This summer, the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) both fined Merrill Lynch, the brokerage arm of Bank of America Corporation, for negligently failing to adequately disclose information in connection with the sale of a product called “Strategic Return Notes” (“SRNs”). These structured notes were issued by Merrill Lynch’s parent company, Bank of America Corporation, but Merrill Lynch had principal responsibility for drafting and reviewing the retail pricing supplements. Merrill Lynch failed to adequately disclose certain fixed costs in the proprietary volatility index linked to the SRNs.
Offering Materials Didn’t Disclose Execution Factor
According to the SEC, the offering materials emphasized that the notes were subject to a 2% sales commission and a .75 % annual fee. Due to the impact of these costs over the five-year term of the notes, the volatility index would have needed to increase by at least 5.93% from its starting value in order for investors to even earn back their original investment on the maturity date. But if the two fixed costs Merrill disclosed made the SRNs a bad investment, a third fixed cost Merrill failed to disclose made the products far worse. The offering materials did not adequately disclose a cost known as the “execution factor,” which cost was included in the volatility index linked to the notes. The execution factor imposed a cost of 1.5% of the index value each quarter — an undisclosed annual cost totaling 6%. An index multiplier magnified the impact of the execution factor by an additional 20%, so the hidden trading costs Bank of America incorporates into the volatility index is actually 7.2% per year. Thus, the disclosures in the offering materials of the fixed costs associated with the SRNs were materially misleading.
Merrill Lynch offered and sold more than $150 million of these SRNs to some 4,000 retail investor accounts in 2010 and 2011. Even if the disclosures concerning costs had been adequate, the SRNs were unsuitable for most retail investors. Shortly after the SRNs were issued, their value plummeted. They have lost approximately 95% since inception.
If you have suffered losses in Strategic Return Notes, please contact us at once. Filing deadlines may soon bar your claim. Contact attorney Hugh Berkson at (866) 932-1295 for a free evaluation of your recovery options. Or send an email to firstname.lastname@example.org. You also can reach us by filling out the form to the right.
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.