Reverse Convertible Notes with Contingent Downside Protection
These Enhanced Yield Reverse Exchangeable Securities with Contingent Downside Protection were underwritten by a Norwegian based financial services group, Eksportfinans A.S.A., beginning in the middle of September 2007. Although these investments were highly speculative reverse convertible notes, they were marketed and sold to elderly investors as being safe, income producing, cash like investments similar to certificates of deposit (CDs). With such a promise of protection of their principal, risk averse retirees were easy targets for the sales pitch. Many brokerage firms sold these products, with Morgan Stanley leading the way.
The complexity of these securities made it difficult for all investors to understand but especially the elderly and the retired. Our investigation reveals that there was not adequate disclosure made for investors to make an informed decision regarding the product itself or the Contingent Downside Protection, which meant that the principal was only protected if the price of the underlying security stayed above a set price. Once the notes matured, investors were left holding the bag with the underlying stock. Unfortunately, massive losses were realized by those that could ill afford them. We believe that these investments were both unsuitable and inappropriate for many they were pitched to.
The Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 10-09, detailing brokerage firms’ obligations with regard to the sale of reverse convertibles stating that they “are complex investments that often involve terms, features and risks that can be difficult for retail investors and registered representatives to evaluate.”
If you have suffered losses from these complex products, contact our securities law firm for a confidential, no obligation consultation at 1-800-259-9010.