What Is Hedge Fund Fraud?

Hedge funds are an increasingly popular investment tool, often suggested as an alternative to other pooled fund investments. However, because the Securities and Exchange Commission (SEC) provides less regulation over them, hedge funds carry a greater risk. Over the past two decades, investors have lost billions of dollars to fraud involving hedge funds. As an investor, it is important to be aware how hedge funds operate and how they can be fraudulent. If you believe you’ve been the victim of investment fraud, contact an investment fraud attorney right away. They can assess your case and advise you on your potential options for recovery. What Is a Hedge Fund? Simply put, hedge funds are a type of investment partnership. Like a mutual fund, a hedge fund is built from the pooled funds of many different investors. These investors give their money to fund managers, who invest it according to the fund’s overall objectives. Hedge funds are an attractive option to many investors because they are more aggressively managed than other investment vehicles. Hedge funds invest in a variety of non-traditional assets beyond stocks and bonds, including foreign currencies, real estate markets, and even derivatives. This kind of investment strategy does have its benefits. At the same time, however, the enormous complexity of hedge funds makes them a higher risk. Investors may not know exactly how their money is tied up at any given time. What Is Hedge Fund Fraud? There is no single way that hedge fund managers defraud investors. Instead, hedge fund fraud can take the form of several common types of investment scam, including: Embezzlement; Insider trading for the personal benefit of the hedge fund managers; Securing an investment through misrepresentations about about the investments within the fund or its promised returns; Securing your investment without properly disclosing the risks of the fund; and Hiding investment losses. Occasionally, a hedge fund covers up an outright investment scam from the beginning. Bernie Madoff’s infamous Ponzi scheme, for example, involved a hedge fund. Many hedge funds are legitimate, but investors must always be wary of who is managing their money. What Are the Signs of Hedge Fund Fraud? As with other types of investment fraud, hedge fund fraud can take a number of forms. In general, however, if the promises made about a hedge fund seem too good to be true, they probably are. No two hedge fund fraud cases are exactly alike, but there are several red flags you can look for. When researching a potential investment, pay attention to Promises of excessive returns; Promises of consistent returns regardless of market strength; Vague or complicated communication about your investment; Whether an independent accounting firm regularly audits the fund; and Whether the fund has a balance of liquid and illiquid investments. In addition, the conduct of a hedge fund manager is a good way to judge the legitimacy of a hedge fund. Unlike brokers at a brokerage firm, hedge fund managers do not receive commissions for the securities they sell. Instead, reputable hedge funds charge a management fee of between 1% and 4% of the total assets managed and a performance fee based on the total profit the fund generates. If you plan to invest in a hedge fund and the manager indicates that they are paid on commission, it’s probably best to stay away. Why Is Hedge Fund Fraud So Common? Hedge funds have two primary characteristics that make them a prime target for investment fraud. First, compared to other investments, hedge funds are relatively unregulated. And second, hedge funds involve larger investments and wealthier investors. Hedge Funds Operate with Less Oversight from the SEC Hedge fund fraud is more common because hedge funds operate with less oversight from the SEC. The SEC requires certain types of investment companies to register with the Commission before commencing operations. As a condition of registration, these companies must file certain reports with the SEC. This additional oversight makes it harder for these regulated investment funds to engage in fraudulent behavior. Hedge funds organize themselves as private investment limited partnerships so that they fall within an exception to these registration requirements. This exception allows hedge funds to operate without registering with the SEC and exempts them from the same mandatory reporting requirements as registered investment companies. Hedge Funds Involve More Money Compared to Other Funds Hedge funds are a common target for investment fraud because they involve investors with a higher net worth than in other pooled funds. Compared to other types of investments, hedge funds require sizable upfront investments to join. What’s more, the SEC permits only accredited investors to trade in unregistered securities. The SEC considers an investor to be “accredited” if they have an individual income in excess of $200,000 per year or a net worth of more than $1 million. In August 2020, the SEC amended the definition of “accredited investor” to include investors that meet certain minimum thresholds of professional knowledge, experience, or certifications. In a sense, accredited investors are those that the government believes are sophisticated enough to make riskier investment decisions on their own. However, even diligent and knowledgeable investors may fall victim to particularly clever investment fraud schemes. Unscrupulous hedge fund managers know this and may see these wealthy investors as an opportunity for fraud. Should I Hire an Investment Fraud Attorney? If you’ve suffered investment losses after investing in a hedge fund, it is important to speak with an investment fraud attorney right away. As an investor, there are a number of legal theories on which you can rely to hold a hedge fund and its managers liable for your losses. For example, even though hedge funds are not required to register with the SEC, hedge fund managers are still investment advisers obligated to act as fiduciaries to their investors. As fiduciaries, hedge fund managers owe both a duty of loyalty and a duty of care to their investors Thus, in addition to claims for misrepresentation, breach of contract, or other theories of liability, hedge...

Continue Reading

How To Recover Your Investments from a Ponzi Scheme

If you are an investor who has suffered investment losses as a result of a Ponzi scheme, you’re not alone. In fact, Ponzi schemes are reaching levels that haven’t been seen in a decade, putting many investors in a difficult position. Losing your hard-earned money to a Ponzi scheme can be devastating. And frequently, it can also be surprising. This is because many investors often don’t realize they’ve fallen victim to a Ponzi scheme until it’s too late.  While this can be difficult to process, know that it’s not the end of the road. There are ways that you can fight to recover your investments.  If you need help figuring out how to recover from a Ponzi scheme, the Law Offices of Robert Wayne Pearce, P.A., is ready to help. Investment loss attorney Robert Pearce specializes in getting individuals their money back from bad investments. He has been helping his clients recover for over 40 years and will fight to do the same for you.  Ponzi Schemes: An Overview According to one source, there were an estimated 60 Ponzi schemes uncovered in 2019. In total, these schemes resulted in $3.245 billion in losses to investor funds.  But what exactly is a Ponzi scheme?  Knowing the answer to this question can help you identify whether you may have fallen victim to a Ponzi scheme. If you have, contact our team today to find out how we can help you recover.   Where Does the Name “Ponzi” Scheme Come From? In the 1920s, a man named Charles Ponzi promised investors they would receive a 50% return within 45 days by purchasing discounted reply coupons in other countries and redeeming them at face value in the United States as a form of arbitrage. Ponzi, in reality, was using the funds of later investors to pay the earlier investors to fund his scheme.  Ponzi operated this scheme for over a year, resulting in over $20,000 in losses to investors. What Is a Ponzi Scheme?  A Ponzi scheme is a form of financial fraud. Typically, a ponzi scheme operates by inducing investments from unsuspecting investors often by promising high, risk-free returns over a short period of time from a purportedly legitimate business venture.  In a Ponzi scheme, money funded by new investors is used to pay returns to older investors, rather than money actually made by the purported business. Essentially, the scheme relies on the constant flow of new investor money to survive.  Key Elements of a Ponzi Scheme A Ponzi scheme is a specific type of investment fraud that has a few distinct characteristics. The key elements of a Ponzi scheme involve: Using new investor funds to pay earlier investors; Representing that the returns are generated from a purported business venture; and Attempting to hide the lack of economic success of the purported venture or defer the realization of loss. If these elements exist in your scenario, there is a chance you may be the victim of a Ponzi scheme. An investment loss attorney can help you determine whether this may be the case and what you can do to recover.  Warning Signs of a Ponzi Scheme Knowing the definition of a Ponzi scheme is one thing. But being able to identify one is another thing entirely.  In fact, identifying a Ponzi scheme is more difficult than you might think. However, knowing the warning signs of a potential Ponzi scheme is the first step to avoid potentially being involved in one.  The Securities Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have published a list of characteristics that are common to most Ponzi-like schemes. When attempting to identify a potential Ponzi scheme, look for these red flags. Promises of High Returns with Little to No Risk All investments inevitably carry some risk. Thus, any promise of a “guaranteed” high-return investment should be treated with skepticism. Typically, investments that yield high returns are riskier than investments that yield low returns. If the promise of returns seems “too good to be true,” it probably is. Overly Consistent Returns It is well-known that the market can be very volatile. Thus, investments usually go up and down over time, rather than remaining constant or going up consistently without any fluctuation.  If you are receiving all positive returns, even during times of market volatility, this could be a red flag. Seek more detailed information about your investments, and if something seems off, contact an attorney to discuss your options.  Unregistered Investments You should always be weary of investments that are unregistered.  Registration provides investors with access to important information about the company offering the investment. If a broker is selling or recommending investments that are unregistered, this may be a sign of a potential Ponzi scheme.  Unlicensed Sellers Always be suspicious of sellers who claim they are exempt from licensing.  In fact, federal and state laws require sellers to be licensed or registered. Many Ponzi schemes involve unregistered sellers or unregistered broker-dealers. Difficulty Receiving Payments As an investor, you should have the ability to cash out your investments when you choose to do so.  If you are unable to cash out your investments easily or if you have received multiple offers to “roll over” your promised payments for an even higher return, this could be a red flag.  I May Have Invested in a Ponzi Scheme—Now What Can I Do? If you believe you might be the victim of a Ponzi scheme, you might feel tempted to give up. But don’t do so quite yet.  Parties that defraud investors through a Ponzi scheme can be held liable for the losses caused by their actions. This includes brokers, financial advisors, and brokerage firms.  Additionally, if a broker-dealer is registered with FINRA, you may be able to file a FINRA arbitration against the broker who defrauded you and caused you to lose money.  So what’s next? Here’s what you need to know about how to recover from a Ponzi scheme.  Gather All Relevant Information If you suspect that you are...

Continue Reading

LPL Financial LLC Sued For Scott Lanza’s Sales Of REITs And BDCs

LPL Financial LLC (“LPL”) is a securities brokerage firm with offices in Boca Raton, Florida and elsewhere. It is regulated by Financial Industry Regulatory Authority (“FINRA”).  LPL offered and sold to Claimants the investments at issue in this arbitration, namely, non-traded Real Estate Investment Trusts and Business Development Companies through Scott Lanza (“Mr. Lanza”) an individual registered with FINRA as an “Associate Member” of LPL.  The brokerage firm LPL has been sued because it is vicariously liable for Mr. Lanza’s acts, omissions and other misconduct described more fully herein.

Continue Reading

Non-Discretionary vs. Discretionary Investment Accounts

When investors first set up an account with a brokerage firm, that account is designated as either discretionary or non-discretionary. Unfortunately, many investors are simply unaware of the status of their account or what it means. This is usually because investment brokers fail to properly explain each type of account. However, knowing what kind of investment account you have is important. The claims available to a victim of investment fraud or broker misconduct depend on the status of your account. Discretionary vs. Non Discretionary Accounts A discretionary account is an investment account in which an investment advisor has the power to make individual trades without requiring client approval. A non-discretionary account is one in which the client has complete control over whether or not to execute a trade. Need Legal Help? Let’s talk. or, give us a ring at 561-338-0037.

Continue Reading