Reverse Convertibles and the Cautionary Tale of Dr. Batlan

by Jacob Zamansky on June 16th, 2009 at 1:57 pm : Comments 000

Last July I wrote that I expected the business press to catch on to the fact that Wall Street has been targeting retirees with a particularly toxic form of security called a structured product.  Since then, numerous stories have been published, not to mention the story in today’s “Wall Street Journal, Reverse Converts: A Nest Egg-Slasher?” which features a client of Zamansky & Associates’, Dr. Lawrence Batlan, a retired radiologist.

Citigroup sold Dr. Batlan  ”ELKS,” which stands for Equity Linked Security.  The way it works is the investor receives interest payments not unlike a bond for a certain time period.  The interest payments are linked to a derivative stock. If the underling stock declines beyond a certain level during that time period, the investor is now the not-so-proud owner of stock on the decline.  It’s also called a reverse convertible.  In Dr. Batlan’s case, the ELKS were derived from Yahoo!, Cemex and Sandisk, which led to significant losses to his nest egg.

A popular sentiment, and one that was raised in today’s Wall Street Journal, is caveat emptor or buyer beware.  While that may be true for a sophisticated institutional investor, it’s not consistent with the rules.  By law, a broker can only recommend securities and investment strategies that are suitable for his or her client.  Therefore, a structured product, which coverts into a risky stock, is not suitable for a retiree who is not in the position to play craps with his retirement nest egg.

The WSJ story also doesn’t point out that Dr. Batlan’s Citigroup broker allegedly purchased approximately $300,000 of ELKS, without first obtaining the Batlan’s authorization. To fund these purchases, the broker sold off other holdings that were yielding 6-7% in interest.  Adding insult to injury, Dr. Baltan paid a hefty commission fee to the broker.

Dr. Batlan’s case is a cautionary tale for many investors.  Wall Street rarely, if ever, acts out of the kindness of its heart.  It’s always heads I win, tales you lose.

Filed under Securities Arbitration, Structured Products Arbitration
and citigroup ELKS, Dr. Batlin, reverse convertible, structured product