Financial Counsel by Eccleston Law

SEC Expands Probe of Reverse Convertibles

The Wall Street Journal recently reported that the SEC is expanding their probe of Wall Street firms who developed and sold reverse convertibles for failing to adequately disclose the risks, fees and potential conflicts of interests to retail investors who purchased these products. 

It is also rumored that FINRA is expected to levy a large fine against a brokerage firm for improperly selling these products.  These are yet more signs that seem to indicate that securities regulators are identifying possible wrongdoing on the part of Wall Street firms who sold these complicated products to retail investors.

In 2010, brokerage firms and banks sold a record $52 billion of structured products, including reverse convertibles. 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 represents individual and institutional investors nationwide to recover their investment losses caused by securities fraud, unsuitable investment recommendations, breach of fiduciary duty, negligence or other misconduct. We have extensive experience representing investors in arbitration and litigation disputes with securities broker-dealers and investment advisory firms, and have recovered tens of millions of dollars for investors.

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

Morgan Stanley Smith Barney Cuts 300 Advisers

Morgan Stanley Smith Barney, the largest brokerage firm in the industry, recently cut 300 of its trainees and low producing advisers in an effort to improve the overall productivity of its sales force. 

The general guidelines for the advisers that were terminated were advisers who had at least one year with the firm and production of less than $75,000 or trainees who had been with the firm for less than 36 months with under $25,000 in annual production. 

Recruiters believe that there will be more departures of Morgan Stanley advisers in 2011, particularly among those advisers who came on board from the Smith Barney acquisition. Regional firms have already expressed interest in those Morgan Stanley advisers who are recently departed.

Advisers are cautioned that wirehouse firms such as Morgan Stanley have been aggressively pursuing advisers for monies owed on promissory note or training cost agreements. Wirehouses are committed to collecting these outstanding debts through FINRA arbitration proceedings.  Former Morgan Stanley advisers should be aware of their obligations under any outstanding promissory note or training cost agreement and seek counsel to discuss their options.

The experienced securities attorneys at Eccleston Law stand ready to assist and defend, by asserting all available legal and equitable defenses (as well as any counterclaims, if appropriate).  If you are a former Morgan Stanley adviser being pursued on a promissory note claim, or have more information regarding Morgan Stanley’s collection efforts, please contact Jim Eccleston at Eccleston Law Offices at 312-332-0000.