UBS Lehman: How Safe Are Principal Protected Notes?

March 11, 2011, 8:00AM. By Heidi Turner

Philadelphia, PATo say that investors who had UBS Lehman Principal Protected Notes were stunned when their investments lost a lot of their value is probably an understatement. Many say they had no idea that Lehman Brothers was the sole guarantor of the UBS Lehman structured notes, and no idea that the UBS Principal Protected Notes were such risky investments. Unfortunately, many investors say they lost a lot of money when Lehman Brothers failed and their investment dropped dramatically in value.

An article, titled "How Safe Are Your Savings? The truth about structured products and why brokers promote them," written by John F. Wasik (AARP Magazine, March/April 2011 issue) highlights the story of Charles Replogle, who was looking for a safe investment for his mother, who was 86 years old, and his brother, who was mentally disabled. A friend who was also a broker recommended principal protected notes, so Replogle put about $130,000—approximately one-third of his savings—in UBS principal protected notes.

According to the article, all of Replogle's money vanished within a year. A different investor cited in the article lost $275,000 while yet another lost $200,000—in that case, all of her savings—after Lehman Brothers collapsed. She claims her broker told her not to unload her investment even after Lehman Brothers failed.

Lawsuits and arbitrations filed against UBS allege investors were not informed about the risky nature of the principal protected notes, nor were they informed that Lehman Brothers was the sole guarantor of the notes.

UBS has defended itself, saying all regulatory requirements in selling the principal protected notes were followed.

But the AARP article says that the selling of structured products, including principal protected notes, is misleading. A securities arbitration consultant quoted in the article says structured products come with high commissions for brokers—making them highly lucrative. Given the current economy and problems with massive losses on Wall Street, financial products that have names such as "Principal Protected" are highly tempting for investors. The problem is that in some cases, the principal is not protected.

Structured products are investments in which the return is dependent on an underlying financial product. In the case of the UBS principal protected notes, the underlying financial product was unsecured Lehman Brothers bonds. When Lehman Brothers collapsed, the value of the principal protected notes plummeted, and investors learned that principal protected might not be as good as it seems.