It has been reported that the Secretary of State of Georgia, who regulates stockbrokers, is investigating whether securities laws were violated by the sale of reverse convertible notes to Georgia investors. According to a July 21, 2011 report in Bloomberg, the Secretary has issued subpoenas to UBS AG, Morgan Stanley, and Ameriprise Financial Inc. in order to determine how many reverse convertible notes each sold in Georgia and the names of the investors. According to a spokesman for the Secretary’s office, “We have multiple investigations open with regard to the sale of reverse convertible notes, and will thoroughly review all evidence to ensure that Georgia investors are protected.” It has previously been reported that the SEC and the Financial Industry Regulatory Authority are investigating whether Wall Street firms that sold reverse convertibles adequately disclosed their risks and costs to clients.
Reverse convertible notes are complicated structured debt instruments. The amount of principal which is paid when the notes mature is tied to the performance of a particular stock or index, like Dell or the NASDAQ-100. If the price of the stock or index falls below a certain level when the note matures, the investor may get less than all of his principal back. As we have previously written:
It is difficult to imagine the kind of investor who is suitable for a reverse convertible note. Investors who want the safety of bonds generally fear the stock market’s volatility, and thus are not good candidates for a product whose value is tied to stocks. Secondly, the general premise of this product is questionable at best. Investors who want the security of bonds and the growth of stocks would be wiser to simply make separate and diversified investments in stocks and bonds.
It appears that elderly brokerage firm clients who rely on their investments to meet their monthly income needs may have been particular targets for unsuitable and improper sales of reverse convertible notes. Many were not told about the serious risk that they would not receive a full repayment of their principal.
If you believe you have suffered losses in reverse convertible notes that were sold to you, please contact Smiley Bishop & Porter LLP to discuss your rights at 770-829-3850 or toll-free (800) 697-4514. Smiley Bishop & Porter LLP represents individual and institutional investors in securities arbitration. The firm focuses on cases involving defrauded investors, suitability claims, and mismarketeted investment products. Smiley Bishop & Porter LLP is available for a free initial consultation. Please visit us at www.sbpllplaw.com to obtain additional information.