Wall Street Investment Fraud Lawyer Blog

On February 16, 2010, Financial Industry Regulatory Authority (FINRA) fined H&R Block Financial Advisors, Inc., (n/k/a Ameriprise Financial) $200,000 for failing to establish adequate supervisory systems and procedures for supervising sales of a unique and relatively new investment called reverse convertible notes to retail customers. FINRA also fined and suspended H&R Block broker Andrew MacGill, a Tampa-based financial advisor, for making unsuitable sales of reverse convertible notes to a retired couple. The firm was ordered to pay $75,000 in restitution to the couple for losses they incurred.

The Doss Firm, LLC, a law firm that focuses on representing investors against financial firms like Ameriprise Financial, may have uncovered that the circumstances surrounding Andrew MacGill's suspension and Ameriprises's $200,000 fine is not an isolated incident. The problem is regional, if not firm-wide and involves Ameriprise's financial advisors targeting senior citizens to purchase high-risk reverse convertible notes. These products are sold to investors as safe cash-alternative investments.

Today, the law firm filed suit on behalf of an elderly couple from Sun City Center, Florida (80 years old and 75 years old), who claim that they also were victimized by H&R Block Financial Advisors, Inc./Ameriprise Financial in connection with sale of reverse convertible notes. The elderly couple opened accounts at the firm after attending a free lunch seminar sponsored by H&R Block at an upscale restaurant in Apollo Beach, Florida.

In the press release announcing the fine and suspension, FINRA Chairman and CEO Richard Ketchum stated, "For the typical retail investor, for instance, it would be unwise to put anything more than a small portion of life savings into riskier structured products such as reverse convertible notes." In the case filed today, at one point over 40% of the elderly couples retirement accounts were invested in reverse convertible notes.

What is a reverse convertible note?

A reverse convertible note (RCN) is a structured product that typically consists of a high-yield, short-term note of an issuer and effectively a put option that is linked to the performance of an unrelated, or "linked," asset - usually a single common stock, but sometimes a basket of stocks, an index or some other asset. As a general rule, upon maturity of an RCN, the investor will receive either his full principal investment or a predetermined number of shares of the linked equity (which may be worth less than the principal investment), depending on the performance of the linked equity. Generally speaking, the higher the coupon rate, the higher the expected volatility of the linked equity and the greater the likelihood of the investment resulting in payment of shares. Reverse convertibles not only come with the risks that fixed income products ordinarily carry, such as issuer default and inflation risk, but with additional risks of the underlying asset, which can depreciate or even become worthless. The initial investment for most RCNs is $1,000 per unit and most RCNs have maturity dates ranging from three months to one year.

In the enforcement matter against Ameriprise, FINRA found that during the period from January 2004 through December 2007, H&R Block engaged in sales of RCNs without having a system or procedures in place to effectively monitor customer accounts for potential over-concentrations in RCNs. As a result, the firm failed to detect and respond to indications of potential over-concentration in RCNs in numerous customer accounts.

FINRA found that H&R Block utilized an automated surveillance system to facilitate its suitability review of securities transactions and to monitor customer accounts for potentially unsuitable positions and activity. The system would flag for review any transaction or account meeting certain parameters established by the firm relating to, for example, account turnover and concentration levels in a particular security or class of security. The firm's system, however, was not configured or designed to monitor RCN transactions or RCN positions in customer accounts and the firm did not establish an effective alternative means to do so. As a result, H&R Block failed to detect and respond to indications of potentially unsuitable RCN concentration levels in numerous customer accounts. Additionally, the firm failed to provide sufficient guidance to its supervising managers on how to assess suitability in connection with their brokers' recommendation of RCNs.

According to The Star-Ledger, Stephen Severio, a former Merrill Lynch financial adviser has plead guilty to two counts of theft by deception and to commercial bribery relating to a scheme that netted nearly $700,000. Severio admitted to the court that he had convinced 31 long-term clients of Merrill Lynch to withdraw their money from their Merrill Lynch accounts and invest their money in other opportunities outside of Merrill Lynch. This practice is called "selling away" and violates Merrill Lynch policy as well as industry standards. Some of the Severio's victims had been clients of Severio's at Morgan Stanley. Severio had been an employee at Merill Lynch's Red Bank office for five years.

In an effort to persuade these clients, Severio promised returns of between 15 and 20 percent. Rather than investing the funds he received, Severio merely cashed the checks and used the money as he pleased. Authorities alleged that the scam ran more than a year and that the money was used to support a drug habit. Although the details are not clear as to exactly where the money went, police records indicate that Severio along with two 21 year-old women were arrested in July of 2008 on charges of possession of cocaine.

The prosecutor will recommend a seven-year prison term in exchange for Severio's plea. Additionally, Severio has agreed to a civil consent judgment to repay the victims
$685,653.

The Doss Firm, LLC is currently investigating whether Ameriprise Financial f/k/a H&R Block Financial Advisors violated industry rules on a wide-spread basis in connection with the unsuitable sale of reverse convertible notes to senior citizens.

FINRA fined the firm as well as Andrew MacGill, a broker with the firm, this week for making unsuitable sales of reverse convertible notes to a senior couple. Andrew MacGill practices out of Tampa, Florida. The Doss Firm, LLC has been retained by other Ameriprise clients who are complaining they too were sold reverse convertible notes.

Reverse convertible notes are inherently very risky investments. Unfortunately, in many instances they were sold as safe income-producing alternative investments, which is why FINRA has taken action against H&R Block Financial Advisors.

A reverse convertible note is a type of structured product. According to Notice To Members ("NTM") 05-59, structured products are securities created by investment banks that are derived from or based on a single security, a basket of securities, an index, a debt issuance, and/or foreign currency. As such, these investments come in many shapes and sizes.

Most structured products pay an interest or coupon rate substantially above the prevailing market rate. Structured products also frequently cap or limit the upside participation in the referenced asset. These unique financial instruments are typically issued by investment banks or their affiliates and have a fixed maturity date. Some structured products are listed on a national securities exchange and some are not. Because they are so unique, however, even those listed on a national exchange are thinly traded.

As a result, once an investor purchases such an investment, it is difficult to get out of it prior to the maturity date without suffering a substantial penalty. Structured products typically have two components - a note and a derivative (often an option). The note pays interest to the individual at a specified rate and interval. The derivative component or option component establishes the payment upon maturity.

Most reverse convertibles sold to consumer are linked to a single stock in a household name company (e.g. Jet Blue, Norfolk Southern, Lowes and Bristol Myers to name a few.) Prior to the maturity date, which was typically only a few months, investors receive interest payments at a rate that is higher than the prevailing market rate. Importantly, the reverse convertible notes do not allow investors to participate in any upside in the referenced underlying stock. Investors fully participate, however, in all downside market risk of that stock, because upon maturity (i.e. at the expiration of the option), if the price per share of the underlying stock falls below a predetermined value, the note converts into shares of underlying common stock at the eroded price per share. In other words, in exchange for receiving some income, investors risk losing some or all of their principal investment by assuming all of the downside risk of the underlying stock and by giving up all of the upside potential.

If you believe you have been sold unsuitable reverse convertible notes and suffered losses, you may have a claim to recover damages. Please contact The Doss Firm, LLC at 770-578-1314.

FINRA, Financial Industry Regulatory Authority announced that it was fining H&R Block Financial Advisors, Inc. (n/k/a Ameriprise Advisor Services, Inc.) $200,000 for failing to establish adequate supervisory procedures in connection with the sale of reverse convertible notes. FINRA also fined Andrew MacGill, an advisor of the firm for making unsuitable recommendations to a retired couple.

FINRA also released an Investor Alert, Reverse Convertibles - Complex Investment Vehicles, to educate consumers about these complex structured products. FINRA also issued Regulatory Notice 10-09, reminding firms of their sales practice obligations when recommending or selling reverse convertible notes.

A reverse convertible note is a type of structured product. According to Notice To Members ("NTM") 05-59, structured products are securities created by investment banks that are derived from or based on a single security, a basket of securities, an index, a debt issuance, and/or foreign currency. As such, these investments come in many shapes and sizes.

Most structured products pay an interest or coupon rate substantially above the prevailing market rate. Structured products also frequently cap or limit the upside participation in the referenced asset. These unique financial instruments are typically issued by investment banks or their affiliates and have a fixed maturity date. Some structured products are listed on a national securities exchange and some are not. Because they are so unique, however, even those listed on a national exchange are thinly traded.

As a result, once an investor purchases such an investment, it is difficult to get out of it prior to the maturity date without suffering a substantial penalty. Structured products typically have two components - a note and a derivative (often an option). The note pays interest to the individual at a specified rate and interval. The derivative component or option component establishes the payment upon maturity.

Most reverse convertibles sold to consumer are linked to a single stock in a household name company (e.g. Jet Blue, Norfolk Southern, Lowes and Bristol Myers to name a few.) Prior to the maturity date, which was typically only a few months, investors receive interest payments at a rate that is higher than the prevailing market rate. Importantly, the reverse convertible notes do not allow investors to participate in any upside in the referenced underlying stock. Investors fully participate, however, in all downside market risk of that stock, because upon maturity (i.e. at the expiration of the option), if the price per share of the underlying stock falls below a predetermined value, the note converts into shares of underlying common stock at the eroded price per share. In other words, in exchange for receiving some income, investors risk losing some or all of their principal investment by assuming all of the downside risk of the underlying stock and by giving up all of the upside potential.

These are inherently very risky investments. Unfortunately, in many instances they were sold as safe income-producing alternative investments, which is why FINRA has taken action.

If you were sold reverse convertible notes and lost money you may legal rights to recover your losses. Please call The Doss Firm, LLC for a free consultation.