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Category Archives: Stifel Nicolaus

Reverse Convertibles Can Spell Financial Disaster For Investors

Reverse convertibles, also known as reverse exchangeable securities, are complex structured investment products linked to the performance of an unrelated asset. The asset can be a single stock or a basket of stocks, an index or some other asset.

When investors purchase a reverse convertible, they are getting a yield-enhanced bond. They do not own, and do not get to participate in any upside appreciation of the underlying asset. Instead, in exchange for higher coupon payments during the life of the note, investors give the issuer a “put option” on the underlying asset. In other words, investors are betting that the value of the underlying asset will remain stable or go up, while the issuer is betting that the price will fall.

In the best case scenario, if the value of the underlying asset stays above the knock-in level or even rises, an investor can receive a high coupon for the life of the investment and the return of the full principal in cash. In the worst case, if the value of the underlying asset drops below the knock-in level, the issuer can pay back the principal in the form of the depreciated asset – which means investors can wind up losing some, or even all, of their principal.

That’s exactly what happened to Lawrence Batlan, an 85-year-old retired radiologist. Batlan, who suffered a loss of almost 20%, says his Citigroup broker talked him into shifting out of preferred stocks in 2007 and buying $400,000 of reverse convertibles, which promised higher interest and safety.

As reported June 16, 2009, by the Wall Street Journal, Batlan’s reverse convertibles were linked to four well-known stocks and paid between 6.25% and 13% at a time when 10-year Treasurys were yielding around 5% yearly. Then the financial crisis appeared, and the share prices of the four underlying stocks fell below the 20% knock-in threshold. Batlan suddenly found himself the owner of stocks worth $75,000 less than he initially invested.

“I had no idea this could happen,” said Batlan in the article. “I have no desire to own Yahoo stock or the others.” Batlan has since filed a complaint with the Financial Industry Regulation Authority (FINRA) in an attempt to recover the $75,000 back from Citigroup.

Harvey Goodfriend, 77, has a similar story. The retired mechanical engineer says he was told by his broker that there was no risk in reverse convertibles. Goodfriend soon discovered otherwise. He says he lost 36% of the almost $250,000 that his Stifel Nicolaus & Co. broker placed into reverse convertibles two years ago.

If you have suffered losses in Reverse Convertibles, please contact our securities fraud team. We can evaluate your situation to determine if you have a claim.

FINRA Hands Win To Investor In Case Against Stifel Nicolaus

On March 23, 2009, a St. Louis, Missouri, FINRA arbitration panel awarded investor Philip Rein $220,944 plus interest on his claims of fraud, breach of fiduciary duty and negligence against Stifel, Nicolaus & Company. 

According to award documents (FINRA # 07-01495), the claimant alleged that St. Louis-based Stifel Nicolaus failed to heed his stated investing objectives, which were focused on generating money for retirement income. Instead, Stifel created a retirement portfolio for Rein by investing a portion of his assets in a Pacific Life Variable Annuity and another portion of assets in three aggressive, all equity, money-management funds.

Ultimately, because of the Stifel’s selected investments, the investor said he lost the majority of his principal.

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