Zamansky LLC Investigates Paulson Investment Company Over Customer Losses from Variable Interest Rate Structured Products Including “Steepeners”

On January 23, 2023, Paulson Investment Company, LLC (Paulson) agreed to a censure, a fine of $150,000 and to make restitution to 60 customers in a regulatory settlement with FINRA, the Financial Industry Regulatory Authority. This disciplinary action was the result of FINRA allegations that Paulson, from January 2016 through May 2019, failed to reasonably supervise unsuitable recommendations to purchase variable interest rate structured products sold by three of its firm representatives.

VRSPs May Be Too Risky For Income-Seeking or Retiree Investors

Variable interest rate structured products (VRSPs) are a category of complex structured products that initially pay interest at a fixed, above-market “teaser” rate for a short period of time, typically one year, before switching to a floating interest rate that is based on a reference index or asset. VRSPs typically have long maturities, generally between 10 and 30 years. Income-seeking investors and retirees may be steered into VRSPs by financial advisors because of the yield they offer and/or fees they can generate for the advisor.

A “steepener” is one type of VRSP that pays a high teaser interest rate, usually between 8% and 10% for the first year, and then resets to a floating interest rate based on the spread between longer- and shorter-term interest rates (i.e., the steepness of the yield curve), commonly the spread between the 30-Year Constant Maturity Swap (CMS) rate and 2-Year CMS rate.  Because the spread between longer- and shorter-term interest rates can compress—meaning that the yield curve can flatten—investors holding steepeners can earn little or zero interest for years.  There is also no guaranteed secondary market for steepeners and thus investors seeking to sell the products before maturity in the secondary market may incur losses of principal.

Investors need to be aware that VRSPs can be aggressive and high-risk products that are not safe for income-seeking investors or retirees. Many VRSPs do not guarantee a return of the investor’s principal at maturity. Therefore, depending on the performance of the underlying reference index or asset, customers who purchase such products could lose some or all of their principal at maturity.

What an Investor Can Do

If you have invested in a VRSP or steepener and wish a review of whether you may have a legal claim to recover your losses due to investment fraud, please call investment fraud attorney Jake Zamansky at (212) 742-1414 or email jake@zamansky.com for a free evaluation of your potential legal rights.