Investment Fraud Lawyer Blog

The dynamics of equity investing are changing and investors need to consider these changes when making investment decisions. Investors have pulled over $400 billion out of equity mutual funds since 2008, resulting assets of some of those funds being cut in half. Money has flowed into bond funds, but even more money (eight times as much) has been deposited into bank accounts, confirming investors’ apprehensions about the stock market. (“Investors to stock funds: Get lost,” USA Today, John Waggoner).

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Is owning index funds a good idea? It depends on the index, according to personal finance expert John Waggoner (“Funds following odd index? Just say no”). Broad based index funds are a good idea, but new exotic niche funds are not.

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Many stock mutual funds are down for the year, and the reason why has to do in part with high expenses and use of derivatives. The average diversified equity mutual fund has declined 5.9 percent this year, compared with only a 1.4 percent decline in the S&P 500 stock index, and 92 percent of equity mutual funds have lost value this year. (See John Waggoner’s USA Today article entitled “It’s been a pitiful year for stock funds”).

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For the seventh straight month, equity mutual funds reported net outflows (investor withdrawals). For the week ended November 30, equity mutual funds’ net outflows consisted of $6.67 billion from domestic equity funds and $2.96 billion from foreign equity funds, according to the Investment Company Institute, the national association of U.S. investment companies (i.e., mutual funds). Overall, U.S. mutual funds lost $9.24 billion to withdrawals last week, the most in almost two months. (See InvestmentNews: “Mutual problem as stock fund investors still heading for the exits”).

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Wiretaps of hundreds of conversations have led federal authorities to pursue charges against individuals at two well-known hedge funds and an established mutual fund that caters to ordinary retail investors. The targets are former traders at hedge funds Diamondback Capital management LLC and Level Global Investors LP, and an analyst at mutual fund company Neuberger Berman Group LLC. If charges are brought, they would represent a substantial expansion of the insider trading investigations underway. Word is that two former research analysts at Level Global and Diamondback are cooperating with authorities. (“More Charges Set for Insider Probe,” Wall Street Journal).

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The SEC is scrutinizing mutual funds’ fee arrangements, looking for instances of gouging, and finding plenty of them. Morgan Stanley just agreed to pay $3.3 million for its role facilitating over $1.8 million in payments by a mutual fund to a third party for services the fund did not receive (“Morgan Stanley Settles SEC Case,” Wall Street Journal). Many more such cases are expected in coming months.

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When world markets move significantly in apparent response to major macroeconomic news, even supposedly “uncorrelated assets” move in unison with them, according to Jason Zweig’s Wall Street Journal article, “Caging Raging Contagion.” Such a significant move occurred last week when the Italian government and bonds collapsed over its fiscal problems, and everything else fell, too.

Continue reading "High Correlations Among Asset Classes Means There's No Place To Hide" »

Many target-date funds label their retirement-stage funds as “retirement income” funds, but that is misleading because these funds aren’t designed to generate income even though their names suggest otherwise.. See Tom Lauricella’s Wall Street Journal article entitled “’Target-Date’ Funds Shortchanging Retirees

Continue reading "Many 'Retirement Income' Funds Aren't What They Appear To Be" »

The Securities and Exchange Commission is expanding its investigation into the use of derivatives by mutual funds and exchange trade funds, and will also focus on problems related to disclosures, valuations, transparency, market volatility, liquidity and other systemic risks associated with exchange traded funds, particularly "leveraged" funds that amplify investor bets often through the use of derivatives. See the Wall Street Journal (“SEC Reviewing Effects of ETFs on Volatility,” Andrew Ackerman).

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Focus funds, highly concentrated (undiversified) and volatile equity mutual funds that are actively managed, are some of the worst performing funds of 2011. They typically own fewer than 50 stocks or have more than 50% of their funds invested in their top 10 holdings. They also have higher management fees. In an up year, focus fund managers may far outshine indexed and diversified funds. In a down year, they resemble mackerels rotting in the moonlight. Going from “manager of the year” to “chump of the year” in 12 months is not unheard of.

Continue reading "Focus Funds Only Appropriate for Investors Willing to Take a Wild Ride" »

Wall Street is its own worst enemy, according to Tom Petruno of the LA Times (“Biggest Threat to Wall St. is the Enemy Within”). The enemy is not the occupiers of Wall Street or the regulators but the high-frequency computerized trading firms that comprise 70% of the market and cause the extreme volatility that is scaring off investors.

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Many investors have reason to support the Occupy Wall Street movement that objects to Wall Street greed. These investors have seen their hard-earned money dissipate in the hands of their “trusted financial professionals.”

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Investors continue to pull billions from mutual funds, the Wall Street Journal reports, citing the Investment Company Institute. Almost $11 billion flowed out of mutual funds the week ended October 7, as bond, hybrid and domestic equity funds declined. Money market funds have reported outflows this year. Investors continue to be worried about the debt situation in the U.S. and Europe.

Continue reading "Mutual Funds in Turmoil" »

Alternative funds, mutual funds that use hedge fund-type strategies but do not charge typical hedge fund performance fees of 20%, aren’t producing expected results. The attraction of alternative funds was the promise of growth with of downside protection as a result hedging strategies.

Continue reading "Alternative Funds: Long Term Performance Doesn't Justify the Risks" »

Investors pulled $44.5 billion out of stock mutual funds and $10 billion out of bond mutual funds in August, and that trend is expected to continue. According to Jeff Benjamin’s InvestmentNews article entitled “Fund investors throw in towel,” this marks the biggest net outflow from mutual funds since October 2008. The 2008 credit crisis is still fresh in investors’ minds and they do not want another stomach churning debacle involving their money. The proceeds are being put in FDIC-insured money market accounts paying an average of 0.57% per annum, according to the article.

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Just as a low tide near the seashore can reveal shipwrecks, a falling stock market often reveals misconduct by investment advisers. This is particularly true with respect to an investment adviser’s duty to recommend only investments to a customer that are suitable in light of the customer’s investment objectives, status in life and risk tolerance. Unfortunately many investors only learn that their advisers have violated this duty when adverse market conditions develop.

Continue reading "Market Turmoil Expected to Precipitate an Avalanche of Suitability Claims" »

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.

Continue reading "Morgan Keegan Fined $200 Million for Fraud Involving Toxic Bond Funds" »