Securities Fraud Blog | Find out if your broker is liable for your losses

TAG | RBC Wealth Mangement

Feb/11

1

Have You Purchased Risky Reverse Convertible Notes (RCN)?

Comments off · Posted by admin in FINRA

Reverse convertible notes offer a high coupon in return for the risk of getting shares valued at under the initial principal. Richard Ketchum, FINRA chief executive and chairman, has noted that it is not recommended for a client to place a significant chunk of one’s life savings into these kind of high risk, complex investments. FINRA has issued Notice to Members 10-09 cautioning the entire brokerage community about their sales practice obligations to the investing public when it comes to RCNs and other risky “Complex Investment Vehicles.”  

Many financial advisors sold structured investments that were pitched as 100% safe and secure.  In reality, these investments were of a high risk and the true risks were not made clear to investors.  Many of the structured products targeted at retail investors were reverse convertibles based upon “blue-chip” and “household-name” stocks that comprise the S&P 500 or the NASDAQ-100 indexes.   Brokers at H&R Block, Ameriprise and Morgan Stanley, Ferris, Baker Watts (acquired previously by RBC Wealth Management) and other firms were heavy sellers of these investments.  FINRA Enforcement has already taken regulatory actions against some of the brokerage firms for selling these notes to unsophisticated, elderly, retired or otherwise conservative investors.    The advantages of the investments were allegedly principal protection, superior risk-adjusted returns and access to hard-to-reach investment sectors.  Unfortunately, these representations were often false.  In reality, these investments had extraordinarily high risks and the true risks were not fully disclosed to investors in violation of the state securities acts.  These investments were unsuitable for many of the clients who purchased them.  Large sums of client assets and/or retirement portfolios were put into these investments.  We feel these were grossly unsuitable and inappropriate investments for many of the people who were sold them and more importantly, the true risks were not made clear.  Some of the sellers of RCNs were large banks and firms like RBS, Citigroup Inc., Barclays PLC and ABN Amro Holding NV. Citigroup brought out new versions linked to name a few, Johnson and Johnson, Apple Inc. and Celgene Corp. paying around 11% over one year. There are also reverse convertibles with stocks like Intel, Pfizer, Hess Corp., Yahoo Inc., Mexico’s Cemex SAB and SanDisk Corp. 

Another major seller of the reverse convertibles was Morgan Stanley Smith Barney and the Revcon notes. Morgan Stanley issued the Morgan Stanley Reverse Convertible Bond on AT&T, Apple (AAPL), Deere & Company (DE), Foster Wheeler (FWLT), Amazon (AMZN), Texas Instruments (TI), AMEX Gold Bugs, Citigroup (C), Consol Energy (CNX), Lehman Brothers (LEH), Range Resources Corporation (RRC), Freeport-McMoRan Copper & Gold, Inc.(“FCX”), Norfolk Southern Corp., Western Union Co. (“WU”), Whole Foods Market Inc. (“WFMI”), Toll Brothers, Western Union (WU), Spiders (SPDR), Ebay, Sunoco (Sun), The Goldman Sachs Group (GS), Valero Energy Group (VLO), Baker Hughes Incorporated (“BHI”),Monsanto Company (“MON”), Southern Copper Corporation (“PCU”), Amylin Pharmaceuticals, Inc.(“AMLN”), National Semiconductor (NSM), Baker Hughes Incorporated (“BHI”), Southern Copper Corporation (“PCU”), Arch Coal, Inc. (“ACI”), Joy Global Inc. (“JOYG”)

Most major brokerage firms were selling structured products and reverse convertibles. H&R Block, UBS, Morgan Stanley Ameriprise, Merrill Lynch and others actively sold them to retail clients.  We feel this will cause arbitration claims and lawsuits to skyrocket in the next 6-12 months.     

 The Financial Industry Regulatory Authority (FINRA) has fined H&R Block Financial Advisors (now Ameriprise Advisor Services) $200,000 for failing to put in place the proper system to supervise its reverse convertible notes (RCN) sales to retail clients as one example. FINRA also suspended H & R broker Andrew MacGill for 15 days while ordering him to pay a $10,000 fine and $2,023 in disgorgement for making unsuitable RNC sales to a retired couple. MacGill recommended that they invest close to 40% of their total liquid net worth in RCNs. Meantime, H & R Block has been ordered to pay the couple $75,000 in restitution for their financial losses. Without denying or admitting to the charges, the brokerage firm and MacGill consented to the finding’s entry. According to FINRA, between January 2004 and December 2007, H&R Block sold RCNs without a system of procedures in place to properly monitor whether possible over-concentrations in RCNs were taking place in customer accounts. FINRA says that the brokerage firm relied on an automated surveillance system to monitor client accounts and review securities transactions for unsuitability but that the system was not set up to monitor RCN placement in customer accounts or RCN transactions. This caused H & R Block to miss signs of when there were potentially unsuitable levels of RCN in client accounts. FINRA says that the firm failed to provide guidance to its supervisors regarding the assessment of suitability standards related to their agents’ recommendation of RCNs to the firm’s clients. This is FINRA’s first enforcement action over RCN sales.

Have been a victim of the sale of risky RCNs by your broker or brokerage?  If so call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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Nov/10

1

Brokerage House, Ferris, Baker Watts, Ordered by FINRA to Pay Nearly $700,000 for Inappropriate Sales of Reverse Convertible Notes

Comments off · Posted by admin in FINRA

Firm to Pay Restitution of $189,723 for Unsuitable Sales

 

WASHINGTON — On October 20, 2010, The Financial Industry Regulatory Authority (FINRA) announced that it fined the former Ferris, Baker Watts LLC, acquired by RBC Wealth Management, $500,000 for inadequate supervision of sales of reverse convertible notes to retail customers as well as unsuitable sales of reverse convertibles to 57 accounts held by elderly customers who were at least 85 years old and customers with a modest net worth. 

Also, the firm was ordered to pay nearly $190,000 in restitution to the 57 account holders for net losses incurred as a result of purchasing reverse convertibles.

 ”Reverse convertible notes are complex investments that often entail significant risk of loss and also involve terms, features and risks that can be difficult for retail investors to evaluate,” said James Shorris, FINRA Executive Vice President and Acting Chief of Enforcement. “Ferris, Baker’s inadequate written procedures resulted in recommendations of sales to customers for whom the purchase of these securities was not suitable, including elderly customers and investors who had very modest assets.”

FINRA explains that reverse convertibles are notes with a coupon interest rate set for a fixed duration – three, six or twelve months –  that are tied to the performance of a particular stock. If the price of the underlying stock drops below a certain level during the duration of the reverse convertible, the customer receives a predetermined number of shares of the stock at maturity of the note.

 If the underlying security maintains its price level, at maturity, the customer receives return of the dollar amount invested and a final coupon payment. In most of the instances where customers received the underlying stock at maturity, the customer ended up with an investment loss. Reverse convertibles not only come with the risks associated with fixed income products, such as issuer default and inflation, but with the additional risk that the value of the underlying asset can significantly depreciate.

 Also, FINRA found that during the period January 2006 to July 2008, Ferris, Baker engaged in sales of reverse convertibles to approximately 2,000 retail accounts without providing sufficient guidance to its brokers and supervising managers on how to assess suitability in connection with their brokers’ recommendations of reverse convertibles.

 The firm did not have a system to effectively monitor customer accounts for potential over-concentrations in reverse convertibles. The firm also made recommendations without a reasonable basis to believe that the investment was suitable for elderly customers and those with modest net worth. The firm also failed to detect and respond to indications of potential over-concentration in reverse convertibles.

 One example, the firm sold an 86-year-old retired social worker five reverse convertibles in the amount of $10,000 each. At various times, these represented between 15 percent and 25 percent of her investment portfolio. In another instance, the firm sold a 20-year-old clerk making less than $25,000 annually five reverse convertibles in his Roth IRA and regular accounts. These securities represented 51 percent of the IRA account and 44 percent of the regular account’s value.

 The firm neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

This information was obtained from FINRA’s website.

If you feel you are a victim of these alleged fraudulent schemes of Ferris, Baker, Watts, LLC, or RBC Wealth Management, call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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