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Recovering Losses caused by Investment Misconduct

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Risks of Reverse Convertibles

Many investors have been drawn to complex investments known as reverse convertibles. These investments, which are also referred to as revertible notes or reverse exchangeable securities, often offer high coupon rates, anywhere from 7 to 30 percent. However, the risks associated with reverse convertibles are high.

The Financial Industry Regulatory Authority (FINRA) defines reverse convertibles as “debt obligations of the issuer that are tied to the performance of an unrelated security or basket of securities.” A reverse convertible is a structured product that usually includes a high-yield, short-term note of the issuer.

There are many risks associated with reverse convertibles, which according to FINRA include the following:

  • Greater exposure to risk. With a reverse convertible, you are faced with the risks of the debt instrument, as well as the risks of the underlying asset.

  • High illiquidity. Selling reverse convertibles on the secondary market is not easy, as trading is very limited.

  • Put option sold to the issuer. FINRA states “when investing in a reverse convertible, you effectively buy a note from the issuer and sell a put option (the right to sell) to the issuer simultaneously.” That means you also need to be comfortable with the risks of selling put options.

  • Embedded fees. Some issuers include an up-front fee to investors, which is embedded. This fee can be anywhere from less than 1 percent to 8 percent or higher.

If you have lost money in a reverse convertible, you may be able to recover your losses and hold the brokerage liable.

About the Law Firm of Meyer Wilson
For a free case evaluation, contact our office by calling 866-827-6537 or filling out our online form. Our investment fraud attorneys are licensed in Ohio and Californiaand represent investors nationwide in securities arbitration and litigation claims. We have successfully recovered millions of dollars for our clients.

Be sure to order a FREE copy of attorney David Meyer’s book, Five Signs of Investment Fraud…And What to Do if it's Happened to You.