Forbes has an article about structured notes issued by Lehman that are now worthless. These securities were sold to investors as a way to play the market without the risks normally associated with such investments. Typically, structured notes would offer an investor a percentage of the upside in an index with limited or no downside if held to maturity. The problem is that these notes were liabilities of the issuing firm – in this case Lehman. When Lehman filed bankruptcy, the notes became just another claim in bankruptcy court. The risk whose name wasn’t spoken is called credit risk and it has been realized.

The Forbes article is a discussion between a securities lawyer, an investment advisor and a behavioral financie expert. The lawyer is suing UBS on behalf of clients who bought these securities:

Lipner: General balance sheet debts. Unsecured. But they make it sound like they’re buying a basket of stocks, and you’ll benefit from the upside, and they’ll insure the downside for some modest premium. That’s not what was going on. They’re funding operations. And on the confirmations [the paperwork clients get to confirm they want the notes], all it says is for risk disclosure see prospectus at

Pepper: There’s very little written disclosure given. Very little. Often only a term sheet and nothing else.

Lipner: My clients got oral representations from UBS reps that this paper was safe. The didn’t even get a term sheet. My clients never saw a single piece of paper on this stuff until after it blew up. I’ve never seen this in 25 years that on the confirmations they have the temerity to say to Mr. 65-year-old investor with other things to do in life, “go find it at”

Customers of brokerage firms need to remember that brokers get paid to sell things. Yes, there are some protections such as Know Your Client rules, but the bottom line is that customers need to protect themselves. If something sounds too good to be true, it probably is. If you can’t protect your own interests because you don’t understand the markets, hire an investment advisor who only gets compensated based on advice rather than getting compensated for selling products.

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