Corporate & Securities Law

In recent years brokerage firms and banks have sold more than $6 billion of a complex investment vehicle known as a reverse convertible.  Due to their complexity and questionable performance, retail investors are cautioned to carefully evaluate the risks of reverse convertibles before investing.

Reverse convertibles, also known as ?revertible notes? or ?reverse exchangeable securities?, are a type of structured product that generally is composed of a high yield, short term note that is linked to the performance of an unrelated asset, which is often stock.  Reverse convertibles are not traded on exchanges and their performance is not reported publicly.  

Over the past few years, reverse convertibles have become popular with investors seeking higher interest rates. Reverse convertibles have offered a higher coupon rate than traditional bonds, ranging from 7-30%.

However, reverse convertibles are risky, and the risk to the value of the underlying stock.  If the company?s share price plummets, the short-term note will convert into the company stock at the reduced price.  Upon a conversion, investors can lose the entire principal amount of their investment.  The investor therefore bears the downside risk of the underlying stock in exchange for a higher coupon rate.

Reverse convertibles therefore have lost an average of average of 1% during a period when corporate bonds gained over 11% and stocks gained almost 12%.  Moreover, issuers of reverse convertibles often charge embedded, up-front fees which are typically not disclosed to investors, which can be as high as 5.5%.

Due to these risks, securities regulators are investigating these products to determine whether or not advisers have overcharged and whether customers truly understand these products.   Investors are cautioned to carefully examine the risks of a reverse convertible to make sure they understand the risk of these products before investing.

Eccleston Law Offices, P.C. represents individual and institutional investors in securities disputes nationwide. 

If you have lost money investing in a reverse convertible or other structured products, please contact Jim Eccleston at the Eccleston Law Offices at 312-332-0000 to discuss your recovery options.