Thursday, August 27, 2009

SEC Charges Texas Investment Adviser for Operating a Ponzi Scheme

On August 25, 2009, the Securities and Exchange Commission ("Commission") filed an emergency civil injunctive action against Thomas Lester Irby II, Titan Wealth Management, LLC, and Point West Partners, LLC for their roles in defrauding over thirty advisory clients by selling fictitious interests in what Irby claimed were European Mid-Term Notes (MTNs).

The Commission's complaint alleges that beginning in 2007 and continuing through the present, Irby, Titan, a Commission-registered investment adviser, and Point West, raised over $3.1 million from over 30 of Titan's advisory clients. Irby told investors that he would pool their funds to purchase an MTN or an interest in an MTN, with promised short-term returns ranging from 10% to 50%. The Commission's complaint further alleges that, contrary to representations to investors, the defendants did not pool investor funds to purchase any interest in an MTN. Instead, Irby and Titan misappropriated at least 80% of investor funds for personal use, to make Ponzi payments to certain investors, and for transfer to the relief defendants for no apparent consideration.

The Commission's complaint, filed in United States District for the Eastern District of Texas, alleges that Irby, Titan and Point West violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and that Irby and Titan violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The Commission's complaint also names Joseph Romanow, David Romanow, Karen Bowie, France Michaud, John J. Kim, and Pegasus Holdings Group, Inc. as relief defendants.

The Commission seeks a temporary restraining order, asset freeze, accounting, an order preserving documents, and expedited discovery against each defendant. The Commission also seeks preliminary and permanent injunctions against further violations of the securities laws, disgorgement plus prejudgment interest, and civil money penalties from each defendant. The Commission also seeks to recover investor funds improperly obtained by the relief defendants.

Tuesday, August 25, 2009

FINRA Bars Citigroup Sales Assistant Tamara Moon

The Financial Industry Regulatory Authority barred Citigroup Inc. employee Tamara Lanz Moon from the securities industry for allegedly taking more than $850,000 from at least 22 especially vulnerable customers, including her own father.

The Redwood, Calif., woman was also accused of falsifying account records, engaging in unauthorized trades and related recordkeeping violations.

Ms. Moon's conduct occurred over an eight-year period while she was a sales assistant at Citigroup Global Markets in Palo Alto, Calif. The banking giant has compensated customers for their losses.

The regulatory body found Ms. Moon targeted the elderly and ill customers as well as others she believed were unable to monitor their accounts. Among her alleged victims were an 83-year-old widow that she misappropriated $83,000 from and her father, whom she bilked for $30,000. She also misappropriated $55,000 belonging to an American diplomat working overseas.

Ms. Moon neither admitted nor denied the charges but consented to the entry of Finra's findings. She couldn't immediately be reached for comment.

Monday, August 24, 2009

Medical Capital Investigation

Aidikoff, Uhl & Bakhtiari (www.securitiesarbitration.com) announces an investigation of Medical Capital on behalf of investors in Medical Capital securities. The law firm has been contacted by investors and is
preparing to file FINRA arbitration claims against broker dealers and
possibly investment advisors firms for losses incurred based on the
recommendation to purchase Medical Capital securities.

The individual brokers and individual advisors who sold Medical Capital
are not targets of investor claims.

Medical Capital Corporation and Medical Provider Funding Corporation VI
raised more than $2.2 billion through the offering of notes in Medical
Provider Funding Corp VI and earlier special purpose entity offerings.

On August 3, 2009 the Securities and Exchange Commission (SEC) sought
emergency relief. The SEC has alleged that investors were defrauded
among other things, by Medical Capital's misappropriation of
approximately $18.5 million of the $76.9 million raised through the
sale of MP VI notes to pay administrative fees to MCC.

"The SEC has taken steps to prevent future capital raises from taking
place," stated attorney Philip M. Aidikoff. "However, this will not
help the thousands of investors who have lost millions of dollars by
virtue of the recommendation of Medical Capital related securities."

"We are investigating claims for customers of Securities America,
National Securities, American Portfolio Financial Services and other
broker dealers," stated attorney Ryan K. Bakhtiari. "Brokerage firms
owe a duty to conduct proper due diligence of investments before they
approve the recommendation of them to their clients. We believe that
clients of brokerage firms may have recourse."

Aidikoff, Uhl & Bakhtiari represents retail and institutional investors
around the world in securities arbitration and litigation matters. More
information is available at www.securitiesarbitration.com or by
contacting an attorney below.

Saturday, August 22, 2009

Medical Capital Failed to Disclose Executive's Past

The head of troubled Tustin lender Medical Capital Holdings is a one-time "bad actor" in the auto insurance industry, interviews and documents show.

California insurance regulators sued Sidney M. Field for fraud in the early 1990s after revoking his license.

"We thought he was a bad actor in 1991 and slapped him around and threw him out of the insurance industry, hopefully forever," Lt. Gov.John Garamendi told The Register. Garamendi was the state's elected insurance commissioner when he sued Field.

The SEC alleged that Field and Lampariello cheated investors of $18.5 million. A receiver has taken over the business.

Medical Capital raised $2.2 billion from 20,000 investors over the past six years. It put investors' money primarily into unpaid bills, or receivables, from hospitals and doctors.

Investors reached by The Register said they knew nothing of Field's prior run-in with regulators – and would not have invested if they had known.

"Absolutely not," said Carol Marini, 64, of Fairfield. She invested her life savings, $145,000, in Medical Capital.

"If I would have known, forget about it," said Jim Palladino, 73, of Palm Desert, who invested $160,000.

"Good Lord, what a record," said Bill Balogh, 75 of Mission Viejo. He and his wife Norma invested more than $1 million.

A brief biography contained in a March 2003 SEC filing says that Field "was the founder, past president and chairman of FGS, one of the largest insurance brokers in the United States with annual sales of over $200,000,000. Mr. Field sold his interest in that firm in 1990."

The Department of Insurance's lawsuit and news releases paint a much grimmer picture of Field's insurance career:

In February 1987, Field and several others allegedly arranged for Coastal Insurance Inc., which they controlled, to pay Field $17.5 million for FGS. Two years later, just before it slipped into insolvency, Coastal sold FGS back to Field for $206,000. Regulators called the deal a "sham transaction" that diverted cash from an ailing insurer to Field.

State insurance regulators revoked Field's insurance license in August 1987.

Regulators warned both Field and Coastal that they would not license FGS if Field remained involved. Despite that warning, he allegedly continued to control FGS and to serve as a "de facto" director of Coastal, which sold auto insurance to bad drivers.

Under Field's supervision, FGS agents allegedly used a deceptive practice known as "sliming" to sell Coastal auto policies. They would alter the accident records of questionable drivers and falsify information about car values and commute mileage so applicants could qualify for insurance.

FGS also allegedly duped customers into paying interest rates of 21 percent to 40 percent when they financed their premiums.

The Department of Insurance sued Field for civil racketeering in August 1990 and again three years later, this time for fraud, after he filed bankruptcy. He paid $100,000 to settle the second lawsuit.

In September 1991, after putting one of his companies into bankruptcy, Field told The Register, "I'm never going back into insurance, other than buying it for myself."

A few years later Field's new company, Medical Capital Holdings, was selling investments in medical receivables.

CIT Turns To Retiress for Debt Financing - Internotes

CIT Group Inc., the commercial lender turned to retirees for debt financing. CIT sold $827 million of debentures designed specifically for individuals between December 2007 and March 2008. At the time, “disruptions” in credit markets led to “the loss of access” to unsecured debt markets, “historically significant sources of liquidity for the company,” the New York-based company said in a July 21 regulatory filing.

It turns out the professionals were right to stay away. The 101-year-old lender said last month it may go bankrupt after $5 billion of losses in the past nine quarters. Retired salesman Sam Pons of Metairie, Louisiana, said he bought $220,000 of the notes through a broker in February 2008 at 100 cents on the dollar. The securities have since tumbled to as low as 44 cents.

“I was kind of naïve,” said Pons, 63. A month after buying, “the whole news came alive with CIT Group’s problems. I’ve sat on this for a year and a half now with my heart in my throat hoping they survive.”

CIT joined GMAC Inc., Prudential Financial Inc. and more than a dozen other companies that tapped individuals as credit markets closed to them through underwriters led by Chicago-based Incapital LLC. The Financial Industry Regulatory Authority now says it’s investigating whether the risks associated with the securities were adequately disclosed.

Wednesday, August 19, 2009

Medical Capital Moves Towards Bankruptcy Filing

The officers of Tustin lender Medical Capital Holdings asked a federal judge Monday to let the company file a Chapter 11 bankruptcy reorganization.

U.S. District Judge David O. Carter said he probably would refuse. But he gave the company and the Securities and Exchange Commission a week to make their cases. The SEC sued Medical Capital for fraud last month, and Carter appointed a temporary receiver on Aug. 3.

Separately, Carter told receiver Thomas Seaman and attorneys for Wells Fargo Bank to stay in the courthouse and try to resolve a fight over money. He ordered them to return to his courtroom at 7 tonight.

Wells Fargo is trustee for two of Medical Capital’s six investor funds. The bank wants those two funds, which total $510 million in principal, taken away from the receiver.

Seaman said he needs the money to preserve Medical Capital assets. The power is about to be shut off at one of those assets, medical isotope maker Trace Life Sciences in Denton, Tex., he said. Another asset is a shuttered hospital in Atlanta.

“I have all kinds of collateral that I can’t take care of,” Seaman told Carter.

“Get busy. Work this out,” Carter told Seaman and the attorneys for Wells Fargo. “I’m hearing too much reluctance, quite frankly.”

Carter also gave the Wells Fargo attorneys a pointed warning to make a deal before the nighttime court session.

“I have a nuclear power plant,” Carter said, referring to the linear accelerator at the Denton facility. “If I have to balance the equities, guess who loses? Wells Fargo.”

Medical Capital raised $2.2 billion from 20,000 investors in the past six years, investing most of it in medical receivables. The SEC contended in its lawsuit that the company had defrauded investors of at least $18.5 million.

Tuesday, August 18, 2009

Medical Capital Investors Suffer Losses

A Santa Ana federal judge barred Medical Capital Holdings Inc. from selling additional securities in an offering that has raised at least $76.9 million, in response to a complaint alleging fraud against the Tustin company filed by the Securities and Exchange Commission.

In addition to prohibiting the financial services company from taking in more investor money, U.S. District Judge David O. Carter froze the assets of Medical Capital Holdings and its subsidiaries and appointed a temporary receiver, among other actions. The SEC filed its complaint Thursday, alleging that the financial services company committed fraud as far back as 2003.

The filing also accuses Medical Capital Holdings of lying to backers as the company raised and misappropriated millions of investor dollars while telling buyers nothing about more than $1.2 billion in notes outstanding and $992.5 million in notes that went into default or resulted in late payment of both principal and interest.

The complaint said the company and its subsidiaries, Medical Capital Corp. and Medical Provider Funding Corp. VI, raised more than $2.2 billion through offerings of notes in Medical Provider Funding Corp. VI and earlier offerings made by five other wholly owned "special-purpose corporations" named Medical Provider Funding Corp. I, II, III, IV and V.

The SEC also said Medical Capital Holdings, Medical Capital Corp. and Medical Provider Funding Corp. VI failed to tell investors about defaults on payments to investors who bought into the offerings made by the first five Medical Provider Funding entities.

Medical Capital Holdings provides financing to healthcare providers by buying their accounts receivable and making secured loans.

The parent outfit ran its subsidiaries as fully operating companies that provided management, underwriting, bookkeeping, payroll and accounting services to clients, in addition to using the companies to raise money in the form of securities, court documents said.

In one instance, the SEC alleged, $18.5 million of a total $76.9 million raised through the sale of securities by Medical Provider Funding Corp. VI was used to pay administrative fees to Medical Capital Corp. Original offering documents issued by Medical Provider Funding Corp. VI failed to disclose that administrative fees would be paid out of proceeds from the sale of notes.

Sidney M. Field is named in the complaint as the chief executive and Joseph J. Lampariello is identified as the chief operating officer of the companies in the complaint, said Andrew G. Petillon, associate regional director of the SEC's Los Angeles office.

Merrill Lynch Sued For Madoff Losses

Just months before his now-infamous Ponzi scheme collapsed, Bernie Madoff snookered a Merrill Lynch adviser who was attempting to perform due diligence on him for a foundation that serves the elderly, according to a lawsuit filed in federal court in Florida last week.

In the complaint, MorseLife Foundation is seeking at least $33 million in damages from Merrill Lynch & Co. Inc., claiming that the New York financial advisory firm was taken in by Mr. Madoff during a face-to-face meeting just several months before his fraudulent investment empire collapsed.

Now in prison for running a $65 billion Ponzi scheme and wiping out the fortunes of a lengthy list investors, he met with the Merrill adviser, John S. Lacy, in July of 2008.

Mr. Lacy, a vice president with Merrill's global wealth management group in West Palm Beach, along with foundation executives, was part of a group in a due diligence meeting on behalf of MorseLife, which filed the lawsuit last Friday in U.S. district court in Miami.

As of July 2008, the portfolio was worth $32.4 million.

After 2006, with the hope of building its relationship with the foundation, Merrill Lynch expanded its services, which included advising MorseLife on its investment policies, strategies, asset allocation risk tolerance and specific investments not managed by Merrill Lynch, the lawsuit claims. MorseLife in its suit is alleging that Merrill Lynch was negligent.

Friday, August 14, 2009

Victims Of Citigroup Structured Notes Reach As Far As Norway

Seven Norwegian municipalities along with Terra Securities, a Norwegian securities brokerage firm, filed a lawsuit last year against Citigroup for tens of millions of dollars in losses after recommendations to invest in two highly complex and risky Citigroup hedge funds known as ASTA and MAT. Investors alleged that the instruments were falsely marketed and sold as low-risk, conservative securities.

According to the complaint, the municipalities say they were duped by Citigroup because the bank failed to warn them that the structured notes in question were highly risky and subject to being cashed out, at a significant loss, if the market price dropped below a certain point.

As in the case of Citigroup’s ASTA/MAT hedge funds, the returns on the investments bought by the Norwegian towns were linked to a municipal bond arbitrage fund created by Citigroup. The fund involved leveraged investments in United States municipal bonds. The investments themselves were highly speculative and included collateralized debt obligations and mortgage-backed securities. In addition, the leverage associated with the fund created added risks- something the Norwegian towns, just like ASTA/MAT investors, were unaware of until it was too late.

By May 2008, nearly all the Norwegian towns’ original investment in the Citigroup notes was wiped out. Meanwhile, Terra Securities found itself forced into bankruptcy. Court documents in the case accused Citigroup of selling the notes “in order to unload what was becoming significant risk from either its own or its preferred customers’ balance sheets.”

In addition to Citigroup, the lawsuit, which was filed in the United States District Court for the Southern District of New York, also named Citigroup Global Markets and Citigroup Alternative Investments LLC as defendants.

Saturday, August 8, 2009

Strong Fund Investors Receive Settlement Monies

Five years in the making, it appears that Strong Funds investors who were harmed by mutual fund market timing may soon receive their share of the $154 million settlement.

The Securities and Exchange Commission has published a disbursement proposal for the 24 funds affected on its website that was devised by independent consultant Michael R. Gibbons, a finance professor at the Wharton School of the University of Pennsylvania.

The plan notes that the original settlement, reached with Strong Capital Management, its former CEO Richard S. Strong, and executives Thomas A. Hooker, Jr. and Anthony J. D’Amato was for $140 million, but with interest, it has grown to $154 million.

While other investors have long since been repaid from damages done to their returns from market timing, the Strong case was complicated, explained Robert J. Burson, associate regional director of the SEC’s Chicago office.

Friday, August 7, 2009

Former AIG CEO Greenberg to Pay $15 Million To SEC

Former AIG CEO Hank Greenberg has agreed to pay the SEC $15 million to settle past accounting issues, according to the Wall Street Journal.

Also, former AIG CFO Howard Smith will reportedly pay $1.5 million to the SEC in the settlement.

An official announcement by the SEC on the settlement is expected late on Thursday.

Thursday, August 6, 2009

DBSI Investors Suffer Losses - Serious Problems Emerge

The U.S. trustee for Delaware, where DBSI is incorporated, will ask a bankruptcy court Tuesday to appoint a trustee to run the company, ending DBSI owners' control.

"It appears that certain of the debtor's officers and directors, including (President) Douglas Swenson, have engaged in misconduct, fraud and mismanagement which collectively caused damage to the debtors' investors and creditors," the U.S. trustee's office said in a court document Monday. The office is an arm of the U.S. Justice Department.

Swenson started DBSI in 1980. The company, formerly based in Meridian, manages commercial property investments for well-heeled investors around the country.

Before it filed for bankruptcy in November, DBSI controlled 248 commercial properties around the nation and had more than 8,500 investors. Its holdings include several shopping centers and office buildings in the Treasure Valley. DBSI collapsed as real estate values fell and lending dried up.

DBSI was sued by investors in October after it stopped paying them and was sued for fraud by Idaho securities regulators in February. Those lawsuits are pending. DBSI has denied the state's fraud allegations.

What's left of the company is now in Boise. While a Chapter 11 bankruptcy filing allows a company to reorganize, the DBSI bankruptcy is expected to end in the company's dissolution.

The U.S. trustee's office - which monitors the conduct of companies involved in a bankruptcy - sought its motion based on an interim report on the company's affairs filed Monday by a court-appointed examiner, Joshua R. Hochberg, who spent months reviewing DBSI's internal records.

Among Hochberg's findings:

• DBSI had "serous cash flow problems and operating losses" when it sought investors in a 2008 notes offering, which is like a prospectus.

• Most of the notes' proceeds, which totaled about $90 million, were not truly "invested" in ways the notes offering promised.

Leveraged ETF's

Many investors don't fully understand how these vehicles work. Leveraged ETFs are designed to deliver some multiple of the daily performance of whatever underlying index the ETF tracks. But over time, daily movements in the underlying index can create losses for those who hold shares over longer periods of time -- even if the index rises on the whole.

Regulators recently voiced concern over the sustainability of these investment vehicles as long-term investments. The independent regulatory organization FINRA warned about the risks of inverse and leveraged ETFs this spring, stating that they are "unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets."

In response, many of the big cats on Wall Street have either stopped selling leveraged ETFs, or placed restrictions on sales. Fidelity and Schwab (Nasdaq: SCHW) have warned investors about using them, while UBS (NYSE: UBS) and the Morgan Stanley Smith Barney joint venture of Morgan Stanley (NYSE: MS) and Citigroup (NYSE: C) have simply stopped selling them for the moment.

Wednesday, August 5, 2009

Accomplice liability law proposed in Congress

U.S. Senator Arlen Specter introduced legislation to let investors sue law firms, accountants and investment banks that helped perpetrate fraud, seeking to overcome recent Supreme Court limits on such cases.

The measure would make individuals or firms that provide “substantial assistance” in a fraud subject to investor lawsuits, Specter, a Pennsylvania Democrat, said on the Senate floor last week. The Supreme Court has decided two cases since 1994 that restrict investors from recouping losses from fraud accomplices. The House isn’t considering similar legislation.

“It would be an appropriate change,” said Donald Langevoort, a securities law professor at Georgetown University. “Secondary actors who play a big enough role in perpetrating a fraud should bear responsibility just like anyone else and shouldn’t be able to hide.”

Shareholders are barred from suing parties that have only an indirect role in a fraud after Supreme Court decisions that limited liability to those directly and publicly involved in the scheme. The Specter measure would upend rulings in Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. of 2008 and Central Bank of Denver v. First Interstate Bank of Denver.

Prior to the rulings, investor lawsuits against fraud accomplices were common, Langevoort said. The 1994 Central Bank decision was a “major gift” to individuals and corporations that aided in a fraud, he said.

Tuesday, August 4, 2009

SEC Charges B of A For Statements To Investors About Merrill Lynch Purchase

The Securities and Exchange Commission today charged Bank of America Corporation for misleading investors about billions of dollars in bonuses that were being paid to Merrill Lynch & Co. executives at the time of its acquisition of the firm. Bank of America agreed to settle the SEC's charges and pay a penalty of $33 million.

The SEC alleges that in proxy materials soliciting the votes of shareholders on the proposed acquisition of Merrill, Bank of America stated that Merrill had agreed that it would not pay year-end performance bonuses or other discretionary compensation to its executives prior to the closing of the merger without Bank of America's consent. In fact, Bank of America had already contractually authorized Merrill to pay up to $5.8 billion in discretionary bonuses to Merrill executives for 2008. According to the SEC's complaint, the disclosures in the proxy statement were rendered materially false and misleading by the existence of the prior undisclosed agreement allowing Merrill to pay billions of dollars in bonuses for 2008.

WSJ Reports -- Morgan Keegan Asking Courts To Overturn FINRA Arbitration Awards

A binding arbitration award typically marks the end of a battle between an investor and broker. Not so with three awards against Morgan Keegan & Co.

In an unusual action, the company is asking a state court to overturn the rulings, angering lawyers for investors who say Morgan Keegan is prolonging their clients' trouble and expense.

Morgan Keegan, a regional brokerage owned by Birmingham-based Regions Financial Corp. (RF), has faced a flood of claims by investors who were hit by sizable losses in 2007 and 2008 in seven funds that made bets in debt and other mortgage-related holdings.

Arbitration awards are typically binding. Federal arbitration law gives parties the right to appeal awards only under very limited circumstances, such as when arbitrators clearly ignore established law.

Appeals are very difficult to win, and thus rarely are made, says Peter Henning, a securities law professor at Wayne State University Law School in Detroit.

"The presumption is that arbitration is the end. You don't have judges second-guessing it," he says.

Kathy Ridley, a Morgan Keegan spokeswoman, acknowledged the appeals were unusual "but we believe the arbitrators exceeded their authority or improperly applied the law."

Morgan Keegan filed its motions to vacate in a Birmingham, Ala., court. The most recent appeal was filed July 22 and involved a $220,000 award including attorneys fees and costs. In that case, the brokerage argues that the panel's chairman, who previously sat on another panel that ruled against Morgan Keegan, should have been recused, according to Debra Brewer Hayes, a Houston-based securities attorney who represents the investor.

Hayes' client in the case is United Prison Ministries International in Verbena, Ala., which distributes free bibles and religious books to prisoners and their families. She says the $220,000 award is about half the original request and calls it "level and even handed."

The appeal, she says, could prolong the case another eighteen months to two years. Hayes says she's dealt with only one or two other motions to vacate during her more than 20 years of practice.

In another appeal, filed in May, Morgan Keegan asked the court to vacate an award totalling over $628,000 on behalf of two investors. The motion accuses arbitrators of misconduct for not postponing a hearing during which the investors presented suitability claims. The investors, Morgan Keegan says, had "disavowed" such claims.

Andrew Stoltmann, a Chicago-based attorney who represents the investors, calls the allegation "categorically not true." He said it was the second motion to vacate he has faced in some 700 cases over 10 years.

A third motion to vacate, also filed in May, says an arbitration panel exceeded its authority in awarding more than $187,000 in damages, attorneys fees and costs, according to Steven B. Caruso, a New York attorney who represents the investor.

Henning, the law professor, calls the motions "basic trendsetter cases."

"They may be trying to get the test cases sorted out, see what a court would say, and then they can go about settling," he says.

But the strategy - and its delays - may also come with a price tag, says Caruso. "Who pays for it? The shareholders of Regions Financial," he says.

Monday, August 3, 2009

B of A To Pay $33 Million Fine

Bank of America has agreed to pay a $33 million penalty to settle government charges that it misled investors about Merrill Lynch's plans to pay bonuses to its employees.

In seeking approval to buy Merrill, Bank of America told its shareholders that Merrill agreed not to pay year-end bonuses without Bank of America's consent. But the Securities and Exchange Commission says Bank of America had authorized New York-based Merrill to pay $5.8 billion in bonuses.

The bonuses amount to nearly 12 percent of the $50 billion Charlotte, N.C.-based Bank of America paid for Merrill.

The SEC says Bank of America agreed to pay $33 million to settle the charges without admitting or denying the allegations.

Sunday, August 2, 2009

Lehman Structured Product and Lehman Principal Protected Notes (PPNs) - Recovering and Valuing Losses

If you own a Lehman Brothers structured product issued in Europe, the basic components you are ultimately invested in are a bond and an option. The bond is a zero coupon, which means it is issued at a price well below par. The value you have in the bond is whatever price you have bought it at, minus a bit more if the issue is newly launched and minus a bit less if it is nearing maturity. The bond will have been issued by and in the name of Lehman Brothers.

In addition, there is an option that will have been bought from a counterparty. That counterparty may have been the options desk at Lehman, or it may be the same desk at another bank. If that option – based on the performance of an underlying, typically an equity index, such as the FTSE – is in the money, ie it is performing better than anticipated, then the counterparty will owe money to the investor.

Valuing the option that is closed out as a result of the Lehmans bankruptcy is based on the probability of that option being at an expected level at expiry. This is hi-tech mathematics, but the important element for the investor is that these proceeds will have been put to one side by the counterparty, either in cash or liquid securities like US Treasuries. As the money is specifically put to one side it ranks as a secured obligation of the counterparty.

Once the zero coupon bond and the option have been valued, they are then packaged into a total amount that is then multiplied by the market value of Lehman bonds. Taking Lehman bonds at 50 - the level they were quoted at earlier this week - and the zero coupon at 68 and the option at 10: the bond plus option equals 78, multiplied by 50% leaves the investor with a return of 39.

One oddity of the structured product is that the money from the option – if there is any – is secured, and the money from the bond is unsecured. As a result, the option proceeds rank further up the creditor priority chain on bankruptcy.

This is all conditioned by any steps taken by the regulators in Europe. Apparently, the Nordic, German and Swiss regulators, as well as the UK Financial Services Authority are looking into ways to ensure that retail investors may be protected against the worst of the losses. They will try and look after the 'mom and pop' investor as well as they can.

In Asia, the Hong Kong Securities and Futures Commission and the Monetary Authority of Singapore have told investors owning Lehman Minibond paper that they could receive substantially less than their initial investment and that the separately kept collateral and the swap agreements that back the notes are subject to security in favour of the trustee, who is required to act in the best interests of the investors.