The Securities Arbitration Law Firm of Klayman & Toskes (“K&T”), www.nasd-law.com, announced today that it is continuing to investigate claims against full service brokerage firms on behalf of current and former United Parcel Service (“UPS”) (NYSE: UPS) employees for losses sustained as a result of maintaining a concentrated, leveraged position in UPS stock. Many UPS employees who obtained company stock as a form of compensation, either through the employee stock option plan (“ESOP”) or employee stock purchase plan (“ESPP”), and later transferred it to a full service brokerage firm, were encouraged to take out a “hypothecation loan,” also known as a “hypo loan.” A hypo loan is obtained by pledging securities or other assets as collateral to secure a loan. In this case, the UPS stock served as collateral for the loan. Unfortunately, many UPS employees were never advised of the risks associated with maintaining a hypo loan, including the risk of a margin call. When the price of UPS stock declined, many UPS employees had their stock liquidated thereby decimating their investment portfolio.
Additionally, in many accounts, the UPS stock represented a concentrated position. However, many UPS employees were unaware of the risks associated with owning a concentrated account. Moreover, many brokerage firms failed to explain how the use of risk management strategies, like a zero-cost collar, protective put options, stop loss orders and/or an exchange fund, could have protected the concentrated UPS position.
The effects of margin on a concentrated stock position substantially increase the risk to the account. Once the account receives a margin call as a result of the decline in share price of the UPS stock, a forced liquidation of the stock can occur, which precludes the investor from recovering their losses through a potential rebound in the price of UPS stock. In many cases, had the investor not been on margin, the UPS stock would not have been liquidated to meet a margin call, thereby providing it with an opportunity to recover given that the price of UPS stock came back in value since 2009.
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