Hedge Fund, Structured Product & Private Placement Fraud

Seek the Advice of a Skilled Attorney Who Understands These Complex Investments

Hedge Funds Are Not Suitable For All Investors

Hedge funds are very sophisticated investments that are typically reserved for high-net-worth investors with a high risk tolerance. It is a very narrow category of investors who are suitable for these types of investments, and brokers need to be extremely careful about who they solicit to invest in them. Almost all hedge funds are private investment funds, meaning they are not registered with the U.S. Securities and Exchange Commission (SEC) and do not disclose anything to the public about management, their financial condition or the investments made by the hedge fund managers.  In the last decade, there have been numerous instances of hedge fund fraud, where managers have misrepresented themselves or the performance of the hedge funds. Some hedge fund managers have diverted investors’ funds to themselves and perpetrated Ponzi Schemes by making returns to older investors with new investors’ money deposited into the hedge funds.

Funds Of Hedge Funds Are Just As Risky

An investment in hedge funds was generally limited to the very wealthy and most sophisticated investors and large financial institutions. Many investors were unable to participate in what they misperceived to be well managed investments with high returns. So Wall Street created investment companies to invest in hedge funds and offered investments in their companies to the less wealthy and unsophisticated investors to meet that demand (Funds of Hedge Funds). While most of these Funds of Hedge Funds are registered with the SEC and have publicly available information about them, little is known about the underlying hedge funds in which they invest. The managers of the Funds of Hedge Funds are often kept in the dark like the others by the managers of the hedge funds. These investments are just as complex and illiquid as the hedge funds themselves and even more expensive in terms of management fees because you have two sets of managers taking their cut before investors get their share of profits.

Structured Product Investors Are Easily Mislead By Brokers And Advisors

Unlike hedge funds, almost all structured products are registered with the SEC and sold sometimes by brokers and advisors using the brokerage firm’s fancy brochures. But who really understands those structured product disclosures? Here is how one brokerage firm attempted to answer the simple question: 

What Are Structured Products?

In very general terms, structured products are securities whose value is derived from, or based on, a reference asset, market measure or investment strategy. Reference assets and market measures may include a single equity or debt securities, indexes, commodities, interest rates and/or foreign currencies, as well as baskets of these reference assets or market measures.

Do you understand structured products now? Of course not, and FINRA has been cautioning brokerages and investors about structured product sales abuses for years, but the firms keep churning them out and the sales force keeps pushing them on investors seeking to protect their investment capital and earn more income. 

Retail investors, mostly seniors seeking to protect their retirement savings and support themselves with investment income, are easily mislead into making these investments by omission;  that is, the broker or advisor failing to understand and make a “balanced presentation” of the true nature, mechanics and risks of the investment. These investments are unsuitable for most retirees because there are real risks: the loss of all your principal despite being called “100% Principal Protected Notes” (Remember what happened to investors in the Lehman Bros. notes? Worthless!);  the market prices are not stable and fluctuate based upon the many factors affecting the underlying assets; credit risk; the issuers can redeem or “call” many of them at their discretion at a price less than what you paid; and even at maturity, you may not receive back all of your investment capital. Most structured products are sold in the secondary market without written disclosures, and if your broker or advisor recommended any structured product without a full explanation of the true nature, mechanics and risks, you probably have a good structured product fraud claim to file and recover your investment losses.

Private Placement Investments Are Not Exempt From Fraud Claims

Private placements of securities are supposed to be investments that are only offered to wealthy or sophisticated people known as “accredited investors.”  If the company and salespersons offering the securities follow the rules, the securities can be sold lawfully without registering them with the SEC or state securities regulators where they are sold. While they may be exempt from the registration provisions, they are not exempt from the anti-fraud provisions of the Federal or state securities laws. 

The common fraud associated with private placements is a broker or advisor misrepresenting an investor’s income, net worth or investment experience to the issuer in order to qualify the investor for participation in the offering. So be careful what you sign and make sure the investor questionnaire is an accurate portrayal of you as an investor. Next, be aware of the fact that the private placement offering mechanism is generally used by start-up companies with little or no history of operations, and any broker who makes investment performance projections is probably doing so without any reasonable basis and perpetrating a fraud. These investment vehicles are not supposed to be solicited by any broker, so be wary of “cold call” solicitations of private placement investments because they are probably coming from a “boiler room” loaded with unscrupulous salespersons whose only motivation is the high sales commission associated with these private placement investments.

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