Investment Fraud Lawyer Blog

The regulatory eye in the sky (the SEC) has apparently locked onto private equity firms, sensing valuation problems and conflicts of interest. Generally, private equity firms purchase troubled companies with mostly borrowed funds, cut costs, improve operations, and sell them for a profit, taking a management fee (typically 1.5% to 2.0%) in the interim, plus 15% to 20% of any profits. Private equity firms and how they do business made news recently in the Republican primary presidential debates.

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John Bogle, founder of The Vanguard Group Inc., recommends low-cost, passive index mutual funds as the best way to invest, but that recommendation does not extend to exchange traded funds. Exchange traded funds are good for trading, , according to Mr. Bogle, but trading is not good for investors. Trading and investing are not the same.

Continue reading "Vanguard Icon Says ETFs Are Bad For Investors" »

The Financial Industry Regulatory Authority (FINRA) is taking a closer look at a fast-growing alternative investment known as a non-traded business development company (BDC). According to InvestmentNews, FINRA spokeswoman Nancy Condon states, “we are looking at a number new products being sold to investors and BDC’s are one of them.” BDC’s are typically closed-end funds regulated under the Investment Company Act of 1940. BDC’s were created in 1980 by Congress in order to provide small companies with funding.

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The Financial Industry Regulatory Authority has issued a Regulatory Notice (12-03, Jan. 2012) to “remind” its member firms of their sales practice obligations with regard to complex products, and to provide them “guidance” in exercising heightened scrutiny and supervision over marketing and sales of complex products. Complex products are not defined in the Notice, but are described as including a host of alternative investments, such as derivative-based products, nontraded REITs, structured notes, inverse or leveraged exchange traded funds, hedge funds, and securitized products like mortgage-backed securities and asset-backed securities.

Continue reading "Securities Regulators Set High Standards for Firms Selling Complex Investments" »

The Financial Industry Regulatory Authority (FINRA) recently issued a report outlining is its regulatory and examination priorities for 2012. The securities industry regulator is focusing on conduct and products meant to beat the market that are unsuitable investments for many investors.

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Federal prosecutors plan to file criminal actions against four former traders who allegedly overvalued collateralized debt obligations (CDOs) sold by Credit Suisse in order to increase their commissions. The events occurred in 2008 and resulted in a $2.85 billion write down by Credit Suisse. Credit Suisse fired the traders and cooperated with authorities in their investigation. (“Ex-Traders at Credit Suisse Expected to Be Charged With Fraud,” New York Times, Dealbook).

Continue reading "Credit Suisse Traders Face Criminal Charges for Mortgage Investment Fraud" »

Given the array of exotic alternative investments being sold to the public, it’s logical that many investors often don’t understand what they are buying. What is even scarier is that it is likely their professional investment adviser doesn’t understand the alternative investment either. Investment advisers – 75 percent of them – admit they do not understand alternative investments. Notwithstanding their puzzlement, 50 percent of advisers said they intend to increase their use of them in their clients’ accounts this year. They could use some help, however, because of alternative investments are so confusing. (“Alternatives spur anxiety,” InvestmentNews).

Continue reading " Most Financial Advisers Don't Understand Alternative Investments According To John Hancock Survey" »

While exchange traded funds continue to flood the market, a record number of existing ETFs are failing or in trouble. Last year, 308 new exchange traded funds were launched, but almost 90 percent of them were unable to attract the $30 million regarded as a minimum threshold amount for profitability, according to CNNMoney (See “Is the ETF bubble about to burst?”), citing XTF, a firm that researches and advises exchange traded funds globally.

Continue reading "20% of Existing Exchange Traded Funds (ETFs) on 'Death Watch' List" »

Junk bond exchange traded funds have ten times more money than they did two years ago, and are causing some of the largest price swings ever. Junk bond price swings were seven times higher in November than in May. This volatility in the junk bond market is similar to the volatility seen in other asset classes caused by exchange traded funds. (See Bloomberg “Exchange Traded Junk Funds Roil Bond Market”).

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Brokerage firms that sell nontraded REITs reportedly “cringe” at Investor Alerts posted by the Financial Industry Regulatory Authority (FINRA) warning of the dangers of those products. They know that such alerts cause investors “anxiety and concern,” as they learn about the risks that were not disclosed to them by their brokers. Brokerage firms routinely fail to disclose material risks about the nontraded REITs they sell for two reasons: (i) they failed to inform themselves of the risks by conducting appropriate due diligence, and (ii) they don’t want to cause potential investors any “anxiety and concern,” because that would be bad for sales, which pay hefty commissions to the sellers. (“Non-traded REITs face tough scrutiny,” InvestmentNews).

Continue reading "The News Regarding Nontraded REITs Keeps Getting Worse" »

Ordinarily, the evidence presented in a FINRA arbitration is kept “confidential” and secret from the public. That’s the way the securities industry likes it, because it really does not want the public to see the evidence against it. But in its zeal to try to overturn the largest amount ever awarded to individual investors in a FINRA arbitration, Citigroup inadvertently allowed New York Times columnist Gretchen Morgenson to have a look at the evidence that was presented to the arbitrators in that case. What she found is the subject of her recent article entitled “Secrets of a Sales Machine.”

Continue reading "MAT/ASTA Cases Reveal the Seamy Side of Wall Street" »

MONEY Magazine identifies nontraded REITs as very risky investments that should be avoided. In the last 10 years, the number of nontraded REITs has exploded into a $9 billion dollar market, as yield hunters piled in. Unfortunately, many investors including, most recently, investors in Behringer Harvard Opportunity REIT I have learned about the problems with these investments the hard way.

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One former Wall Street hedge fund executive has just published a book in which he claims that investors would have done twice as well as hedge fund investors by investing in U.S. Treasuries over the past decade. Twice as well. Simon Lack, whose book is titled “Hedge Fund Mirage,” is a former hedge fund executive at JPMorgan Chase & Co. He now runs SL Advisors in Westfield, N.J.

Continue reading "Are Most Hedge Fund Investors Chasing 'Fools Gold?'" »

The Securities and Exchange Commission has implemented a strategy of using computer analyses to identify hedge funds and other firms whose claimed investment performance figures warrant special scrutiny for possible fraud. Working on the theory that, if the performance seems too good to be true, maybe it is, the SEC has commenced lawsuits and investigations into a number of supposedly “outperforming” hedge funds. More than 20,000 funds have or will be screened by the SEC’s new system.

Continue reading "'Serious Fraud' Exists in Hedge Fund Market" »

It’s getting crazy out there in ETF land. Leveraged exchange traded funds like Direxion Funds that deliver two times the return of a benchmark are being jacked up to three times the return. Many market observers believe that the highly leveraged exchange traded funds are contributing to the market volatility that is causing investors to flee the stock market. (“Beware of ETFs On Steroids,” Bloomberg Business Week, Markets & Finance).

Continue reading "Some Exchange Traded Funds (ETFs) Are Morphing Into Monsters" »

The Financial Industry Regulatory Authority (FINRA) has fined Wells Fargo Investments $2 million and ordered it to pay restitution to customers for unsuitable sales of reverse convertible securities, and other misconduct. The reverse convertibles sales involved one broker and 21 customers with 172 accounts. Seventy one percent of the customers were over 80 years old. (See “Wells to pay $2M to settle claims broker sold unsuitable investments to seniors,” Investment News).

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Promoters of fraudulent investments are targeting the 77 million baby boomers in the U.S. who make up 25 percent of the population, according to securities regulators and prosecutors (“Boomers Wearing Bull’s-Eyes,” Wall Street Journal, Kelly Greene). Regulators expect to file a record number of enforcement actions involving investors age 50 years and older, as financial fraud against boomers is “rampant” throughout the nation, according to the article.

In 2010, there were 1,241 criminal and civil regulatory fraud actions involving investors age 50 and over, versus 506 cases in 2009, according to the North American Securities Administrators Association (NASAA), the association of state securities regulators. Unfortunately, the number of enforcement actions is tiny compared to the number of actual fraud cases out there.

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Thinly sliced niche exchange traded funds provide exposure to arcane parts of the market, but they may not be what investors had in mind when they purchased them. (“Thinner and Thinner: ETF Providers Cut Market Into Ever-Narrower Slices,” Wall Street Journal).

Continue reading "Exotic ETFs Become Riskier and Riskier" »

The four top selling nontraded real estate investment trusts have either closed or say they intend to close soon. This has left industry participants wondering whether new players will be able to fill the void. “As top nontraded REITs close, doubt over new ones,” InvestmentNews). Industry participants apparently believe the $9 billion nontraded REITs market is still popular with investors. But that may not be the case for long as negative press reports, well-publicized disciplinary actions and investor arbitration claims have increased investors’ awareness of the risks of these alternative investments. In fact, Registered Rep Magazine, a publication geared to brokers, recently published an article reporting that the securities industry is beginning to take notice of these storm warnings in the nontraded REITs arena. (“NonTraded REITs Raising Red Flags in the Industry,” Registered Rep).

Continue reading "Is There a Future for NonTraded REITs?" »

Registered Rep Magazine, a publication geared to brokers, reports that the securities industry is beginning to shun non-traded real estate investments trusts (REITs). Well-publicized disciplinary actions and investor arbitration claims, as well as the hundreds of independent brokerage firm that were forced to close their doors as a result of improper sales of non-traded REITs, have brought an increased awareness of the risks of these alternative investments on the part of investors and the securities industry. (“Non-Traded REITs Raising Red Flags in the Industry,” Registered Rep).

Continue reading "Brokerage Firms Beginning to Grow Leery of Non-Traded REITs" »