What Types of Investment Issues Lead to Negligence or Fraud?

Some of the claims our investment negligence lawyers handle involve:

• Mutual funds. Mutual funds can be sold to the general public, and as such must be registered with the SEC. They are less predictable than some other purchases, so they should be overseen by a board of directors or trustees, and should be managed by registered investment advisors.
• Closed end funds (CEF). CEFs are collective investments in which a fixed number of shares are issued but are not redeemable. The shares can be bought and sold, but the broker receives a fee or commission for each purchase or sale. Brokers “push” them, many times improperly, because the broker makes a fee for each transaction.
• Private placement investments. These investments, also known as private equity investments or private offerings, are not usually registered with the SEC, which means little public information about them is available. While they can have large returns, they are often high risk and unsuitable for most investors. They include:
  • Master limited Partnership (MLP). MLPs are common, publicly-traded investments in the energy and natural resource sector. Our attorneys investigate brokers and brokerage firms who recommended MLPs when other investments would have been more suitable (such as the volatility of the oil and gas industry, for example).
  • Real estate investment trusts (REITs). Generally, the publicly traded REITs are much better investments than privately held REITS (called non-traded REITs), which broker-dealers sell. While non-traded REITs are available securities, because they are registered with the SEC they often underperform due to the up-front charges investor need to pay. Non-traded REITs may also underperform because of conflicts of interest that rarely exist with publicly traded REITs.
• Buying on margin. Investment fraud attorney frequently will lend their clients money so the client is able to buy more securities from them. This not only increases the commissions paid to the firm, but it also makes the firm money in the form of interest. The real risk in using margin or loans to buy more securities is that it increases the leverage in the client’s positions. That is to say, it increases the downside risk because losses will be increased due to the larger position held by the client and due to the underlying debt used to buy more of the security.
• Variable annuity fraud. Often sold to seniors as an investment which can protect them from asset seizures, variable annuities are high-risk products that are rarely suitable for most investors. FINRA itself says that “Sales pitches for these products might attempt to scare or confuse investors.”
• Penny stocks. These are stocks that are generally not listed on NASDAQ or the NYSE and trade below $5. Brokers and brokerage firms who recommend these must comply with the SEC provisions, including many different disclosure obligations and a duty to approve each transaction and get the customer’s written confirmation. Penny stocks are very speculative, lack liquidity, and are difficult to value, making them high-risk investments.

Brokers and investment fraud lawyers that fail to exercise their fiduciary duties, fail to supervise their brokers, and fail to recommend suitable investments can and should be sued for negligence or fraud. Other legal claims may also apply.