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Massive Losses in Autocallable Structured Notes
HOW TO RECOVER YOUR LOSSES
If you have lost money investing in autocallable structured notes or other types of structured products, please contact the securities and investment fraud law firm of Israels & Neuman today. You may be able to recover some or all of your investment losses through securities arbitration.
Our experienced securities arbitration 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. We offer a free consultation and we work on a contingency fee basis, meaning if we don’t recover money for you, you don’t pay us.
We recently read an excellent 5-part article series on auto callable structured products, written by Craig McCann and Mike Yan of SLCG. Mr. McCann is an expert witness and has extensive knowledge related to complex financial products.
The third part of the original article can be found here, but we have summarized it for you below.
Summary
Auto-callable notes (ACNs) have become a popular yet risky investment product, frequently issued by major financial institutions such as UBS, Goldman Sachs, JP Morgan, Citigroup, and Morgan Stanley. In just the past four years, $122 billion worth of these structured products have been sold. However, their complexity often conceals severe risks.
In previous analyses, we examined the role of ACNs tied to Lucid Motors. Today, we highlight a particularly poorly timed issuance by Citigroup linked to Silicon Valley Bank (SVB)—an auto callable note that was already worthless before it even settled in customer accounts.
The SVB-Linked Auto-Callable Notes: A Disaster for Investors
Between August 2021 and March 9, 2023, five auto-callable notes were issued that were directly tied to SVB stock, including:
- Credit Suisse’s $725,000 Contingent Coupon Callable Yield Note
- Citigroup’s $593,000 Auto-Callable Securities, Due September 12, 2024
- RBC’s $887,000 Auto-Callable Contingent Coupon Barrier Note
- Citigroup’s $1,301,000 Auto-Callable Linked to Adobe, Intuit, and SVB
- HSBC’s $1,301,000 Auto-Callable Notes Linked to SVB
These products were issued with the expectation that SVB’s stock would remain stable or grow, thereby allowing for coupon payments and potential early redemption. However, this assumption proved disastrous.
A Perfect Storm: The March 2023 Collapse of SVB
Silicon Valley Bank’s stock steadily declined leading up to its collapse. The key price movements were:
- $581.73 – Initial issue price for the first ACN
- $542.74, $402.56, $310.77 – Subsequent issues at lower stock prices
- $267.83 – Closing price on March 8, 2023
- $106.04 – Closing price on March 9, 2023, a 60% single-day drop
- March 10, 2023 – SVB is shut down by regulators
Despite numerous public warnings about SVB’s impending collapse, Citigroup issued an auto-callable note on March 9, 2023—after the stock had already suffered catastrophic declines. This note was completely worthless before it was even settled into investor accounts on March 14, 2023.
Auto-Callable Notes: High-Risk and Poorly Understood
Auto-callable notes are often marketed as high-yield investments with contingent coupon payments. However, they come with severe risks:
- Market Volatility Destroys Value
- When the underlying stock declines significantly, coupon payments stop, and the note’s value collapses.
- No Principal Protection
- Unlike bonds, there is no guarantee of repayment. Investors may receive only a fraction—or nothing—of their initial investment.
- Early Redemption Works Against Investors
- If the stock performs well, the issuer redeems the note early, preventing the investor from benefiting from long-term gains.
- Liquidity Issues
- Investors cannot easily sell these notes, often facing steep losses in secondary markets.
The Devastating Investor Losses from SVB-Linked ACNs
Every auto-callable note linked to SVB suffered massive losses:
- Citigroup’s March 9, 2023 Issuance → Completely worthless before settlement
- Credit Suisse’s Note → Paid $103.50 in coupons but only $1.70 per $1,000 at maturity
- RBC’s Note → Paid $2.50 in one quarterly coupon per $100 face value
- Citigroup’s Worst-Of Note (Adobe, Intuit, SVB) → Paid $19 in 20 monthly coupons per $100 face value
- HSBC’s Note → Paid $11.15 in 4 quarterly coupons per $100 face value
Citigroup’s Reckless Decision: A Lesson for Investors
The decision to issue a new SVB-linked auto-callable note on the eve of the bank’s collapse raises serious questions about Citigroup’s risk management and investor protection measures.
This case underscores why investors should be extremely cautious with structured products like auto-callables. The SVB-linked ACNs illustrate how these notes can lead to near-total losses, even when issued by major financial institutions.
Dr. Craig McCann and SLCG Economic Consulting have repeatedly warned about the dangers of structured financial products like auto-callable notes. The SVB collapse shows that these instruments are designed to benefit issuers, not investors.
For investors seeking safer alternatives, it may be prudent to look into:
- Diversified ETFs for long-term growth
- Government or high-grade corporate bonds for stability
- Traditional dividend-paying stocks for passive income