Experienced Attorneys Explain the Risks Involved for Investors When Brokerage Firms Offer Unsubstantiated Credit Default Swaps
Holding investment firms liable for lack of due diligence
A broker or investment firm can only offer advice based on experience and research. A good broker will have many resources and years of experience to draw from when advising clients about potential investment opportunities to best meet their needs. However, with credit default swaps, investment professionals often fail to perform sufficient research into the fiduciary credentials or fully explain the process to their clients, leading to financial losses for the investor.
At The Frankowski Firm, our legal team works to right injustices perpetrated by misinformed or malicious brokers and investment firms. Our trusted professionals have the knowledge and skill needed to educate and fight for investors who have suffered financial losses.
What is a credit default swap?
The premise of a credit default swap is similar to an insurance policy against any losses on the investment, usually a debt. The investor makes a series of payments to the seller of the swap (a type security called a derivative), and in turn is promised a financial payoff if the debt goes into default. If the debt makes money, and the investor keeps any profit, minus the payments made for the credit default swap.
What can go wrong in a credit default swap?
In theory, a credit default swap is a fine option for an investor who is uncomfortable with the risk involved in buying a debt and who has sound advice from a reputable investment broker or firm. However, if any of the crucial elements is missing, the investor may be risking more than he or she realizes. A CDS can go wrong because of:
- Failure to perform due diligence. The broker’s responsibility is to fully investigate the risk involved in the debt, the credentials of the seller of the credit default swap, and the suitability of the investment for the client. Lack of assiduity in this area can lead to even a well-intended broker making unsuitable suggestions to his or her clients, resulting in serious financial losses.
- Misrepresentation of the debt. Unlike with the failure to perform due diligence, misrepresentation of the debt involves more than a well-intended but unwise suggestion from a broker. Instead this issue arises when a broker intentionally misleads the client about the risks, terms, or fees involved with the debt or if the broker has any conflicts of interest in the investment.
- Misrepresentation of the CDS itself. This situation arises again out of malicious intent from a broker who, for some reason, makes plausible but untrue statements about the costs, payout, or terms of a credit default swap, leading innocent investors into precarious financial risks.
- Lack of oversight. Credit default swaps are not overseen the same way as traditional investments are through the SEC and FINRA. This can lead some unscrupulous brokers to attempt to undermine the integrity of the system, take advantage of the opacity of the interactions between the buyer and seller of the credit default swap and play both sides of table in order to make a personal profit. This is unethical and a prosecutable offence.
If you have sustained financial losses through credit default swaps, The Frankowski Firm may be able to help. Our team of securities fraud attorneys fight on behalf of investors in both FINRA arbitration and civil trials.
Contact a trusted securities fraud attorney for help
Our lawyers have heard time and again from clients who were woefully and deliberately misinformed about the nature of the contract they had entered and lost money as a result. If you have had a negative experience with a credit default swap instigated by an investment firm or broker, call 888-741-7503 or complete our contact form to discuss your legal options with The Frankowski Firm.