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Securities Fraud Investigation Involving Reverse Convertible Notes

The White Law Group is investigating the appropriateness of reverse convertible securities or reverse convertible notes sold by broker-dealers.

A reverse convertible security (RCS), or reverse convertible note, is a short-term note linked to an underlying stock. The primary selling point of the product is that it offers a steady stream of income – generally by way of a high coupon rate. At maturity, the owner then receives either 100% of the par value of the note, or, if the stock value falls, a predetermined number of shares of the underlying stock.

Like any other structured product though, reverse convertible notes are complex investments with extraordinary risks.

Notwithstanding the complexity and risks of these products, reverse convertible notes are becoming increasingly popular in the brokerage industry because of the current low-yield environment, and brokerage firms (who generally earn approximately 2% commissions when selling reverse convertible notes) are happy to sell them. In fact, according to data from Future Value Consultants Ltd. issuers have stepped up production of the controversial securities, issuing 632 reverse convertibles in the fourth quarter of 2009 (compared with 178 in the comparable period of 2008).

Even though these products are actually equity investments coupled with a short-term note, often times, these structured products are sold as a relatively safe fixed-income investment to high-net-worth or retired investors.

Concerned that the securities industry is not properly disclosing the risks of reverse convertible notes, FINRA recently issue investor alerts related to the risks of reverse convertible notes. Specifically, FINRA cautions that there are many problems inherent in these structured products, including that the higher yields offered by these products go hand in hand with greater risk, and that typically the stated yield that is advertised is the maximum return that you could achieve on the product in the best circumstances — not a guaranteed return or even likely return.

If you have questions about a reverse convertible note you purchased or if you believe that you have been the victim of a securities fraud, please contact The White Law Group at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and commodities or futures transactions. For more information on The White Law Group, please visit our website at https://whitesecuritieslaw.com, or call the firm at 312-238-9650.

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