JP Morgan Structured Notes Cooked-Up in the Back Office Burn Investors

Stoltmann Law Offices, a Chicago-based investment and securities fraud law firm, has been prosecuting claims on behalf of burned investors against banks and brokerage firms since 2005.  We have seen it all; from the Tech Wreck, where investors were torched by the advice to put their entire retirement funds into NASDAQ darlings; to the Financial Crisis where Wall Street engineers manufactured every sort of derivative possible to off load their risk onto the accounts of retirees and investors alike. Now, as interest rates rise, inflation grips the economy, and the market waivers, the old adage that some things never change, is prescient.

For the last decade, big banks like JP Morgan Chase, RBC, and Bank of America-Merrill Lynch have been creating “structured notes” and selling them to their clients by the billions. These “notes”, they claim, offer an investor some of the upside of owning a company’s stock or an index, and some of the perks of a fixed income investment. Now, the common-sense response to this would be, no, I’ll just invest in preferred stock, or traded-REITs if I want income with growth potential. But Wall Street’s salesmen and their masters dress-up these incredibly complicated and conflicted “notes” and pump them up with grandeur and promise.

What Are “Structured Notes”?

Structured notes or structured products are financially engineered notes that combine the characteristics of traditional stocks and index funds with fixed income investments. Typically, they offer a fixed rate of interest plus some level of upside participation in whatever the equity or index the note is “linked” to. They are “structured” because they are actually a derivative. An investor is not investing directly in Apple stock for example, but rather, the investor is investing in a structured note created by JP Morgan, for example, that is linked to Apple stock in some way.

What Risks Are Involved In Structured Products?

There are many risks involved in structured products and notes. And the most difficult part for any investor is figuring them out. These products are typically extremely complicated and loaded with contingencies and triggers that are correlated to the price of what the note is linked to: that could be an index like the S&P 500 or to the common stock of a company, like Teladoc Health for example. The stock or index price acts as a trigger for the note’s performance. If the stock price drops to some predetermined price, then the note will stop paying interest for example. At some levels, if the price drops far enough, the investor’s principal becomes at risk. Further, these notes a illiquid – once you invest, you own them until maturity (typically 2-5 year terms).  Given the concentration risk, meaning the fact that at the end of the day, the performance of most of these notes is based on a single stock or index, that is locking in a lot of risk long-term for fairly nominal returns.

Your broker or financial advisor likely won’t tell you about the downside risk of these complicated products, or at least not in language most investors understand. These structured notes are so complicated, there is a pretty good chance your financial advisor or broker does not even understand them entirely. Your broker certainly won’t explain to you that the only reason these structured products exist, is because the bank for whom he or she actually works, makes billions of dollars creating and selling these complicated bits of Wall Street alchemy to retail investors.

One specific investment that has fallen on particularly hard times recently is the:

JPMorgan Chase Auto Callable Contingent Interest Notes Linked To The S&P GSCI® Crude Oil Index Excess Return

If a name was enough to cause investors to run, this should be it.  But, as we know all too well, investors trust their financial advisors.  They believe their advisor has their best interests at heart, and would not lead them astray.  These “notes” only “work” when things go right; otherwise the bank has built in so many trap doors that suspend payments and can even result in total loss of principal, the bank never takes the hit – just the investors.  As the markets heave, as Warren Buffett once said famously, “when the tide goes out, we’ll see whose wearing shorts.”

These complicated derivatives are only suitable for investors that can both understand the complicated structure of these investments, along with the contingencies and risks, and tolerate a suspension of payments, total illiquidity, and the risk of total loss. Unfortunately, these notes tend to offer attractive fixed-income yields and as such, were sold disproportionately to investors seeking income – which is typically not the risk-taking portion of an investor’s portfolio. FINRA requires brokerage firms to only recommend investments that are suitable for their clients, based on the investor’s financial status, investment objectives, and risk tolerance.  For all recommendations made after June 30, 2020, the new Regulation Best Interest applies.

If you have suffered losses in structured notes offered by your financial advisor or brokerage firm, please contact the securities lawyers at Stoltmann Law Offices at 312-332-4200 for a no-obligation, free consultation. You may qualify for a FINRA Arbitration claim where you can potentially recover your investment losses.