Georgia requested information from UBS AG, Morgan Stanley and Ameriprise Financial Inc. in its probe over whether the firms broke the state's securities laws in sales of structured notes called reverse convertibles.
The Secretary of State's office sent subpoenas requesting data from each of the firms on how many reverse convertibles they sold in Georgia and the names of the investors, according to a person familiar with the matter, who spoke on condition of anonymity because the investigation is ongoing.
Reverse convertibles are short-term bonds generally sold to individuals that convert into stock if a company's share price plummets. Georgia began examining the securities in May after lawyers received complaints from investors who asked if the state had any open investigations, Vincent Russo, general counsel and acting assistant securities commissioner for the Secretary of State's office, said in a telephone interview last month.
“We received a generic subpoena seeking a list of Georgia- based clients who invested in certain types of products, some of which we do not offer. The subpoena does not name products or advisers,” Benjamin Pratt, a spokesman for Minneapolis-based Ameriprise, said in an e-mail.
Allison Chin-Leong, a spokeswoman for Zurich-based UBS, and Mary Claire Delaney, of Morgan Stanley in New York, declined to comment.
“We have multiple investigations open with regard to the sale of reverse convertible notes, and will thoroughly review all evidence to ensure that Georgia investors are protected,” said Matt Carrothers, a spokesman for the Georgia Secretary of State's office.
Sales of structured notes such as reverse convertibles are soaring as investors frustrated by record-low interest rates on savings seek higher returns through investments that carry more risk. The “complex” securities can be difficult for investors and brokers to evaluate, according to the Financial Industry Regulatory Authority.
Regulators have increased scrutiny of the market, fining some brokers for marketing reverse convertibles to elderly investors or those with little money, as sales have increased. Massachusetts is looking into sales of the products, Brian McNiff, a spokesman for the Secretary of State's office, said in May.
Kenneth Lench, head of the Securities and Exchange Commission's structured products unit that investigated Goldman Sachs Group Inc.'s subprime-mortgage investments, said in a September interview that the agency was examining whether brokers overcharged investors for the notes.