STUDIO CITY, Calif., Jan. 21, 2011 /PRNewswire/ -- Following six days of arbitration hearings, a FINRA arbitration panel issued an award for $125,000 against Wells Fargo Investments, LLC for the sale of high-risk reverse convertible securities.
Jonathan Evans said, "This was a very sad case; the Claimant was a cancer patient and was trying to preserve his estate for his children. The Wells Fargo broker first sold him a certificate of deposit which had no risk of loss of principal. After that, the broker solicited him to purchase three reverse convertible securities in May 2008." Six months later, two of the reverse convertibles imploded, causing massive losses.
Reverse convertible securities (also called reverse convertible bonds, reverse convertible notes, or revertibles) typically consist of a short-term promissory note issued by an investment bank such as Barclays or Societe Generale combined with a put option on an unrelated equity. If all works well, the investor receives the interest plus the return of his principal. If the linked stock's price falls by a pre-determined percentage, the put option is triggered and the investor has the stock put to him at the reduced price instead of receiving the return of principal. When the put option is triggered, it causes an immediate and often catastrophic loss, potentially up to the entire invested principal.
Michael S. Edmiston, Evans' co-counsel, stated, "Reverse convertible securities are complex, volatile products with a risk of 100% loss of principal and only a minimal upside. They are products of Wall Street's financial alchemists and are sold to yield-seeking investors in times of low interest rates and high market volatility."
In Evans' client's case, the two reverse convertibles which failed were linked to IndyMac Bank and Jet Blue Airways and paid interest ranging between 10% and 17.5% on an annualized basis. Both stocks suffered large losses during the time period Evans' client held the securities resulting in the depressed stocks being put to the client instead of a return of his principal.
Evans explained how the unsafe products are sold: "Bank-based brokers often sell these investments as 'highly rated bonds' to customers, disappointed with the low interest rates offered on the bank's CDs. Customers are persuaded to buy reverse convertibles with minimal, if any, disclosure of how the product works, its risks, or potential for loss." Evans added, "In this case, the testimony demonstrated the broker sold reverse convertible securities to many clients and the related commissions consisted of 73% of the broker's earnings in the second quarter of May 2008."
"The investment bank maximizes its profit on a reverse convertible when the put option is triggered. Furthermore, the investor is stuck with the stock of a troubled company which by itself may be a totally unsuitable holding. Few products are born to fail investors like reverse convertibles," warns Evans.
Evans concluded, "Reverse convertible bonds are terrible products for the average investor, and anyone who suffered outsized losses should seek an independent opinion whether to pursue a claim against his or her broker as did my client."
The FINRA case number is 09-00339 and the award may be found at www.finra.org.
Practicing law since 1975, Mr. Evans specializes in securities arbitration matters, which currently represent 95% of his practice. He limits his representation to public customers. Mr. Evans has litigated hundreds of securities arbitration claims, and tried more than fifty (50) cases to a conclusion at FINRA. He has mediated many more, and has proudly represented hundreds of other public investors in their disputes, many of which resulted in favorable settlements. Based in Studio City, California, Jonathan W. Evans & Associates represents aggrieved investors throughout the United States.
More information is available at www.stocklaw.com.
Contact: Jonathan W. Evans or Michael S. Edmiston (213) 626-1881 or (800) 699-1881
SOURCE Law Offices of Jonathan W. Evans & Associates