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There are many types of investment fraud. Some of the common types of investment misconduct we see include unsuitability, negligence and fraud. However, there are many additional forms of investment misconduct, and some are not easy to identify. To have your case reviewed by our investment fraud lawyers, simply give us a call or fill out our online form.
Common Types of Investment Fraud & Abuse
As the old saying goes, “Don’t put all your eggs in one basket.” A good financial advisor should not make recommendations that concentrate your portfolio in just a few investments. If your financial advisor did not properly diversify your assets, this may have caused significant financial losses. Our investment fraud lawyers can analyze your accounts to determine if your financial advisor failed to diversify your investments.
Churning is when an advisor recommends or makes excessive trades for the purpose of earning extra commissions. These commissions can take a big bite out of your investment! Even trading that is years apart may still be churning, depending on the investment. Our investor attorneys Law can help you determine if your broker traded your assets excessively.
Many different types of investment fraud and securities fraud appear in the securities industry. Broadly speaking, fraud occurs when a financial advisor tells an investor something that is misleading in order to to influence investment decisions. This commonly involves a false statement about the investment or the expected or promised rate of return. Fraud can also occur when a financial advisor withholds important information from you about an investment.
Margin trading is borrowing money from a brokerage firm to buy securities. Margin trading amplifies profits, but can also result in increased losses. If your financial advisor failed to explain the risks of margin trading, you may be able to recover these losses.
A financial advisor does not have to intentionally mislead or swindle an investor for the investor to have a claim. You may be able to recover losses when a financial advisor makes a mistake that a reasonably prudent advisor would not have made.
If your investment suddenly crashed and became worthless, you may have inadvertently invested in a ponzi scheme. This is especially true for penny stocks and securities that are not publicly traded. Our ponzi scheme lawyers can help: 1) uncover these schemes; 2) recover your losses; and 3) protect you from clawback litigation.
Even if your broker has your best interests in mind, they must always ask your permission before buying or selling. If your financial advisor engages in unauthorized trading, you may be able to recover your losses.
The law requires that your financial advisor be familiar with your financial situation and only recommend investments that are suitable for you. The fact that an investment lost value does not automatically mean it was unsuitable. However, an investment is unsuitable if it is not a good fit for you considering several factors, including: 1) your age; 2) financial situation; 3) investment objectives; 4) investment experience; and 5) risk tolerance. Let Investor Defense Law help you determine whether the investments you were sold were unsuitable.
At Basalt Legal, we have the experience to pursue claims involving exotic or unsuitable investments.
Some investments are riskier than others.
Common Types of Investment Fraud & Abuse
Having failed to perform as advertised for wealthy families and institutions, many hedge-fund style investment strategies are now being marketed to ordinary Americans, including seniors. These strategies include betting against stocks, using derivatives or leverage to amplify bets, and buying unusual assets such as privately issued junk bonds. One securities regulator recently compared the sale of products using these strategies to “giving a 6-year old a circular saw. Most mom-and-pop investors don’t understand the risks they’re taking.”
Real Estate Investment Trusts (REITS) are a tool for collecting capital from numerous investors to purchase real estate portfolios—and non-traded REITs are a potential trap for investors. Financial advisors like to sell non-traded REITs because they get paid high commissions. While financial advisors emphasize the high yields REITs offer, commissions and fees can eat up as much as 15% of your initial investment. All REITs are subject to the risks of investing in real estate, and these risks are frequently amplified when REIT management uses debt to purchase the REIT’s real estate portfolio. Non-traded REITs raise additional concerns. The market for non-traded REITs is thin, so selling your shares may be difficult. REITs may charge you a withdrawal fee of up to 3% of your investment. Non-traded REITs are almost never suitable for short-term investors, including many seniors. Valuing non-traded REITS is also difficult. For publicly traded REITs, the value of a share is the sell price on the exchange where the REIT is listed. For non-traded REITs, valuation can be incredibly complex. This means that your financial advisor might not know how much the REIT he is selling you are worth. You may have significantly overpaid for your investment.
Many investors have been buying bonds as a "safe haven," but bonds still carry significant risks: Risk of default – The organization issuing the bond may default, failing to pay as promised under the bond. Generally, the higher the interest rate the bond pays, the higher the risk of default. Today, many investors are looking for investments that pay a high fixed rate of return, so they buy junk bonds orforeign bonds.These bonds may have attractive yields, but those yields come with a price.Many of these bonds are risky investments. Interest rate risk – When interest rates go up, bond prices fall. If interest rates go up significantly after you invest in bonds you can lose money, even though you receive interest payments. Interest rate hikes affect some bonds more than others, and can lead to double digit declines in a bond’s value. If your financial advisor recommended bonds to you without adequately explaining the risks, you may be able to recover your losses.
Exchange Traded Funds
In many ways, ETFs are a more evolved version of mutual funds. Like a passively invested mutual fund, shares of an ETF track an underlying benchmark or index. While mutual funds can only be bought or sold once a day, ETFs are exchanged throughout the trading day. This offers liquidity, or at least the appearance of liquidity. In reality, many small ETFs are not liquid investments, so it can be difficult for an investor to sell their shares at a reasonable price. While most ETFs attempt to track an index, like the Dow Jones Industrial Average, they do not always hit their target. Instead of buying shares of the companies that make up an index, an ETF might try to hit its target using synthetic swaps and other risky, complex derivatives. Generally, the more obscure the benchmark the ETF is designed to track (such as an index for an emerging market economy), the higher the risk that the ETF will use complex derivatives and fail to hit returns that are in line with its stated objective. Leveraged ETFs are especially risky, even when they achieve their objective. Leveraged ETFs seek to yield multiples of an index’s performance. For example, an index might try to produce a daily rate of return that is double or triple the percentage change in the Dow Jones Industrial Average. The problem with these funds is that their return over a longer period of time than one day deviates significantly from the index it tracks. For example, according to the Financial Industry Regulatory Authority, between December 1, 2008-April 30, 2009, an ETF seeking to deliver three times the daily return of an index fell 53%, even though the index actually gained 8%. For all but the most sophisticated investors who buy or sell investments on a daily basis, niche ETFs and leveraged ETFs are probably unsuitable.
Limited Partnership Interests
Like many of the investments on this page, Limited Partnership Interests are recommended by financial advisors because they pay big commissions. These investments are hard to value.Once an investor has purchased these interests, they can also be hard to resell. They are usually only suitable for sophisticated, long-term investors.
Penny stocks, or stocks that trade on the “pink sheets,” are stocks that trade for less than a dollar and that are not listed on a securities exchange. Financial advisors offer these shares as an opportunity to hit the jackpot, but many of these companies go out of business. These shares are also less regulated than shares listed on exchanges, allowing market manipulators to run “pump and dump” schemes and ponzi schemes with little oversight. Investing a significant portion of an investment portfolio in penny stocks is unsuitable for most investors.
Annuities – Variable and Equity-Indexed
Investor Defense Law has experience with annuities. Variable and equity-indexed annuities are complicated investments sold by insurance companies. The most common characteristics of these annuities are: 1) tax-deferred earnings; 2) a death benefit (a life insurance policy inside the annuity); and 3) a guarantee of minimum payments. Financial advisors like to sell annuities because they receive unusually large commissions. While annuities are a win for financial advisors, they are not always a suitable choice for investors. Unless you read the fine print, you may not be getting what you pay for when you purchase an annuity.Rates of return may not be as high as advertised, and some of the guarantees and other provided features may not be useful for someone in your financial situation. Variable and equity-indexed annuities also carry liquidity risk. These annuities are long-term investments. An investor that needs to pull money out of these annuities could end up paying a hefty fee, even years after purchasing the annuity. A financial advisor that ties up too much of an investor’s money in illiquid annuities could be more focused on the commissions he will receive than his client’s best interest. If your financial advisor failed to explain the risks and other details about your variable or equity-indexed annuities, you may be able to recover your losses.