Caveat Emptor

An article in today’s Wall Street Journal by Jean Eaglesham, Sarah Krouse and Ben Eisen about the refashioning of CDs (certificates of deposit) contains this human interest story of a widow almost defrauded of part of her inheritance by a bank (or two banks) more interested in collecting fees than servicing a customer.


Mary Bailey, a 79-year-old widow in Arlington, Mass., made a big deposit for her grandchildren at her Citizens Bank branch when a financial adviser there sold her on a newfangled $100,000 certificate of deposit. It would, he said, double her savings in six years, according to a later state enforcement action.

So she was irate when her first statement showed the CD’s value had fallen to $95,712, thanks to upfront fees. “This was not a CD as I know a CD,” Ms. Bailey says.

Traditional certificates of deposit offer better interest rates than normal savings accounts for customers who agree to lock up funds for a period of time. Since the 1960s, they have been among the most popular products retail banks offer. Now Wall Street has re-engineered the most bread-and-butter of investments in a way that leaves many investors with lower returns, and facing losses if they have to cash out early. . .

Ms. Bailey. . . had sold a condo in Maine in 2013, a year after the death of her husband, who she says had handled their finances. She went to a Citizens branch in Arlington, a suburb of Boston, to deposit the money. She says bank employees pressured her not to just park the money in a savings account.

She says she was directed to Citizens broker Andrew Jurkunas, who steered her to a CD called the GS Momentum Builder Multi-Asset 5 ER Index-Linked Certificate of Deposit Due 2021. It is one of a series of CDs based on a Goldman Sachs-designed index that tracks the performance of up to 14 exchange-traded funds and a cash-like holding. The index aggregates the performance of different combinations of some or all of the underlying funds, relying on a complex formula designed to smooth volatility.

When the CD matures, customers get back their principal, plus a payout that is up to double the return achieved by the Goldman index. That return is reduced by an annual fee and other costs.

Documents related to the CD, including a description of the methodology behind the Goldman index, run to 266 pages and feature calculus, hypothetical backtested data and flowcharts. Ms. Bailey says she didn’t read the documents. [Who can blame her?]

She says she told Mr. Jurkunas she didn’t want to take any risks. She relied on his advice. He jotted a note on a sheet summarizing the Goldman index: “CD 200%,” according to documents reviewed by the Journal.

Mr. Jurkunas hung up when called by the Journal and didn’t respond to subsequent requests for comment.

A spokeswoman for Goldman, which hasn’t been accused of any wrongdoing in relation to the case, said the bank was “not a party in the customer’s complaint or settlement, and had no direct relationship with the investor” and that the product’s risks were “clearly explained” in its documents.

When Ms. Bailey received her first statement showing that the value of her CD had dropped by more than $4,000, she complained to Massachusetts state securities regulators. This January, the office filed civil charges against the bank alleging that Mr. Jurkunas, who wasn’t named or accused of wrongdoing, didn’t adequately disclose the risks of the market-linked CD.

A month later, Citizens agreed to refund Ms. Bailey her full $100,000 deposit, plus interest, as part of a broader settlement in which it didn’t admit wrongdoing.

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