In September 2012, Apple shares ("AAPL") were valued at more than $700 per share. As of January 25, 2013, they closed at $439.88 per share. The losses to the stock's investors is ugly. However, Wall Street is hiding an even uglier product linked to Apple stock, reverse convertibles.
According to a December 2012, Bloomberg report, banks issued 76 different reverse convertible securities linked to Apple stock between August 20, 2012 and October 13, 2012, during which time Apple stock was at its peak.
A reverse convertible is a complex structured finance product sold to yield-seeking investors. Often the product is sold as a "safe" "secure" bond instrument. Unless an investor understands the arcane language of financial alchemy, the investment appears to be a bond paying interest on a regular basis. It is anything but a safe, secure bond.
Instead of being a simple bond, a reverse convertible is a combination of a short-term debt instrument ("promissory note") linked to a put option on a stock which gives the issuer the right to "put" the underlying stock to the investor if the price of the stock declines to a certain defined level called the limit price or "knock-in" price during the term of the investment. On the promissory note's maturity date, the investor either receives the return of his principal or if the price of the stock fell beneath the limit price during the term of the reverse convertible (or in other instances fell below and remained below the limit price at the time of maturity), the issuer "puts" the stock to the investor and the investor must accept the stock in lieu of receiving his principal.
Looking at the two sides of the transaction, the buyer of a reverse convertible is making a bet the underlying stock's price will not fall and have the stock put to him in exchange for receiving a high rate of return on promissory note. The issuer is betting the stock price will fall and will be able to exercise the put option for a large gain despite paying the interest on the promissory note. On either side of the transaction, the put option is the engine which drives the reverse convertible.
In the late summer of 2012, banks were issuing and stockbrokers were selling Apple-linked reverse convertibles like hotcakes at Sunday brunch. Today, with the first of the reverse convertible notes coming due, unsuspecting investors now face having Apple stock put to them at losses of up to 40% of their principal.
We have burned through Wall Street's excuses and obfuscations of these dangerous products obtaining a FINRA arbitration award against Wells Fargo and favorably settling several more of these cases for burned investors.
If an advisor or stockbroker sold you reverse convertible securities which resulted in the stock being put to you for a loss, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation. As always, each case is individual to its own set of facts and our successful resolution of prior cases is no guarantee your case will be resolved on such favorable terms.