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Important Information About Autocallable Structured Notes and Products
Our securities and investment fraud lawyers have handled many different cases involving structured products and can quickly determine if you are eligible to bring an arbitration case to try to recoup your losses.
If you have lost money investing in auto callable structured notes or other types of structured products, please call our office today. You may be able to recover some or all of your investment losses through securities arbitration. Israels & Neuman, PLC is a securities and investment fraud law firm that represents investors who have lost money investing in structured products. We always offer free consultations and work on a contingency fee basis, meaning you don’t pay us unless we successfully recover money for you.
We recently read an excellent 5-part article series on autocallable structured products, written by Craig McCann and Mike Yan of SLCG. Mr. McCann is an expert witness and has a deep level of understanding of complex investment products.
The second part of the original article can be found here, but we summarized it for you below.
Summary:
Auto-callable notes (ACNs) have become an increasingly popular structured product, offering high potential yields while embedding complex risk factors. While they promise attractive returns, they also expose investors to significant risks, especially when linked to volatile stocks. A recent analysis of five autocallable notes tied to Lucid Group Inc. (and in some cases Uber, Chewy, Square, PetMed Express, and DocuSign) demonstrates just how dangerous these products can be for investors.
How Auto-Callable Notes Work
Auto-callable notes are structured products with three key features:
- Contingent Coupons: Investors receive periodic interest payments only if the underlying stock remains above a pre-set coupon barrier.
- Auto Call Feature: If the stock price rises above a certain level at designated observation dates, the issuer redeems the note early, returning the principal but halting future high-yield payments.
- Knock-In Protection: If the stock price falls below a critical threshold, investors suffer significant losses, often receiving a fraction of their initial investment.
McCann Case Study: Five Auto-Callable Notes Linked to Lucid Group Inc.
Five ACNs issued by Credit Suisse and Citigroup from late 2021 to early 2022 illustrate the risks involved. The results of these investments have been overwhelmingly negative:
- Only one note was called early after paying just three coupons, limiting investor gains.
- The other four notes failed to auto-call and are projected to pay less than $10 per $100 face value at maturity due to Lucid’s stock decline.
Example 1: Credit Suisse Note (Oct 2021 – Lucid & Uber)
- Paid only 3 coupons before being called.
- Investors received their principal back but missed out on potential continued high-yield payments.
Example 2: Credit Suisse Note (Nov 2021 – Lucid Only)
- Failed to auto-call as Lucid’s stock declined.
- No coupons paid after April 2022.
- Investors will likely receive about $80 per $1,000 face value at maturity.
Example 3: Credit Suisse Note (Nov 2021 – Lucid, Chewy, Square, PetMed)
- Required all four stocks to be above their thresholds.
- Only 2 coupons paid, then no further payments.
- Expected payout: Below 10% of face value.
Example 4: Citigroup Note (Jan 2022 – Lucid Only)
- Never paid a single coupon due to Lucid’s continued price decline.
- Expected payout: Less than $10 per $100 face value.
Example 5: Citigroup Note (Jan 2022 – Lucid & DocuSign)
- No coupons ever paid.
- Expected payout at maturity: Under 10% of face value.
Comparing Auto Callable Notes to Traditional Investments
Autocallable notes are often misrepresented as safe, high-yield alternatives, but when compared to traditional investments, their risks become evident:
| Feature | Auto-Callable Notes (ACNs) | Stocks | Bonds | ETFs (Index Funds) |
| Potential Returns | High if stock remains above thresholds, but capped if called early | Unlimited growth potential | Fixed coupon payments | Market-driven but diversified |
| Risk Level | High – principal at risk if stock falls below knock-in level | High – stock prices fluctuate | Lower – fixed income | Medium – diversified risk |
| Liquidity | Low – difficult to exit early without losses | High – can be sold anytime | Medium – depends on bond type | High – traded like stocks |
| Market Dependency | Stock price fluctuations dictate payouts | Stock performance-dependent | Less volatile (interest rate-sensitive) | Diversified, reducing single-stock risk |
| Early Call Risk | Called early if performing well, capping gains | N/A | N/A | N/A |
| Principal Protection | No – high risk of losing most of the investment | No – stock prices fluctuate | Yes – unless issuer defaults | No – but diversified risk |
| Income Generation | Only if the stock stays above coupon barriers | Some stocks pay dividends | Regular interest payments | Some ETFs offer dividends |
Key Risks of Auto-Callable Notes
- Early Redemption Caps Gains
- If the underlying stock performs well, the issuer redeems the note early, limiting the investor’s profit potential.
- Knock-In Risk – Potential for Huge Losses
- If the stock falls below the knock-in level (often 50% of initial value), investors lose a large portion of their principal.
- Limited Liquidity
- Investors cannot easily sell these notes before maturity without incurring significant losses.
- Hidden Costs & Conflicts of Interest
- Many ACNs are issued at below face value (e.g., Citigroup and Credit Suisse valued the Lucid-linked notes at less than $970 per $1,000 at issuance).
- Brokers receive commissions (3%-3.75%) for selling these products, creating a conflict of interest.
- No Dividend Benefits
- Unlike direct stock ownership, investors do not receive dividends from the underlying assets.
- Issuer Credit Risk
- If the issuing bank collapses, investors could lose everything, even if the underlying stock recovers.
Conclusion: Are Auto-Callable Notes Worth the Risk?
The recent performance of Lucid-linked auto callable notes highlights their inherent dangers. Investors were left with massive losses due to falling stock prices, while issuers and brokers profited through early calls and hidden fees.
For most investors, traditional stocks, ETFs, and bonds provide far better alternatives with greater liquidity, transparency, and long-term growth potential. Before investing in structured products like ACNs, investors should fully understand their downside risks and consider whether the potential rewards justify the lack of control and liquidity.