CIT Group Inc. InterNotes
Bonds issued by recently bankrupt CIT Group Inc. have caught the attention of regulators. An investigation is being made regarding the representations made to investors regarding the risk associated with CIT's InterNotes. Investors who were sold this product may have been led into believing that such an investment was a suitable and stable investment, when the truth has shown CIT InterNotes to be anything but. Banks and brokerage firms who sold CIT InterNotes had a duty to their clients to accurately represent the risks associated with this investment and perform the due diligence necessary to ensure that such representations were correct prior to marketing them to investors.
CIT traditionally sought investment money from institutional investors. However, as institutional investors became increasingly wary of CIT's escalating risk, CIT was forced to look to new sources of capital. In a move similar to that of other companies, CIT found that source in retail investors. The retail marketing scheme allowed CIT two benefits:
- It allowed CIT to offload risk without the transparency it would face from institutional lenders.
- It offered CIT the ability to offload risk while offering smaller yields than would have been necessary to pay out to institutional investors.
In order to get CIT-backed InterNotes to investors, the investments were marketed through a network of banks and broker-dealers. This extensive network included many household names. Through such institutions, CIT-backed InterNotes were marketed to retail investors. The target of such marketing was especially those currently in or approaching retirement.
One of the key features that CIT InterNotes were marketed as possessing was a, "survivor option," or, "death put." The feature allows the heirs of a bondholder to sell the bond back to the issuer in the event that the bondholder passes away. While attractive to a potential investor, this feature is only applicable if the bond issuer remains financially viable. Because CIT is in bankruptcy, this feature may prove to have virtually no value to a bond holder.
If investors had been provided with complete and accurate representations by their financial advisors, many would have never bought CIT InterNotes. The Financial Industry Regulatory Authority (FINRA) has noted the situation and is currently investigating whether the risks to CIT InterNotes were adequately disclosed to investors.