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contract, under which the seller/brokerage firm will repurchase
the LPO and issue a new one (for an additional cost) whenever the
value of the related securities equals the Expiration Price.
Bear Stearns acquired the underlying securities for the
LPO's that it sold to petitioner or Kenilworth. When Bear
Stearns sold an LPO to petitioner or Kenilworth, Bear Stearns
charged the purchaser a purchase commission that was based on the
gross cost of the underlying securities. When the purchaser
exercised or otherwise disposed of the LPO, Bear Stearns charged
the purchaser a selling commission based on the gross proceeds of
the securities. Prudential Bache followed a similar, overall
procedure with respect to the LPO's that it sold to petitioner or
Kenilworth.
Pursuant to the terms of the LPO's purchased by petitioner
or Kenilworth, the Expiration Price was set at an amount that
reflected a 3 percent decline in the value of the related
securities. Under the terms of the addendums that petitioner or
Kenilworth entered into with the seller/brokerage firm, the
seller would: (1) Repurchase an LPO every time that the market
value of the related securities equaled the Expiration Price and
(2) simultaneously issue a new LPO for the same securities, the
payment of which was due on the day of issuance. The repurchase
price of an LPO equaled the amount by which the proceeds received
from selling the underlying securities (usually the market price
less commissions and other costs) exceeded the exercise price for
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Last modified: May 25, 2011