK lost money the bank would only pay investors if those losses were less than 30% of the initial value. If ARKK lost more than 30% the investor would not receive any interest payment during that time period and in addition the investor would lose between 30% to 100% of their investment principal depending on the end performance of ARKK. 

Morningstar analyzed another structured product tied to the performance of Tesla stock. The title says is all “Structured Products and Tesla: A Match Made Somewhere Other Than Heaven” In conclusion the article found that the structured product was “a heads-I-lose, tails-you-win situation” and that for “most Tesla investors, a structured product just isn’t worth the hassle.” Investing is risky enough without entering the banking casino of structured products.

Investors who have suffered losses are encouraged to contact us at (800) 810-4262 for consultation. At Gana Weinstein LLP, our attorneys are experienced representing investors who have suffered securities losses due to the mishandling of their accounts. Claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover.