SPA Letter in Response to Chicago Lawyer Article on Structured Notes

The following is the SPA's response to an article concerning Structured Notes in Chicago Lawyer Magazine. http://www.chicagolawyermagazine.com/2009/01/14/financial-services-sales-of-structured-notes/

Dear James,

Your article is generally well-reasoned, but it is important to point out some significant inaccuracies.

Under federal securities law, if an underwriter has conducted the proper due diligence of an underwriter, it has no strict liability for the material misstatements or omissions in the issuer's prospectus. UBS was as much a victim as its investors -- to suggest that UBS should have "inside information" about Lehman's financials is unsupportable.

You seem to suggest that because UBS sold structured notes mere weeks before Lehman's demise, it should have known about Lehman's financial condition. UBS does not have a legal right to have superior knowledge than the rest of the market simply because it is an underwriter -- to suggest otherwise is to open the door to a form of insider trading.

Moreover, the statement that investors "didn't know" they were purchasing "unsecured debt" of Lehman is, quite frankly, preposterous. The front page of the prospectus makes that abundantly clear, and the federal securities laws do not provide strict liability protections to investors who don't bother to read the prospectus of investments they purchase.

Also, a few words about structured products. If credit risk is now the major concern of purchasers of structured investments, they should also steer clear of corporate bonds, equities, convertibles, preferreds and any other security issued by a corporate entity. From a credit risk perspective, structured products are no worse than any of the other securities. In fact, arguably, the holders of unsecured debt are better off than the holder of equity -- yet we don't hear much about the credit risk of equities vs structured products.

Structured products are exceptionally useful investment vehicles that have tremendous utility in repairing portfolios devastated by conventional investments such as equities and bonds. The constant stereotype about all structured products being "dangerous" or "too complex" has been an intellectually lazy way certain money managers have simply dismissed the entire investment class. This is unfortunate -- structured products are to Europeans what mutual funds are to Americans. The difference is that mutual funds charge an average of 1.37% per year, and structured products are closer to .55% per year.

That said, everyone agrees with the FINRA Notice to Members, and by and large, you'll find that all constituents in the structured products industry devotes enormous effort and resources to best practices in the marketing of these investments. I believe that UBS was as much a victim of Lehman's default as investors, and it will prevail in any class action lawsuit that seeks to impose liability in its role as an underwriter.

Sincerely,
Keith Styrcula
Chairman
Structured Products Association