Reverse Convertible Notes

Skilled Securities Fraud Attorneys Protecting the Rights of Investors Nationwide

The knowledgeable securities fraud lawyers at Fitapelli Kurta are experienced in asserting investors’ rights in arbitrations and before courts. From our office in New York, our legal team also represents individuals throughout the United States who have been financially harmed as a result of broker misconduct. We are familiar with resolving matters involving reverse convertible notes, among other investment forms.

How Reverse Convertible Notes Function

A reverse convertible note (RCN) is an investment product that can provide high yields but can also expose investors to high risks. Its complexities can be difficult to understand for the average individual, which increases the potential for fraud by a financial adviser.

RCNs are structured investments that can also be called revertible notes or reverse exchangeable securities. An investor who purchases one of these will essentially receive a bond that pays a set interest rate, or “coupon rate,” for the duration of the note. The coupon rates are typically higher than the market rate. RCNs are linked to the market performance of another, unrelated asset, and that asset’s volatility or risk level determines the coupon rate.

The unique feature of these notes is an accompanying option that allows the investment’s issuer, usually a financial institution, to repay the investor in one of two ways. First, upon the maturity of the RCN, the issuer may return 100% of the initial investment in cash. If this happens, the investor receives a full refund in addition to the interest payments that have been paid over the course of the note’s existence. In the event that the stock price increases significantly, however, there is no additional payment to the investor.

The other option available to the RCN issuer upon maturity of the note is to deliver a pre-determined number of shares of a stock, rather than cash. The asset that has been used to determine the RCN’s coupon rate is the asset that is paid out under this option. The ability to exercise this second option depends on whether the asset’s stock price has fallen below a certain level that has been set from the beginning of the transaction. This set price is called a “knock-in” level because the option will only “knock in” if that level has been reached.

Brokers Must Disclose the Risks Associated with Investments

RCNs can be rewarding because they offer higher than typical interest rates over the course of the note’s duration and guarantee a full refund on principal if the value of the underlying asset remains stable or rises. However, if the stock value falls below the knock-in level, an investor could lose a significant amount of his or her principal investment.

Moreover, there have been criticisms that financial professionals have failed to sufficiently disclose the fees and commissions associated with RCNs, not to mention the risks related with market volatility. Some notes also contain sections that allow the issuer to redeem the investment at any given time. These are known as “call provisions,” and they must be included in the language of the RCN’s prospectus. However, the terms may be complex and difficult to understand without the assistance of a broker or adviser. Another problematic situation associated with RCNs arises when banks and other financial institutions may have failed to disclose potential conflicts of interest because a note is linked to the stock belonging to a related business. Finally, there may also be certain tax consequences that result from the possession of these notes.

Federal laws and the guidelines of the Securities and Exchange Commission (SEC) protect investors by establishing duties for brokers and advisers. These financial professionals are required to comply with high standards and disclose any information that is deemed material to the investors they serve. One of the most important duties a broker has is to recommend suitable investments for clients. He or she must examine and take into account an individual’s financial circumstances, investment goals, risk preferences, and age, among other considerations. With investments like RCNs, suitability is especially important, given the potential risks associated with them.

Discuss Your Stock Fraud Claim with a Securities Fraud Lawyer

If you or someone you know has invested in reverse convertible notes and has not been made aware of the risks and fees associated with the investment, you may be entitled to legal recourse against a financial adviser who was responsible for any losses that have resulted. The stock fraud attorneys at Fitapelli Kurta have seen many of these cases and know how to protect your rights. You can reach our New York office by calling us toll-free at (877) 238-4175 or completing our online contact form to set up a free case evaluation.