As the securities market continues to change due to the economic uncertainty, investors are trying to find ways to increase their yield and recoup their earlier losses. One investment product that is causing increasing concern is Reverse Convertible Securities ("RCS"). Like other investment products created by Wall Street, RCSs are complex with various layers built into it. Wall Street Journal.Com reporter Eleanor Laise states, "Wall Street is luring income-hungry investors with complex securities that come with big risk as well as extravagant yields." More often than not, the cost is unwittingly paid by investors. Of course, the question is whether or not investors are aware of how big the risk is, and if the motivation behind brokers' solicitation to purchase RCSs is really related to the sizable fees issuers receive?
There are several reasons why RCSs would be attractive to someone who has limited funds to invest: 1) Notes are usually sold in increments of $1,000; 2) During the term of the investment (usually somewhere between 3-12 months), investors receive regular interest payments; 3) Often, Reverse Convertible Securities offer a high return on the initial investment, sometimes in the range of 7% - 25%; and 4) When the note matures, the investor's original investment is paid in full. However, there are substantial risk factors which could cause an investor to lose their investment.
Reverse Convertibles (sometimes called Reverse Convertible Bonds or RCB and Reverse Convertible Notes or RCN) are structured investment products linked to the performance of the underlying stocks. The manner in which RCS are structured requires the investor to purchase the underlying stock if it falls below a certain amount! Or, in essence, the RCS is treated like a "put". Because of the problems inherent in RCSs, in 2005, NASD (now FINRA) in an effort to stem the losses directly related, suggested limiting RCS solely to investors approved for options trading. Further, on its website under "Investor Alert - Reserve Convertibles - Complex Investments", FINRA cautions about many of the problems inherent in this type of investment. Three in particular stand out: "Higher yields go hand-in-glove with greater risk"; "Consider whether you would independently invest in the underlying asset" and "Typically the stated yield that is advertised is the maximum return that you could achieve on the product in the best circumstances -- not a guaranteed return or even likely return."
If the RCN or RCB promises a higher yield, the following adage comes to mind: "If it sounds too good to be true, it probably is!"
If you have sustained losses from an investment in Reverse Convertible Bonds (RCB) or Reverse Convertible Notes (RCN), contact us and discuss your legal remedy to recover your money.
- Laiser, Eleanor, Risky Strategy Lures investors Seeking Yield, March 26, 2008, Wall Street Journal.Com, retrieved February 17, 2010,
- Reverse Convertibles - Complex Investment Vehicles, FINRA Dispute Resolution, retrieved February 17, 2010,
- Jonathan W. Evans Scores a Win Against Wells Fargo for Solicited Sale of High-Risk Reverse Convertible Securities to a Senior Citizen, click here to read more.
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