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 from October 2008 through April 2009, 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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