Yesterday the SEC issued a scathing report stemming from a broad review of Wall Street firms’ sales of structured products to their retail customers. After its comprehensive study, the SEC staff concluded that the Street was rife with “fraud and abusive sales practices” as well as faulty training and lax supervision.
Specifically, the SEC has found that the firms:
- recommended unsuitable structured products to their customers;
- omitted material facts about the structured products they pitched;
- engaged in questionable sales practices; and
- treated their customers unfairly in secondary-market sales, including charging outsized commissions
For years we have been warning investors about the dangers of these opaque derivatives with their catchy names, exotic benchmarks, hidden commissions and shaky issuers. Now it appears the federal regulators have reached the same conclusion many of our clients learned the hard way: Wall Street’s creativity in separating investors from their money knows no bounds!
Analyzing an early 20th-century bout with another brand of ruinous “financial innovation,” the renowned economist John Kenneth Galbraith wrote, “If there must be madness something may be said for having it on a heroic scale.” Apparently Wall Street agrees, since Bloomberg now reports that following a brief slowdown in the wake of Lehman’s failure, the sales of structured products in the U.S. reached a record $25.3 billion in the first half of 2011, an increase of 14%.
Whether your brokerage firm is pitching reverse convertibles (products that offer tempting upside but turn, pumpkin-like, into a company’s shares if the stock tanks), so-called “principal protection notes” (ask the Lehman noteholders about that one) or whatever Wall Street’s mad scientists cook up next, buyer beware.
Disclosure: Zamansky & Associates represents customers in arbitration cases against brokerage firms concerning structured products.