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Investigation of Reverse Convertible Notes and Other Autocallable Securities

In the past ten years, the issuance of “autocallable” structured products, including “reverse convertible” notes, has blown up. Their issuers have become more creative, the variety of products has proliferated, and the potential for investor harm has increased dramatically. 

The securities litigation attorneys at Colling Gilbert Wright, PLLC are currently investigating brokers and broker-dealers who actively marketed and solicited Reverse Convertible notes and other autocallable securities. These structured products are short-term notes which purport to pay a higher-than-market coupon rate while returning the face value of the note at maturity. However, in the case of reverse convertibles, apparently often undisclosed to investors, these products could only be redeemed at face value when the underlying stock price didn’t decline below a threshold or “trigger value” during the term of the note. Also, many Reverse Convertibles have embedded short put options, typically written on the underlying individual stocks. Issuers of these securities had an incentive to link reverse convertibles to volatile stocks since the more volatile the stock, the more profitable it was to issue reverse convertibles…all other conditions being equal or remaining unchanged. Many of the stocks underlying reverse convertibles issued in late 2007 and the first 8 months of 2008 declined substantially by late 2008 and early 2009 when the notes matured. As such, Reverse Convertibles became subject to heightened regulatory scrutiny and carried a well-deserved negative connotation which in turn made them hard to market…even to the most unsophisticated individual investors.

Autocallable structured products were the industry’s response to the negative aura surrounding reverse convertible structured products acquired because of massive losses investors experienced in 2008 and 2009. Rather than abandon the practice of attaching short put options to notes they issued, brokerage firms simply made it harder to identify the risky embedded options. This effectively created a “new market” and increased demand with nearly $100 billion dollars of autocallables issued in the past four years. The popularity is easy to understand in what was until recently a low interest rate environment because these products paid higher than market interest…assuming they don’t fail which was a big assumption as it turns out as many of these issues have failed to pay the face value at maturity.

The eight largest issuers of autocallable structured products account for nearly 90% of the total market. Among those top issuers are Morgan Stanley, Citigroup, JP Morgan, Goldman Sachs and UBS.

If you purchased autocallable structured products and have experienced losses as a result, please contact our offices for a free case evaluation.