How Wall Street robbed you

In this gathering of the Forbes.com Investor Team, a securities lawyer, a behavioral finance expert and a fee-only investment adviser grapple with the losses that their clients have experienced in 2008.

The tales of real estate investors and owners of financial stocks have largely been told. But losses are only now being realized by those who invested in the $114 billion of structured notes sold by banks like Lehman Brothers Holdings, Morgan Stanley, Merrill Lynch and Goldman Sachs.

US capitalism faces change
Selling papers

Principal protected notes promise that investors will receive the market return if it's positive or get their money back if returns are negative over a certain amount of time. But investment adviser Carol Pepper of Pepper International says that every note has its own terms and conditions, and investors often don't understand them.

Seth Lipner, a securities attorney with Deutsch & Lipner of Garden City, N.Y., is representing clients who are bringing arbitration complaints against UBS. UBS had sold his clients principal protected notes issued by Lehman. Lipner makes the surprising declaration that:

Next week's guest: Muriel Siebert
Japan Bank measures a salve, not a cure

"You know what Lehman was doing with that money? They were funding their operations. They weren't buying securities and protecting it with some kind of hedge. They're borrowing money from their clients."

With Lehman's bankruptcy, says Lipner, the notes are worthless. Lipner says that the UBS brokers sold the notes with almost no disclosure beyond a verbal commitment that they wouldn't lose money and a brief confirmation letter that instructed them to go find the prospectus on sec.gov if they wanted to know more.

What have you got to lose?

The structured notes market more than doubled in 2008, which is no surprise as investors sought assurance during these volatile months. Michael Ervolini, a behavioral finance expert and the head of Boston's Cabot Research believes that investors' fears led them to make rash decisions, or at least to acquiesce too willingly to the suggestions of Wall Street's clever salespeople.

"When we want to like something, we only answer the questions with positive answers. I ask questions that affirm my desire to own this thing," says Ervolini.

Several law firms are now gathering clients who bought the Lehman notes. Meanwhile, the structured notes business continues to thrive as the markets haven't exactly inspired confidence of late.