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The Risk of Rising Autocollable Structured Products: The Case of the Worthless Bank

Attorney Advising Disclaimer

Advertised as paying above market yields through potentially high coupons, autocallable structured products are an investment that may look appealing with the chance of earning profits that outpace the market, if a specific index or stock exceeds a certain price or "upside barrier." However, the same complexity that makes autocallables so attractive is also a collection of features that amplifies risk, which in one case caused an autocallable note sold by Citigroup linked to the stock price of Lucid (Lucid Group Inc: LCID) to become virtually worthless, as did other autocallables linked to Silicon Valley Bank (SVB).

Because autocallables are tied to stocks or indexes, they also require the underlying stock or index maintain a certain price, called a "knock-in level," and if the autocollable matures with the underlying stock at or above this level, it pays the note's value at a certain percentage lower than buy-in, meaning that customers suffer the losses.

Autocallables, however, may also be called just as investors stand to benefit from holding the notes, bringing us to the example of Citigroup and Credit Suisse's LCID and UBER autocallables.

Because of the stocks' volatility, Credit Suisse called one of their Lucid notes on the very first possible call date, after investors received only three of the Lucid coupons. This was possible because this particular product set its barriers, including the downside knock-in level, when Lucid was trading at a relatively high price, meaning that when the stock's price fell back down, it decreased to a level lower than the knock-in, which triggered the autocall that resulted in significant customer losses.

As one might imagine, this high-risk, high-reward investment strategy is generally deemed unsuitable for investors with conservative-to-moderate risk tolerance preferences. Even though they may be advertised with high-yield coupons, autocallable risk disclosure forms, such as this filing for a callable linked to the performance of Silicon Valley Bank (SVB Financial Group), warn, "the securities are not a suitable investment for investors who require regular fixed income payments." Another such pricing supplement states in bold text, "You may lose a significant portion or all of your investment."

Silicon Valley Bank collapsed in 2023, which makes the warnings somewhat prophetic...all while customers who purchased these autocallables linked to SVB or similar products that failed are left with little, if any, of their capital.

If a broker or investment adviser recommended autocallables to you despite your risk-averse investment profile or fixed income objectives, you may be entitled to damages as a result of these unsuitable recommendations. If you have suffered losses as a result of this misconduct, please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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