Investment Fraud Lawyer Blog

Investors should use extreme caution before investing in alternative investments. Alternative investments have become the popular “investment du jour" but these investments are fraught with risks. Simply stated, alternative investments are not the panacea that so-called experts represent them to be. For the reasons discussed below, investors need to be very skeptical of any recommendation encouraging them to invest in alternative investments.

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The risks are increasing for investors in principal protected notes, reverse convertibles and other structured products associated with Bank of America, Citigroup and Wells Fargo. Moody’s recently announced that it has downgraded the debt of those financial institutions. One reason given: the U.S. government is unlikely to bail them out again. “It is more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute,” said Moody’s.

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Many registered investment advisors and brokerage firms have increased their use of alternative investments for clients, many of whom are retired and lack the knowledge and sophistication to understand the complex investments, according to Liz Skinner’s InvestmentNews article entitled “Clients clamoring for alternative investments and advisers obliging.” But are alternative investments suitable for most investors? Similarly, are most investors provided with balanced disclosures of the risks that they are taking when they invest in alternative investments? Unfortunately, the answer to both questions appears to be no.

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Wall Street is aggressively selling so-called structured notes as a “safe” way to earn increased returns without increased risk. The appeal of such a pitch is obvious in these times of low interest rates and stomach-churning stock market volatility. Structured notes are gaining in popularity. Retail sales of structured notes increased by 46% in 2010 to a record $49.4 billion, according to Bloomberg, and are expected to be up again sharply in 2011. But beware, says Fortune magazine contributor Janice Revell (“Beware of Wall Street’s latest ‘safe’ investment,” CNNMoney), there is increased risk and the increased returns are illusory.

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The association of state securities regulators known as NASAA has released its top 10 investment traps. NASAA finds that scam artists are peddling various get-rich-quick schemes to take advantage of the economic uncertainty. According to NASAA, investments that investors should be particularly wary of include distressed real estate schemes, energy investments, gold and precious metal investments, promissory notes, and securitized life settlement contracts. Tactics used to peddle such investments often involve affinity fraud, bogus or exaggerated credentials, mirror trading, private placements, and securities and investment advice offered by unlicensed agents.

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Lehman Brothers is filing arbitration claims to recover recruitment and retention bonuses paid to brokers based on the premise that they are loans that have to be repaid if the broker’s employment was terminated for any reason. So far, Lehman has been successful as arbitration panels have awarded Lehman clawbacks of $2.2 million against one former broker and $800,000 against another, according to Joseph Checkler’s and Suzanne Barlyn’s Wall Street Journal article entitled “Lehman Pursues Former Brokers' Bonuses.“

Continue reading "Lehman Sues Brokers to Recoup Bonuses - Confirms that Consummate Corporate Arrogance Knows No Bounds" »

More than a year after it was created by the Dodd-Frank financial reform act, the U.S. Securities and Exchange Commission (SEC) opened its Office of the Whistleblower on August 12, 2011. According to a statement released by SEC Director of Enforcement Robert Khuzami, “early and quick law enforcement action is the key to preventing securities fraud and avoiding investor losses, and the whistleblower program gives us the tools to help achieve that goal.” Investor rights attorney Craig T. Jones of Page Perry LLC in Atlanta agrees: “This program will catch fraud sooner because it gives Wall Street insiders a significant cash incentive to be the first to come forward with information about abusive practices. Not only will whistleblowers and their attorneys profit from doing the right thing, but the investing public as a whole will benefit.”

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The current free fall in the stock market is likely to activated the ticking time bombs that are hidden away in some investors’ portfolios. These time bombs are embedded in a type of structured product called Reverse Convertible Notes or Reverse Exchangeable Notes. The problem has to do with the way these products are structured.

Continue reading "Reverse Convertible Securities More Likely to Become Toxic as Market Swoons" »

On July 27, 2011, the Staff of the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations published a report entitled “Staff Summary Report on Issues Identified in Examinations of Certain Structured Securities Products Sold to Retail Investors.” This report was based on the Staff’s review of eleven broker dealers that sell various structured securities: three large firms affiliated with bank holding companies that are issuers structured securities, on wholesale seller of structured securities issued by third parties, and seven smaller retail firms that also sell structured securities issued by third parties.

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The Financial Industry Regulatory Authority (FINRA) has issued an investor alert warning against chasing yield with structured products, junk bonds and floating-rate bank-loan funds. The alert was prompted by "significant recent inflows" into high-yield products. Investors may find enhanced yields attractive in the current market environment of low yields on conventional fixed-income investments and higher stock market volatility.

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Regions Financial Corp. is trying to find a buyer for Morgan Keegan, but the clock is ticking, and the longer it takes, the greater the likelihood that its most valuable asset, the advisor reps, will leave, thereby reducing the value, and making a sale unlikely to happen at all, according to Andrew Osterand’s InvestmentNews article entitled “Morgan Keegan’s 1,200 reps are waiting to see if parent bank Regions can find a buyer.”

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In her recent New York Times article entitled “Findings That May Get Lost,” Gretchen Morgenson writes about a “disturbing paradox” presented by the following scenario: Investors who lost over $1 billion in toxic RMK bond funds may not benefit from the recent settlement with regulators that Morgan Keegan paid $200 million to obtain, despite findings that Morgan Keegan and James Kelsoe misled and defrauded investors in those funds, because Morgan Keegan’s lawyers will argue that the regulatory findings are irrelevant in arbitration proceedings filed by injured investors, and, incredibly, some arbitrators will agree not to consider those findings, despite court decisions holding that such findings must be admitted in evidence.

Continue reading "Morgan Keegan Toxic Bond Fund Cases Provide Disturbing Examples of How Industry Arbitration Fails Investors" »

Morgan Keegan & Company and Morgan Asset Management have agreed to pay $200 million to settle fraud charges related to proprietary bond mutual funds that were both mispriced and loaded with risky subprime mortgage-backed securities. Approximately 39,000 investors lost $1.5 billion in the RMK bond funds (later renamed Helios) that were the focus of the charges.

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Morgan Keegan & Company and Morgan Asset Management have agreed to pay $200 million to settle fraud charges related to bond funds that invested in subprime mortgage-backed securities. The charges were filed by the Securities and Exchange Commission, state regulators from Alabama, Kentucky, Mississippi, Tennessee and South Carolina, and the Financial Industry Regulatory Authority (FINRA). Former RMK bond fund portfolio manager James C. Kelsoe Jr., and comptroller Joseph Thompson Weller also agreed to pay penalties for their misconduct. Kelsoe is now barred from the securities industry.

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Investors in today’s markets, particularly seniors, are caught between extremely low interest rates and the risk of pursuing higher returns they want or need. Brokerage firms are capitalizing on that dilemma by selling structured products as a way to earn above-market returns purportedly without market risk. But as Robert Powel, editor of MarketWatch’s Retirement Weekly, points out in his article entitled “Investors warned about risky structured products,” structured product sellers routinely overstate the potential upside and understate the potential downside of these investments. The net result has been the rampant destruction of investors’ wealth.

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In one of the largest dollar awards to date in a Lehman note case against UBS Financial Services Inc., a Financial Industry Regulatory Authority (FINRA) arbitration panel “walloped” UBS, ordering it to pay former Philadelphia 76ers President Pat Croce more than $2 million for losses in so-called “100% Principal Protected” Lehman notes that were sold to him weeks before Lehman’s September 15, 2008 bankruptcy filing. See Samuel Howard’s Law360 article entitled “UBS Told To Pay 76ers Prez $2M Over Lehman Notes.”

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Retail investors in structured products that were sold as safe and secure investments have lost at least $113 billion, according to a report by the nonpartisan policy center Demos and The Nation Institute. "In my three decades of Wall Street experience, I have not seen any other product as absurdly destructive as retail investments linked to structured products," securities arbitration consultant Louis Straney wrote in the report.

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The Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) continue to warn that the so-called “principal protection” feature of structured notes is misleading, according to an InvestmentNews article by Liz Skinner entitled “Principal-protected notes don’t always protect principal, regulators warn.”

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Simply stated, senior investors (in fact, all investors) should be very leery of high-risk structured products. Author John Wasik, in conjunction with Demos and The Nation Institute, has published a white paper entitled “How Safe Are Your Savings? How Complex Derivative Products Imperil Seniors’ Retirement Security.” The paper’s focus is on structured products and how they are mis-marketed to seniors, the group most in need of safe and secure income. The paper is reportedly the result of more than a year of research involving interviews with investors, state securities regulators, investors’ attorneys and officials with the Securities and Exchange Commission (SEC).

Continue reading "Study: Structured Products Pose Huge Risks to Investors' Portfolios" »

While financial advisers are selling the daylights out of high-yield structured products to investors who complain about low interest rates, the Financial Industry Regulatory Authority (FINRA) is warning them of the perils of such securities, according to Bruce Kelly’s InvestmentNews article entitled “Ketchum warns that FINRA is focusing on ‘hot’ investment.”

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