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Investors With “Blown-Out” Securities-Backed Credit Line and Margin Accounts: How do You Recover Your Investment Losses?

If you are reading this article, we are guessing you had a bad experience recently in either a securities-backed line of credit (“SBL”) or margin account that suffered margin calls and was liquidated without notice, causing you to realize losses. Ordinarily, investors with margin calls receive 3 to 5 days to meet them; and if that happened, the value of the securities in your account might have increased within that period and the firm might have erased the margin call and might not have liquidated your account. If you are an investor who has experienced margin calls in the past, and that is your only complaint then, read no further because when you signed the account agreement with the brokerage firm you chose to do business with, you probably gave it the right to liquidate all of the securities in your account at any time without notice. On the other hand, if you are an investor with little experience or one with a modest financial condition who was talked into opening a securities-backed line of credit account without being advised of the true nature, mechanics, and/or risks of opening such an account, then you should call us now! Alternatively, if you are an investor who needed to withdraw money for a house or to pay for your taxes or child’s education but was talked into holding a risky or concentrated portfolio of stocks and/or junk bonds in a pledged collateral account for a credit-line or a margin account, then we can probably help you recover your investment losses as well. The key to a successful recovery of your investment loss is not to focus on the brokerage firm’s liquidation of the securities in your account without notice. Instead, the focus on your case should be on what you were told and whether the recommendation was suitable for you before you opened the account and suffered the liquidation. Should either one of those leveraged accounts have been recommended at all by a financial advisor in the first place? Should the broker-dealer have even allowed you to open one of those type of accounts based upon your investment profile and financial condition? Did the financial advisor misrepresent the nature, mechanics, and/or risks of the securities backed line of credit and/or margin account? Once the accounts were opened, did the financial advisor make unsuitable securities recommendations to purchase especially volatile securities in that account? Did the financial advisor recommend that you over-concentrate your investment portfolio in stocks in any particular sector (such as the oil and gas, hospitality, gaming, air travel, and/or cruise industry) in the leveraged account? Those are the facts and circumstances that probably caused losses but may give you an opportunity to recover all or some of your losses from your stockbrokerage firm. The leverage and liquidation to meet margin calls with or without notice probably only magnified and accelerated the inevitable losses. Your stockbroker had a duty to not only understand but explain the nature, mechanics and all of the risks associated with those investments before he/she sold them to you! Your stockbroker also had a duty to make sure they were suitable investments before they were recommended in light of your risk tolerance and financial condition and not over-concentrate investments in volatile emerging market stocks or any industry in your portfolio. Leveraged investments are not suitable for clients with conservative and moderate risk tolerance. All securities-backed lines of credit and margin accounts employ leverage, and leverage is a “speculative” investment strategy. Individuals close to retirement who are depending upon income from their investment portfolio cannot afford to speculate in leveraged accounts. If your financial advisor misrepresented the nature, mechanics, and/or risks of those accounts; or the investments or the risks were not fully explained; or you were over-concentrated (more than 10%) in any investment sector; or if it was not in your best interest (or unsuitable); and your investments were liquidated with or without notice due to margin calls, you may have the right to bring an arbitration claim against your financial advisor and/or the brokerage firm who employed him. One thing is certain, there is no way you will recover your losses in any SBL or margin account case without some legal action. At The Law Offices of Robert Wayne Pearce, P.A., we represent investors in investment disputes for misrepresented and unsuitable investments in FINRA arbitration and mediation proceedings. The claims we file are for fraud and misrepresentation, breach of fiduciary duty, failure to supervise, and unsuitable recommendations in violation of SEC and FINRA rules and industry standards. Attorney Pearce and his staff represent investors across the United States on a CONTINGENCY FEE basis which means you pay nothing – NO FEES-NO COSTS – unless we put money in your pocket after receiving a settlement or FINRA arbitration award. Se habla españolCONTACT US FOR A FREE INITIAL CONSULTATION WITH EXPERIENCED SBL AND MARGIN ACCOUNT INVESTMENT FINRA ARBITRATIONS ATTORNEYS The Law Offices of Robert Wayne Pearce, P.A. have highly experienced lawyers who have successfully handled many SBL and margin account “blow-out” cases and other securities law matters and investment disputes in FINRA arbitration proceedings, and who work tirelessly to secure the best possible result for you and your case. For dedicated representation by an attorney with over 40 years of experience and success in SBL and margin investment cases and all kinds of securities law and investment disputes, contact the firm by phone at 561-338-0037, toll free at 800-732-2889, or via e-mail.

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Regulation Best Interest (Reg. BI): Better But Not the Best!

Finally, ten years after the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) was enacted to bring about sweeping changes to the securities industry, the best regulation the U.S. Securities & Exchange Commission (“SEC”) could pass, SEC Regulation Best Interest, is now the law governing broker-dealers giving investment advice to retail customers. Although the SEC had the authority to impose a uniform and expansive “Fiduciary Duty” standard throughout the country upon broker-dealers and investment advisors, it yielded to the stock brokerage industry demands and enacted Regulation Best Interest (“Reg. BI”), which is better than the Financial Industry Regulatory Authority (“FINRA”) “Suitability Rule,” but not the best that it could have been done to protect investors. Last month FINRA amended its Suitability Rule to conform with SEC Reg. BI and made it clear that stockbrokers now uniformly have duties related to disclosure, care, conflicts and compliance, which are equivalent to the common law “fiduciary duty” standard when making recommendations to retail customers. See, FINRA Regulatory Notice 20-18. 1 The controversy of the standard of care applicable to stockbrokers in a non-discretionary account relationship with their customers has been ongoing for decades. Broker-dealers have long advocated for two standards: one standard being a non-fiduciary standard governing the non-discretionary account relationship and a fiduciary standard only governing the stockbroker with a discretionary account relationship. On the other hand, the investment advisory firms have been crying foul for years and advocating for a level playing field where stockbrokers and investment advisers alike are both held to the same “fiduciary” standard in their entire relationship with customers. The investment advisory industry recognized the importance of working in the “best interest” of their clients all of the time and the damage that stockbrokers (who are held to a lower standard) do to the reputation of “investment advisers,” especially those stockbrokers palming off the name “advisers” when doing business with the public. Stockbrokers were able to take advantage of the goodwill and trust associated with “investment advisers” but not accountable to their clients as “fiduciaries.” At the very least, the public was confused about the kind of “adviser” they were dealing with and the degree of investment professional duties the “adviser” owed to them. The SEC recognized that although Congress, in enacting Dodd-Frank authorized it to impose a uniform “fiduciary” standard on stockbrokers, it was not going to do so. It made that decision after the Trump administration took control. Are you surprised? The SEC’s public rationale was a bogus cost factor consideration; it reasoned if the standard was elevated broker-dealers would have to increase the transaction costs to investors with non-discretionary accounts to offset the increased compliance costs. The SEC supposedly wanted to avoid destroying the commission-based broker-dealer business model but expand broker-dealer and stockbroker obligations when they give advice to retail investors. The compromise was Reg. BI which I will attempt to summarize below. First, it is important to point out the new regulation only imposes new obligations upon broker-dealers and their associated persons when making recommendations to natural persons or their personal representative, such as trustees, executors, etc., who are retail customers (not institutions). It’s unclear whether an individual’s wholly owned corporation or family limited partnership would reap any benefit from the new “best interest” rule even though those entities would probably be relying on recommendations for “personal, family or household purposes.” Second, Reg. BI only applies to broker-dealers and their stockbrokers when they make recommendations of any securities transaction or investment strategy involving securities (including securities account type recommendations) to a retail customer. Next, in general terms, the “Best Interest” rule imposes four obligations upon broker-dealers and their associated persons: Disclosure: to provide disclosures about the type of relationships they will have with their customer before or at the time of any recommendations (which will probably be buried somewhere in their website or the fine print of the 80-100 page customer agreement and disclosure booklets only made available via the internet when the account is opened). Due Care: to exercise reasonable diligence, care and skill in making the recommendation. Conflicts: to establish, maintain, and enforce written policies and procedures reasonably designed to address conflicts of interest, preferably to avoid or mitigate them and if they cannot be avoided to make sure they are disclosed to the retail customer in a way the customer will understand the conflict and appreciate its impact on the recommendation. Compliance: to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg. BI. It goes without saying that the new SEC rule also requires broker-dealers to comply with new recordkeeping requirements to be sure Reg. BI is being implemented and enforced. To retail investors, the “Due Care” and “Conflict” obligations will hopefully have the greatest impact. This is because up until this point in time, broker-dealers and their stockbrokers would say, if we can match an investment recommendation to a customer’s profile, we have done our job and complied with FINRA Rule 2111 (formerly NASD Rule 2310), end of story. For example, in the past, the recommendation of high fee proprietary structured products might fit the customer’s profile and be a suitable recommendation. However, now that type of investment might not be in the “best interest” of the retail customer, particularly if the risk-reward analysis of another non-proprietary, plain vanilla, and less expensive security is the same. To make it clear that Rule 2111 was no longer the rule when it came to future recommendations to retail customers, FINRA amended its rule (effective June 30, 2020) to state that Rule 2111 no longer applies to recommendations governed by Reg. BI because Reg. BI incorporates and enhances the principles found in Rule 2111. Some writers of blogs for the defense bar have focused only on the Due Care obligation and said nothing has changed from the old suitability rule. If that were true, the SEC and FINRA would have said so and the new rule would be meaningless! Instead FINRA said it “incorporates and enhances the...

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FINRA Arbitration: What To Expect And Why You Should Choose Our Law Firm

If you are reading this article, you are probably an investor who has lost a substantial amount of money, Googled “Securities Arbitration Attorney,” clicked on a number of attorney websites, and maybe even spoken with a so-called “Securities Arbitration Lawyer” who told you after a five minute telephone call that “you have a great case;” “you need to sign a retainer agreement on a ‘contingency fee’ basis;” and “you need to act now because the statute of limitations is going to run.” You may want to ask yourself whether that attorney is as bad as the stockbrokers you were concerned about in the first place. Some attorneys will rush you to hire them before you speak to anyone else and not tell you about the clause in their contract that allows them to drop you as a client later on if they cannot get a quick settlement. They will solicit you without a real case evaluation and/or without any explanation of Financial Industry Regulatory Authority (“FINRA”) proceedings. The scenario above is not the way for attorneys to properly serve clients, and it is not the way we do business at The Law Offices of Robert Wayne Pearce, P.A. If you are planning on speaking or meeting with us or any other attorney, let us introduce you to the FINRA arbitration proceeding by giving you some information in advance to help you understand the different stages of FINRA arbitration, what you should expect from skilled and experienced FINRA securities arbitration lawyers, and what you should expect to personally do in order to have the best outcome: 1. CASE REVIEW Before we accept any case, our attorneys conduct a thorough interview of you to understand: the nature of your relationship with your broker; the level of your financial sophistication; the representations or promises made to you in connection with any investment recommendation; and your personal investment experience, investment objectives, and financial condition at the time of any recommendation or relevant time period. We will review your account records, including, but not limited to: account statements; confirmations; new account opening documents; contracts; correspondence; emails; presentations; and marketing materials that you may have received in connection with your accounts and the investments made therein, etc. Investors rarely contact our office without knowing whether they have suffered investment losses, but sometimes that occurs because the particular investor does not have all their records and/or is unsophisticated, inexperienced, and unable to decipher the account records they retained. If you retained your account statements and provide them, we should be able to at least estimate (under the different measures of damages) the amount you may be able to recover if you win your arbitration proceeding. If you do not have those records, we will help you retrieve them without any obligation so that all of us are fully aware of the amount we may possibly recover for you if we are successful in arbitration. In addition, we will spend the time necessary to get to know you and the facts of your dispute to have a good chance of success in proving your case. After all, it does not benefit either you or our law firm to file an arbitration claim that, months or years later, we discover has little chance of success. Ultimately, we want to know, and so should you, whether or not you have a claim with merit and are likely to recover damages if we go through a full arbitration proceeding. The fact is Attorney Pearce does not take cases unless he and his team believe you suffered an injustice and are likely to succeed at the final arbitration hearing. 2. THE STATEMENT OF CLAIM Many of these young and/or inexperienced attorneys with flashy websites and Google Ad Word advertisements (to get them to the top of the page) are more interested in marketing and signing up cases to settle early than they are in going all the way and winning your case at a final arbitration hearing for a just result. Oftentimes, they will insert your name in a form pleading, one that they use in every case, which states little more than if you (the “Claimant”) were an investor with brokerage firm ABC and stockbroker XYZ (the “Respondent(s)”) made misrepresentations, failed to disclose facts, made unsuitable recommendations, and violated laws 123, you are entitled to damages. They are unwilling and/or fail to take the time necessary to study the strengths and weaknesses of your case and write a detailed Statement of Claim (also referred to as the “Complaint”) with all of the relevant facts necessary to inform the arbitrators what happened and why you are entitled to recover your damages. That is not the way Attorney Pearce, with over 40 years of experience with investment disputes, files a Statement of Claim, the first and sometimes the only document that the arbitrators will read before the final arbitration hearing. 3. THE ANSWER After we file the Statement of Claim and it is served, the brokerage firm and/or stockbroker will have forty-five (45) days to file the Answer to your allegations. Oftentimes, the Respondent(s) will ask for an extension of time to file the Answer and we will give it to them provided no other deadline is extended, particularly the deadlines associated with the selection of arbitrators and scheduling of the initial pre-hearing conference, where all of the other important deadlines and dates of the final arbitration hearing are scheduled. Some clients have asked why would you give them extra time to file their best Answer? Well, we believe after 40 years of doing these FINRA arbitrations, that it is better to know the story they intend to tell the arbitrators early on and lock them in so we can come up with the best strategy and all the case law necessary to overcome their best defenses and win your arbitration. In other words, we would rather know about the defense early on than be surprised at the final hearing. Besides, Respondent(s) can always try to file...

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A Stockbroker’s Introduction to FINRA Examinations and Investigations

Brokers and financial advisors oftentimes do not understand what their responsibilities and obligations are and what may result from a Financial Industry Regulatory Authority (FINRA) examination or investigation. Many brokers do not even know the role that FINRA plays within the industry. This may be due to the fact that FINRA, a self-regulatory organization, is not a government entity and cannot sentence financial professionals to jail time for violation of industry rules and regulations. Nevertheless, all broker-dealers doing business with members of the public must register with FINRA. As registered members, broker-dealers, and the brokers working for them, have agreed to abide by industry rules and regulations, which include FINRA rules. In order to check for compliance with industry rules and regulations, FINRA conducts routine examinations or investigations of broker-dealers, which consist of inspections occurring once every one, two, or three years depending on the firm’s business model, its size, and its perceived risks. FINRA may also conduct an examination if it has reason to believe that a rule violation has occurred – an examination may be initiated based on a Form U-4 or U-5 disclosure, a customer complaint, an arbitration claim, information received from another regulator or law enforcement agency, or information received in the form of tip from a competing broker-dealer. The purpose of the examinations is to make sure that a firm is operating with sufficient capital, is properly supervising it employees and business operations, and has proper internal systems and controls in place. The examinations generally focus on unethical sales practice behavior such as conversion of funds, forgery, theft, selling away, undisclosed outside business activities, unauthorized trading, unsuitable recommendations, and misrepresentations or omissions. Consulting an attorney is highly recommended when facing a FINRA examination because all brokerage firm “Members” and stockbroker “Associate Members” of FINRA have agreed to be subject to its jurisdiction, rules, procedures, disciplinary proceedings and sanctions which could have serious consequences. These disciplinary proceedings are like trials in a courtroom but under FINRA’s lopsided rules and procedures to the stockbroker’s disadvantage. You need to be on guard – FINRA can make referrals to the U.S. Securities & Exchange Commission (“SEC”) for injunctions, fines and/or to federal and state prosecutors for criminal prosecution. THE EXAMINATION PROCESS Upon initiating an examination, FINRA examiners will usually send a written request for information to the broker-dealer as well as to the broker, which seeks basic information about a complaint or other disclosure. A request letter to the broker will often ask for a written response to the allegation, and a request letter to the firm will usually seek a written narrative of the complaint or other disclosure and the firm’s findings. A request letter to a firm may also include a request for relevant documents such as communications with customers and account records. Once FINRA has obtained such information, it will determine whether the issue is one over which FINRA has jurisdiction. FINRA will also determine whether there is a potential rule violation or if any other threshold has been met, which would allow it to continue to review the matter at issue. Examiners obtain the vast majority of information needed to conduct an investigation through written correspondence. Letters requesting information and documents and responses to specific questions sent to firms, brokers, and involved personnel are not uncommon. In many cases, FINRA will require the broker to respond to a specific question with a signed, written statement. Brokers tend to receive two to four or more of such letters. In addition, examiners may conduct telephone interviews with brokers, managers, compliance employees, and customers to obtain relevant information. Although these interviews are considered informal, brokers should proceed with caution because anything they say may be used against them. The majority of examinations that lead to a disciplinary action include an on-the-record interview (OTR), which requires the broker or other associated persons of a firm to meet with the regulators. OTRs are similar to depositions taken in civil proceedings as the witness is sworn to tell the truth, a court reporter is present to record the interview, and transcript of the interview is prepared. Seeing as brokers are permitted to have a lawyer appear at the OTRs with them, brokers are encouraged to obtain legal counsel to assist in preparing for an OTR, for the OTR proceeding itself, and for any future enforcement action. As soon as the examiners believe that they have gathered all the relevant information, documents, and other evidence, a report of the examination is prepared and submitted to a supervisor. The supervisor’s role is to review the report and the evidence and make a recommendation to close the file without action, to pursue some type of informal disciplinary action, or to pursue a formal disciplinary action – matters may also be resolved through a combination of the foregoing choices. FINRA JURISDICTION AND IMPORTANT RULES Brokers should know that FINRA does not have jurisdiction over individuals not affiliated with the securities industry. Therefore, since FINRA cannot ask for or force cooperation from non-affiliated individuals, many examinations are never fully completed if such cooperation is necessary to establish evidence of a violation. This does not mean that brokers should encourage customers to avoid or not cooperate with the authorities because this is a violation of FINRA rules itself, which can lead to sanctions, Brokers should also know that they themselves are not obligated to respond to FINRA requests for information, but this decision may come with a significant price, such as a permanent ban from the industry. Still, FINRA makes use of Rule 8210, which serves as subpoena for FINRA examinations. Rule 8210 requires broker-dealers, registered representatives, and any other individuals subject to FINRA’s jurisdiction to cooperate in an examination and provide written, electronic, and oral information when requested. If a broker chooses not to respond, he or she may be barred from association from any FINRA member firm in any capacity in addition to other sanctions. This consequence may seem contrary to one’s 5th Amendment right...

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EquiAlt Private Placement Investments

We are investigating and representing investors against FINRA-registered brokerage firms and financial advisors who offered and sold securities issued by affiliates of EquiAlt, LLC (EquiAlt), a private real estate company which organized at least four private placements: EquiAlt Fund, LLC; EquiAlt Fund II,LLC; EquiAlt Fund III, LLC; and EA Sip, LLC (collectively referred to as the EquiAlt Funds). According to a recent SEC Complaint, Brian Davison (Davison) and Barry Rybicki (Rybicki) offered and sold $170 million of unregistered debentures issued by the EquiAlt Funds to over 1,100 investors nationwide. The SEC alleged that Davison, Rybicki, and others committed securities fraud by misrepresenting the debentures as “secure,” “safe,” “low risk,” and “conservative.” Further, while investors were promised “that substantially all of their money would be used to purchase real estate in distressed markets in the United States and their investments would yield generous returns … EquiAlt, Davison, and Rybicki misappropriated millions in investor funds for their own personal use and benefit.” According to the SEC, the revenues that were generated by the EquiAlt Funds became insufficient to pay the interest owed to investors. As a result, the SEC alleged “the Defendants resorted to [a Ponzi Scheme] fraud, using new investor money to pay the returns promised to existing investors.” While many of the sales were solicited by unregistered EquiAlt salespersons, it is reported there were many sales by small offices of registered salespersons associated with large independent FINRA-registered stockbrokerage and insurance firms primarily located in Florida, Arizona, California, and Nevada, and many other states nationwide. It is alleged that EquiAlt salespersons received “commissions of anywhere between 10%-14%,” which is extraordinarily high for the sale of any investment product. Thus, there was such a strong incentive to sell these debentures by any means. It is likely that many of the FINRA registered brokerage firms did not authorize sales of the EquiAlt Fund debentures and that no due diligence or any other investigation of the company or its investment offerings were ever conducted. Consequently, it is very likely that the EquiAlt Funds were sold via misrepresentations and misleading statements. We have learned that investors who purchased the EquiAlt Funds debentures through FINRA-registered brokerage firm representatives also received the same sales pitch; that is, the debentures are “secure,” “safe,” “low risk,” and “conservative” investments, which was untrue which constitutes securities fraud. If you invested in any of the EquiAlt Funds private placements, you may be able to recoup your losses through a FINRA arbitration proceeding. Mr. Pearce has over 40 years of experience with private placement investment disputes and recovering money for investors lost in Ponzi Schemes. The cases we accept will be filed against FINRA registered broker-dealers for misrepresentation, omissions due to failed due diligence, unsuitable investment recommendations, and unauthorized private securities transactions otherwise known as “selling away.” If Attorney Pearce accepts your case there will be no attorney’s fee or arbitration expenses unless we recover funds for you in a settlement with the brokerage or through an arbitration award. Call 1-800-SEC-ATTY (1-800-732-2889) or email us now and get your questions answered and top notch representation in connection with your EquiAlt Funds private placement investments. If you purchased your investment directly from EquiAlt or BR Support Services, your recovery will probably be limited to what assets the Court Appointed Receiver is able to locate, liquidate, and distribute to investors. However, please call us to find out what recourse is available for this investment fraud.

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Investigations and Prosecutions of Early Retirement Scams

Looking for fresh capital to invest in order to earn commissions, the early retirement scam has gained popularity among unethical investment advisors and brokers throughout the United States. The Law offices of Robert Wayne Pearce, P.A. is representing retirees who were tricked into taking lump sum retirement payments in lieu of the traditional pension payments they slaved away for many years with promises of greater growth and more income with little or no risk. We are also representing other baby boomers, near retirement, who were falsely promised security and income at an earlier stage in their life by accepting early retirement packages or just retiring early and cashing out their 401(k) plan. According to Attorney Pearce many investors have fallen prey to these schemes through elaborate seminars and financial projections that misrepresent or do not fully disclose all of the assumptions or the underlying projections and/or risks of the investment program. Representing clients throughout Florida and nationwide. Se habla español Too many retirees have elected the lump sum option based on the advice of trusted financial professionals. In these cases, the financial professional improperly recommended the lump sum option because that was the only way that his or her firm could gain control of the retirement assets and generate commissions. As a result, the investors sustained substantial losses and retained our law firm to recover their nest egg. For more information on Early Retirement Scams and our cases, click on the links below: Watch Out for Early Retirement Scams Regulation Best Interest (Reg. BI): Better But Not the Best! 72(t) Early Retirement-Not for me! FREE INITIAL CONSULTATION WITH ATTORNEYS WHO UNDERSTAND EARLY RETIREMENT SCAMS The Law offices of Robert Wayne Pearce, P.A. understands and has substantial experience with early retirement scams. We represent victims of such scams and constantly strives to secure justice. Attorney Pearce provides a complete review of your case and fully explains your legal options when you have been scammed out of your retirement funds by unscrupulous brokers and financial advisors. The firm works to ensure that you have all of the information necessary to make a sound decision before any action is taken in your case. For dedicated representation by a law firm with substantial experience in all kinds of securities, commodities and investment disputes, contact the firm by telephone at 561-338-0037 or toll free at 800-732-2889 or via e-mail. We may also be able to arrange a meeting with you at offices located in Boca Raton, Fort Lauderdale, Miami and West Palm Beach, Florida and elsewhere. 72 (t) Early Retirement-Not for Me! Watch Out for Early Retirement Scams

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SEC Halts Alleged EquiAlt Ponzi Scheme: How do Investors Recover Their Losses?

On February 11, 2020, the United States Securities and Exchange Commission (“SEC”) filed a Complaint for injunctive relief to halt an alleged ongoing fraud conducted by EquiAlt LLC (“EquiAlt”), a private real estate investment company that controlled the business operations of EquiAlt and its four real estate investment funds: EquiAlt Fund, LLC (“Fund I”); EquiAlt Fund II, LLC (“Fund II”); EquiAlt Fund III (“Fund III”); and EA SIP, LLC (“EA SIP Fund”) (collectively referred to as the “EquiAlt Funds”). Simultaneously, the SEC and filed an Emergency Motion to freeze all of the Defendant assets and appoint a Receiver to marshall all of the assets and take control of EquiAlt and the EquiAlt Funds. The Court entered an Order that granted the SEC’s request for Temporary Restraining Order and Asset Freeze and another Order Appointing a Receiver. According to the SEC, beginning in 2011 and up until it filed suit, Defendants EquiAlt, Brian Davison (“Davison”), and Barry Rybicki (“Rybicki”), through fraudulent unregistered securities offerings, raised more than $170 million from over 1,100 investors nationwide. The Defendants were supposed to invest all of the investors’ money in the EquiAlt Funds by purchasing real estate in distressed markets throughout the United States. The managers of the EquiAlt Funds were supposed to manage the real estate, pay high rates of returns to investors, sell the real estate for a profit, and then liquidate the EquiAlt Funds. Instead, according to the SEC, EquiAlt, Davison, and Rybicki misappropriated millions in investor funds for their own personal use and benefit. According to the SEC, the revenues generated by the EquiAlt Funds were insufficient to meet the interest rate obligations of the debentures sold to the investors. In addition, the SEC alleged Defendants Davison and Rybicki paid themselves millions from the EquiAlt Funds and spent it on automobiles, jewelry, and private jets. The insufficient cash flow due to operations and alleged misappropriation of funds supposedly led the Defendants to perpetrate the Ponzi Scheme fraud. As time went by, the Defendants allegedly sold more and more debentures and used the sales proceeds to pay the interest obligations to the earlier investors in the EquiAlt Funds. The SEC further alleged the investments – unregistered securities in the form of debentures issued by four real estate investment funds managed by EquiAlt – were falsely touted to investors as “secure,” “safe,” “low risk,” and “conservative.” The Defendants paid significant sales commissions to numerous unregistered sales agents who allegedly repeated the same misrepresentations and sold investments to unaccredited and unsophisticated investors in various states. Sadly, the combined assets of EquiAlt and its three active funds (Fund I, Fund II, and the EA SIP Fund) are insufficient to repay the principal and interest owed to investors. By December 2020, investors in these three funds will be owed approximately $167 million in principal and interest. However, as of November 2019, the assets of EquiAlt, Fund I, Fund II, and the EA SIP Fund total only $6.8 million in cash and real property purportedly worth $145 million based upon EquiAlt’s own inflated valuation. Thus, the combined assets of the three active EquiAlt Funds are insufficient to pay investors the principal and interest owed to them at the end of this year. The SEC suit has resulted in an Asset Freeze and appointment of a Receiver who has taken control of EquiAlt and all of the EquiAlt Funds. Since that appointment, the Receiver, in a letter to all investors, said he has stopped making any interest payments and will not return any principal invested in the EquiAlt Funds to investors while the suit is pending. The length of time before any investor will see any of their money again is uncertain and will depend upon: 1) whether the SEC proves its case of fraud or the Defendants settle and relinquish all right to the assets of EquiAlt and the EquiAlt Funds; 2) the Court Orders a liquidation of EquiAlt and the EquiAlt Funds and all other assets marshalled by the Receiver from the Defendants; and 3) the time it takes the Receiver to liquidate the assets and distribute the proceeds. It is fair to say this process will take years to complete. But one thing is certain, and that is investors will not receive back their entire investment due to the Defendants’ dissipation of assets and the Receiver’s fees and expenses, including attorney fees, to marshal the assets and liquidate them. And so, the investors in the EquiAlt Funds will need to take charge of their own case and hire their own attorneys to recover their losses from those who offered and sold the investment, such as attorneys, accountants, stockbrokers, insurance brokers and other salespersons. Attorney Pearce has over 40 years of experience with private placement investment disputes and recovering money for investors lost in Ponzi Schemes. If you invested in any of the EquiAlt Funds, you may be able to recoup your losses through a FINRA arbitration proceeding. We are reviewing and accepting EquiAlt Fund cases on a contingency fee basis, meaning you do not pay any fees or expenses unless we are successful in recovering money for you in a court or arbitration proceeding or settlement. The cases we accept will be filed against FINRA registered broker-dealers for misrepresentation, omissions due to failed due diligence, unsuitable investment recommendations, and/or unauthorized private securities transactions otherwise known as “selling away” in a FINRA arbitration proceeding. We may also group investors in lawsuits to be filed with the Receiver or other counsel against attorneys, accountants, and other unlicensed salespersons who are not subject to mandatory arbitration. Please complete the Contact Us form below for help recovering your EquiAlt Fund investment losses. Alternatively, call 1-800-SEC-ATTY (1-800-732-2889) or email us now and get your questions answered along with top-notch representation in connection with your EquiAlt Funds private placement investments. If Attorney Pearce accepts your case there will be no attorney’s fee or expenses charged unless we recover funds for you by judgment, award, or settlement.

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Oil and Gas Investment Attorneys

FLORIDA BASED ATTORNEYS HANDLING OIL AND GAS INVESTMENT CASES AND INVESTIGATIONS NATIONWIDE AND THROUGHOUT THE WORLD Just as the oil and as limited partnerships proliferated in the 1980s and 1990s, Wall Street has invented a new set of oil and gas energy sector products to capture more of your savings for themselves. These investments along with traditional stock and bond investments in the energy sector are aggressively promoted during the period of booming oil and gas prices and then abandoned when the energy sector market collapses leaving investors with huge losses. Attorney Pearce knows this market well because he has been representing investors in stockbroker disputes involving this sector since 1980, over 40 years. This is not a new phenomenon to financial advisors who have had many lessons over the years about the volatile nature of this market and when the market goes south they tell investors not to worry and to hold their investments because prices always rebound and investors will always recoup their investment capital placed in the energy sector. While that may have been true decades ago, some new products in the energy sector are leveraged multiple times and blow up permanently when the energy market tanks. Some of the more exotic structured oil and gas products have features which mandate liquidation at certain price points where investors lose any opportunity to participate in any energy sector market rebound. Other complex oil and gas investments involve the rolling of commodity futures contracts and/or option contracts that lose money when the market rebounds when investors thought the opposite was supposed to happen. Welcome to the new world of investing in the oil and gas market and the reason you need a knowledgeable, skilled and experienced FINRA arbitration lawyer to represent you when you have suffered an unreasonable amount of losses in your oil and gas market related investments. REPRESENTING CLIENTS THROUGHOUT FLORIDA, NATIONWIDE AND THE WORLD IN FINRA ARBITRATIONS Investing in the oil and gas market directly or indirectly is not for everyone. Investors must understand that all of the investments in the energy sector are volatile and therefore, risky investments. Even investments in the traditional dividend paying energy sector stocks are never guaranteed. Further, over-concentration of investor’s portfolios in this sector has been a perennial suitability problem. Lately, financial advisors have been pushing the more complex Exchange Traded Funds (ETFs), Exchange Traded Notes (ETNs) and other Exchange Traded Products (ETPs) tied indirectly to the oil and gas market through various indices that are often misunderstood by not only investors but the stockbrokers and investment advisors themselves. For more information about our oil and gas investment cases and investigations, click on the links below or just call us: Oil and Gas Investors: How Do You Recover Your Oil and Gas Investment Losses? CALL FOR YOUR FREE INITIAL CONSULTATION ABOUT YOUR OIL AND GAS INVESTMENT DISPUTE The Law Offices of Robert Wayne Pearce, P.A. understands what is at stake in all securities and commodities investments, particularly the many forms of oil and gas investments and risks associated with them. Attorney Pearce provides a complete review of your case and fully explains your legal options. He constantly strives to secure the most favorable possible result. Mr. Pearce and his team is careful to ensure that you have all of the information necessary to make a sound decision before any action is taken in your case. For dedicated representation by a law firm with substantial experience in all kinds of securities, commodities and investment disputes, particularly oil and gas investment disputes, contact the firm by telephone at 561-338-0037 or toll free at 800-732-2889 or via e-mail. Oil and Gas Investors: How Do You Recover Your Oil and Gas Investment Losses?

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Investing in the Stock Market: Part Four

SHORT SELLING Short selling is relatively complicated compared to conventional buy-and-hold transactions and involves many unique risks and pitfalls. As always, the investor faces high risks for potentially high returns. It is important to understand how the short sale process works before entering a short sale order. WHAT IS SHORT SELLING? When an investor is “long” on a stock, it means that he or she has purchased a stock expecting its price to rise in the future. Conversely, when an investor goes “short,” he or she is expecting a decrease in share price. Short selling entails selling stock that one does not own. More specifically, the seller sells the stock without owning it and promises to deliver it in the future. When a stock is sold short, the brokerage firm will lends it to the account owner. The stock will come from the brokerage firm’s own inventory, from a firm customer, or from another brokerage firm. After the order is entered, the shares are sold and the proceeds are credited to the account. To “close” the position, the same number of shares must be bought or “covered” and returned to the firm. If the price of the stock drops, shares can be bought back at the lower price and a profit is made on the difference. If the price of the stock rises, and shares are bought back at the higher price, a loss will be incurred. In most cases, a short position can be held for as long as the investor desires, but the margin account will incur interest charges, so keeping a short sale open can be costly. However, short sellers can be forced to cover if the brokerage firm wants the borrowed stock back. This is known as being called away, and it occurs because brokerage firms cannot sell what they do not have, so the short seller will either have to come up with new shares to borrow or cover the position. Being called away does not happen often, but it is possible if many investors are short selling a particular security. Since the short seller does not actually own the stock, the lender of the stock is entitled to any dividends or rights declared during the course of the loan. If the stock splits during the course of your short, twice the number of shares is owed but at half the price. WHY SHORT? Generally, the two primary reasons to enter into a short position are to either speculate or to hedge. SPECULATING Speculators watch for opportunities in the stock market to make a quick, big profit, but it is not without risk. Because of the risks involved, speculation has been likened to gambling and is perceived negatively. However, speculation can involve a calculated assessment of stock market risks and can be profitable when the odds appear to be favorable. Speculating is distinguished from hedging because speculators purposefully assume risk, whereas hedgers seek to mitigate or reduce it. Speculators can bring certain benefits to the market, such as increased trading volume and market liquidity. However, an irrational amount of speculation can contribute to an economic bubble and stock market crash. HEDGING The majority of investors employ short sale transactions for hedging. When investors hedge, they are protecting a long position with an offsetting short position, much like a form of insurance. However, hedging can also be expensive, and a basis risk can occur. RESTRICTIONS A number of restrictions govern the size, price and types of stocks traders are able to sell short. For example, penny stock short sales are prohibited, and most short sales must be executed in round lots. The Securities Exchange Commission (SEC) employs restrictions to prevent stock price manipulation. As of January 2005, short sellers are also required to comply with “Regulation SHO,” which modernized the rules overseeing short selling and sought to provide protection against “naked short selling.” For instance, sellers had to show the location and availability of the securities they intended to short. Regulation SHO also created a list of securities displaying high levels of failures to deliver. In July of 2007, the SEC eliminated the uptick, or zero plus tick, rule. This rule required that short sale orders be entered at a higher price than that of the previous trade. The rules intention was to prohibit short sellers from contributing to the downward momentum of a sharply declining stock. The rule has been in existence since the creation of the SEC in 1934. One year later, the SEC put a stop to market manipulations resulting from dispersion of negative rumors about a company. The SEC’s goal was to renew confidence in the wake of the credit crisis. For one month, the SEC did not allow naked short selling on 19 major investment and commercial banks, which included Fannie Mae and Freddie Mac. In September of 2008, the SEC took further action to minimize abuses. One notable action was the halting of short sales in shares of 799 corporations. The ban ended after a bailout plan worth $700 billion was passed in October 2008. WHO SHORTS? Short sellers are often portrayed as pessimists who are rooting for corporate collapse, but they have also been described as studied, disciplined and confident in their decisions. Short sellers are typically: Wealthy sophisticated investors, Hedge funds, Large institutions, and Day traders Short selling involves a great amount dedication to market and company analysis. The very basics that must be understood include: The nature of securities markets, Trading techniques and strategies, Market trends, and The company’s business operations THE TRANSACTION Suppose that after hours of detailed research and analysis, company XYZ is presumed dead in the water. The stock is currently trading at $65, but research and analysis results show it will trade much lower in the coming months. In order to capitalize on the anticipated decline, shares of XYZ stock are shorted. The following is how the transaction would unfold: Step 1: Open a margin account. Recall, a margin account allows one to borrow...

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Investing in the Stock Market: Part One

INTRODUCTION Depending on your investment profile, stocks can form a part of your investment portfolio. Before you start investing in stocks, you need to understand their nature and how they trade. Over the past half century, the general public’s interest in the stock market has grown substantially. What was once a toy of the rich has now become accessible to anyone seeking wealth. This newly developed demand coupled with advances in online trading technology allows anyone with investible cash to own stocks. Notwithstanding their popularity, most people do not fully understand stocks. To make matters worse, people often engage in conversation with others who also do not fully understand stocks. There is a good chance you have heard people make comments such as: “John made a killing in the market, and now he’s got another hot tip …” or “Watch out with stocks–you can lose your shirt in a matter of days!” Much of this misinformation is based on a get-rich-quick mentality. Some people even believe that investing in stock is the magic answer to instant wealth with no risk. The good new is that stocks can (and do) create massive amounts of wealth, but they are not without risks. The only solution to this is education. The key to limiting your risk and protecting your hard-earned capital is to do your homework before you put money in the stock market. DIFFERENT TYPES OF STOCKS There are two main types of stocks: common stock and preferred stock. COMMON STOCK When people refer to stocks they are usually referring to common stock. In fact, the majority of stock is issued in common stock form. Common shares represent an ownership interest in an entity and a claim, in the form of dividends, on a portion of that company’s profits. Although voting structures may vary, investors typically get one vote per share to elect the board members, who oversee management and their decisions. Over the long term, common stocks, by means of capital appreciation, have produced higher returns than almost any other security or investment. However, this higher return comes at a cost since common stocks are subject to a number of risks. For example, if a company goes bankrupt and liquidates, the common stock shareholders’ claims are inferior to bondholders and preferred shareholders. PREFERRED STOCK Preferred stock represents a lesser degree of an ownership interest in a company and usually does not offer the same voting rights as common stock, but this may vary among companies. One notable feature of preferred stock is that investors are usually guaranteed a fixed dividend. This is distinguished from common stock, which has variable dividends that are never guaranteed. An advantage of preferred stock is that in the event of liquidation, preferred stock shareholders are paid before common stock shareholders but only after debt holders’ claims have been satisfied. Preferred stock may also be callable, meaning that the company that issued the shares has the option to purchase or redeem the preferred shares from investors at anytime for any reason – for a premium in some events. Many investors consider preferred stock to be more akin to debt than equity or common stock. One way to categorize preferred stock is to view them as a hybrid of bonds and common stock shares. DIFFERENT CLASSES OF STOCK Common and preferred are the two main types of stock; however, it should be noted that companies oftentimes categorize stock into classes. The most common reason for classifying stock is the issuing company’s desire for the voting power to remain with a certain group. As a result, different classes of shares are given different voting rights. For example, one class of shares would be held by a select group of investors who are given five votes per share, while another class would be held by the majority of investors who are given one vote per share. When there is more than one class of stock outstanding, the classes are traditionally designated as Class A and Class B. For example, Berkshire Hathaway (ticker: BRK) has two classes of stock. The different classes of stock are identified by the letter after the ticker symbol or after the period in the ticker symbol: “BRKa and BRKb” or “BRK.A and BRK.B”. UNDERSTANDING VARIOUS WAYS STOCKS ARE DESCRIBED In addition to the classes a company might establish for its shares, industry experts often group stocks into sub-categories or subclasses. Common subclasses, explained in greater detail below, focus on the company’s market capitalization or size, sector, cyclical performance, and short and long-term growth prospects. Subclasses have their own characteristics and are subject to certain external pressures that can affect their performance at any given time. Each individual stock’s behavior can be subject to a variety of factors as a result of its subclass(es). MARKET CAPITALIZATION If you follow investments news, you have probably heard the terms “large-cap, mid-cap, and small-cap.” These descriptors refer to company market capitalization, which is sometimes shortened to market cap. Market cap is a measure of a company’s size. Specifically, it is the dollar value of the company and is calculated by multiplying the total number of outstanding shares by the current market price. There are no fixed value ranges for large-, mid-, or small-cap companies, but you may find small-cap companies valued at less than $1 billion, mid-cap companies valued between $1 billion and $5 billion, and large-cap companies valued over $5 billion; the numbers could very well be twice those amounts. In addition, micro-cap companies are less capitalized than small-cap companies. Large-cap companies tend to be less vulnerable to volatility or the ups and downs of the economy than small-cap companies because large-cap companies typically have larger financial reserves and can afford to absorb losses and bounce back more quickly from a bad year. However, even the largest and most well-capitalized companies can fail. At the same time, small-cap companies may have greater potential for fast growth in an economic upswing than large-cap companies. Even so, there is no guarantee...

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72 (t) Early Retirement-Not for Me!

Section 72 (t) of the Internal Revenue Code is often touted as the secret to early retirement by brokers and financial advisors at free seminars and free lunches for employees of major corporations with profit-sharing and pension plans and 401(k)s. Presentations are made at upscale hotels and restaurants to induce the employees to retire or cash out their 401(k)s earlier than they might otherwise have done through a fairly unknown loophole that allows you to avoid the IRS penalty for early withdrawal. Employees are also promised that that they can cash in their retirement savings in their 40- 50s, reinvest the money, and live off the proceeds for the rest of their lives. But there is a lot more to early retirement benefits that just avoiding the IRS penalty. First, what is Section 72 (t)? It is the section of the IRS Code that imposes an additional 10% tax on distributions from qualified retirement plans such as profit-sharing and pension plans, 401K’s and traditional IRAs before the age 59 1/2. The only way to avoid this 10% penalty is if the distributions from your retirement plan “are part of a series of substantially equal periodic payments.” These payments must last for 5 years or until you reach the age 59 ½, whichever is longer. The IRS rule is often used as the hook in the early retirement scheme. The pitch continues with a well-crafted presentation of charts, graphs and handouts depicting stock market and other investment returns over long periods of time, including a representation that stock market returns have historically been in excess of 10% per year. The financial advisor skips over the fact that for many years, and sometimes for longer periods of time, the actual annual return was far less than 10% per year, and some years investors in the stock market suffered losses. Of course, the broker promises returns in excess of 10% per year because of his or her unique skills and expertise at stock and other investment selection and management. The pitch continues with representations and promises that an employee could safely withdraw 7 to 9% from their retirement savings annually for the rest their life and avoid the IRS penalty. So simple! So tempting!! Who wouldn’t want to take early retirement and go fishing or travel around the world!?!?!? The primary reason is that the stock market does not always have positive returns in any given year, and there have been many years that stock market returns have been less than 10% per year. Consequently, any withdrawal of funds greater than the actual rate of return in any year actually eats into your retirement savings. This is important because your future investment returns and withdrawals are dependent upon maintaining the original amount of savings to earn income for your future retirement years. And every year that you withdraw more than you earn, the greater the investment return must be on the balance of the retirement savings to continue the retirement distributions. There are other reasons not to fall for this early retirement pitch, and they include the fact that the overall return promised in excess of 10% per annum based on historical stock market returns is reduced by upfront sales charges, investment management fees, and other fees and expenses associated with opening the new accounts with the pitchman. Further, you will pay taxes at ordinary income rates on every distribution, and so, you will net less than the rate of return promised before incurring those additional investment expenses. Moreover, once you begin the 72 (t) withdrawals you cannot stop them without incurring the penalty on all of the withdrawals you have taken. And so, if you begin the “substantially equal periodic payments” at the age 49, you must take them until you are at least 59 ½, and your investment returns must exceed the amount of your withdrawals for over 10 1/2 years to avoid eating into the principal you saved for retirement after many years of employment, which is close to impossible when you withdraw funds at the rate of 7 to 9% every year. In the end, you may be forced to continue with the withdrawals just to avoid massive penalties, w hich just might destroy your retirement altogether. The most important of investors’ rights is the right to be informed! This article on Section 72(t) of the Internal Revenue Code is by the Law Offices of Robert Wayne Pearce, P.A. , located in Boca Raton, Florida. For over 40 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors’ rights throughout the United States and internationally! Please visit our blog, post a comment, call 800-732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about losses you may have suffered in connection with any early retirement recommendation, Section 72(t) and/or any related matter.

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Private Placement/Reg. D Offerings

Private Placements have historically been the first source of financing of many of our greatest companies in America. Unfortunately, they have also been the number one source of investment fraud in America. The good news for victims of such frauds is that the attorneys at The Law Offices of Robert Wayne Pearce, P.A. have over 40 years experience investigating and prosecuting the perpetrators of these type of scams. These securities offerings are generally exempt from registration under the Federal and state securities laws if the issuer complies with the strict letter of the laws. Regulation D is just one of the exemptions that fraudsters commonly rely upon in an attempt to avoid disclosure of important facts relating to a company that might have influenced your investment decision. According to Attorney Pearce the private nature of the investment has given many unscrupulous brokers the opportunity to profit by selling away these unauthorized products due to many brokerage firms’ lack of supervision of their sales force. These investments pose the greatest number of risks to investors, have no liquidity, pay highest commissions, and have caused investors to lose billions of dollars. Representing clients throughout Florida and nationwide Although the private placement market is an important source for small business growth, investors must be wary of fraud, illiquidity, valuation figures, sales practice abuses, and marketing materials issued with inaccurate statements or omitted information pertinent to making a sound investment decision. The following are some of the primary risks associated with investing in private placements: Inadequate disclosure – private placement marketing materials are oftentimes issued with inaccurate statements or omitted information, which are necessary to make an informed investment decision. Lack of liquidity – Private placements are illiquid investments. Redemptions are usually restricted, which means that money can be locked up for months or even years. They are not publicly traded, and there is no ready secondary market where securities can be sold. Imprecise valuation – Since no ready market for private placements exists, valuation is left up to mathematical models that may use unreliable factors. Oftentimes, valuations are left up to personal estimates. Insufficient broker due diligence – broker-dealers that sell risky private placements should carry out rigorous due diligence procedures prior to offering them to their clients. However, too many broker-dealers are ignoring red flags that could prevent clients from suffering investment losses. If a broker-dealer lacks important information about a private placement issuer or its securities it is recommending, the broker-dealer must disclose this fact along with the risks that arise from a lack of information. However, a broker-dealer is not permitted to rely blindly upon an issuer for information about a company, nor may it rely on information given by the issuer or its counsel in the place of conducting its own reasonable investigation. Broker-dealers are required to exercise a high degree of care in investigating and verifying an issuer’s representations and claims. Even if a broker-dealer’s customers are sophisticated and well-educated investors, it does not obviate their duty to conduct a reasonable investigation. For more information about Private Placements/ Reg. D Offerings and our cases and investigations, click on the links below: GPB Capital Fund Investors: How Do You Recover Your GPB Capital Investment Losses? Investing in Private Placements/ Reg. D Offerings EquiAlt Private Placement Investments FREE INITIAL CONSULTATION WITH PRIVATE PLACEMENT AND REGULATION D INVESTMENT DISPUTE ATTORNEYS The Law Offices of Robert Wayne Pearce, P.A. understands what is at stake in Private Placement and Regulation D investment law matters and constantly strives to secure the most favorable possible result. Attorney Pearce provides a complete review of your case and fully explains your legal options. The firm works to ensure that you have all of the information necessary to make a sound decision before any action is taken in your case. For dedicated representation by a law firm with substantial experience in all kinds of securities, commodities and investment disputes, contact the firm by telephone at 561-338-0037 or toll free at 800-732-2889 or via e-mail.

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Investing in the Stock Market: Part Two

MAKING MONEY There are two main ways to make money with stocks: Dividends. When a publicly owned company is profitable, management can choose to distribute a percentage of profit to shareholders by paying a dividend. Shareholders can either take the dividends in cash or reinvest them in more shares in the company. Retired investors typically focus on stocks that generate consistent dividend payments to replace their job income. Stocks that pay a higher than average dividend are sometimes referred to as “income stocks.” Capital gains. Stocks are constantly bought and sold throughout trading sessions, which causes their prices to change. When a stock price goes above what you paid, you can sell your shares for a profit. These profits are known as capital gains. On the other hand, if you sell your stock for a price lower than what you paid to buy it, you have incurred a capital loss. Both dividends and capital gains depend on the company’s performance – dividends as a result of the company’s earnings and management’s decision, and capital gains as a result of investor demand for the stock. Stock demand goes to the outlook for the company’s future performance. If a company’s shares are experiencing strong demand by many investors, in an increase in the stock’s price will most likely occur. In contrast, if a company is not profitable, or if investors are selling rather than buying the stock, the shares may be worth less than what was paid for them. Individual stock performance is also affected by overall stock market performance in general, which is in turn affected by the economy as a whole. For example, if interest rates go up, and you believe you can make more money with bonds or fixed income investments than you can with stock, you might liquidate your stock holdings and allocate that money to bonds. If many investors have the same sentiment, the stock market is likely to drop in value, which may affect the value of your investment holdings. In addition, factors such as geopolitical uncertainty, unstable energy prices, and acts of nature can also influence stock market performance. One important element of investing to remember is that over-priced or expensive stocks will most likely trade low enough to attract investors again. If investors begin to buy again, prices tend to rise, which offers the potential for making a profit. In turn, that market reaction may breathe new life into the stock market as more and more people begin to invest. Such a cyclical pattern of strength and weakness in the stock market recurs, but the timing is not predictable. In some cases, the market moves from strength to weakness and back to strength in only a few months. Other times, the described pattern, which is known as a full market cycle, takes many years. While the stock market is experiencing its ups and downs, the bond market is fluctuating as well. That is why “asset allocation,” or holding different types of investments in your portfolio, is such an important strategy because, in many cases, the bond market is usually up when the stock market is down, and vice versa. This anomaly is know as negative correlation. WHAT CAUSES STOCK PRICES TO CHANGE? Stock prices fluctuate every day as a result of market forces or changes in supply and demand. If more investors want to purchase a stock (demand) than sell it (lowering supply), then the stock price moves up. Conversely, if more investors want to sell a stock (increasing supply) than buy it (decreasing demand), supply will exceed demand and the stock price would fall. Grasping the concept of supply and demand is not difficult. What is difficult to understand is what drives investors to like a particular stock and dislike another stock. One factor is determining out what news is positive for a company and what news is negative. There is no single answer to this problem, and each investor has her own sentiments and strategies. That being said, the principal theory is that the general trading direction of a stock indicates what investors feel a company is worth. However, you should not equate a company’s value with its stock price. Generally, the value of a company is its market capitalization or stock price multiplied by the number of shares outstanding. For example, a company that trades at $10 per share and has 1 million shares outstanding has a lesser value than a company that trades at $5 per share and has 5 million shares outstanding ($10 x 1 million = $10 million while $5 x 5 million = $25 million). Furthermore, the price of a stock does not only reflect a company’s current value but also what investors expect the company to be worth in the future. When evaluating a company, the most important factor to consider is its earnings. Earnings are the profit a company makes, which every company needs to survive in the long-run. If a company cannot generate earnings, it is not going to stay in business. Public companies are required to report their earnings each quarter of the year. Wall Street and investors in general keep a close eye during the reporting period, which is referred to as earnings season. The reason behind this is that analysts base future valuations on the companies they follow on their earnings projection for those companies. If a company’s results are worse than expected, the price will fall. If a company’s results are better than expected, the price will rise. However, stock prices can fall or sell off after favorable news reports as some investors may want to lock in profits. An earnings report is not the only factor that can change sentiment towards a stock. For example, during the dot.com bubble, dozens of internet companies accumulated billions of dollars in market capitalization without ever making even the smallest profit. Investors were simply placing their bets on expectations of future profits. Unfortunately, these valuations did not hold, and nearly all internet companies...

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Investing in Bond Markets (Continued)

THE TERM STRUCTURE OF INTEREST RATES The term structure of interest rates, also known as the yield curve, is a very common bond valuation method. Constructed by graphing the yield to maturities and the respective maturity dates of benchmark fixed‑income securities, the yield curve is a measure of the market’s expectations of future interest rates given the current market conditions. Treasuries, issued by the federal government, are considered risk‑free, and as such, their yields are often used as the benchmarks for fixed‑income securities with the same maturities. The term structure of interest rates is graphed as though each coupon payment of a noncallable fixed‑income security were a zero‑coupon bond that “matures” on the coupon payment date. The exact shape of the curve can be different at any point in time. So if the normal yield curve changes shape, it tells investors that they may need to change their outlook on the economy. There are three main patterns created by the term structure of interest rates: Normal Yield Curve: As its name indicates, this is the yield curve shape that forms during normal market conditions, wherein investors generally believe that there will be no significant changes in the economy, such as in inflation rates, and that the economy will continue to grow at a normal rate. During such conditions, investors expect higher yields for fixed income instruments with long‑term maturities that occur farther into the future. In other words, the market expects long‑term fixed income securities to offer higher yields than short‑term fixed income securities. This is a normal expectation of the market because short‑term instruments generally hold less risk than long‑term instruments; the farther into the future the bond’s maturity, the more time and, therefore, uncertainty the bondholder faces before being paid back the principal. To invest in one instrument for a longer period of time, an investor needs to be compensated for undertaking the additional risk. Remember that as general current interest rates increase, the price of a bond will decrease and its yield will increase. Flat Yield Curve: These curves indicate that the market environment is sending mixed signals to investors, who are interpreting interest rate movements in various ways. During such an environment, it is difficult for the market to determine whether interest rates will move significantly in either direction farther into the future. A flat yield curve usually occurs when the market is making a transition that emits different but simultaneous indications of what interest rates will do. In other words, there may be some signals that short‑term interest rates will rise and other signals that long‑term interest rates will fall. This condition will create a curve that is flatter than its normal positive slope. When the yield curve is flat, investors can maximize their risk/return tradeoff by choosing fixed‑income securities with the least risk, or highest credit quality. In the rare instances wherein long‑term interest rates decline, a flat curve can sometimes lead to an inverted curve. Inverted Yield Curve: These yield curves are rare, and they form during extraordinary market conditions wherein the expectations of investors are completely the inverse of those demonstrated by the normal yield curve. In such abnormal market environments, bonds with maturity dates further into the future are expected to offer lower yields than bonds with shorter maturities. The inverted yield curve indicates that the market currently expects interest rates to decline as time moves farther into the future, which in turn means the market expects yields of long‑term bonds to decline. Remember, also, that as interest rates decrease, bond prices increase and yields decline. You may be wondering why investors would choose to purchase long‑term fixed‑income investments when there is an inverted yield curve, which indicates that investors expect to receive less compensation for taking on more risk. Some investors, however, interpret an inverted curve as an indication that the economy will soon experience a slowdown, which causes future interest rates to give even lower yields. Before a slowdown, it is better to lock money into long‑term investments at present prevailing yields, because future yields will be even lower. THE CREDIT SPREAD The credit spread, or quality spread, is the additional yield an investor receives for acquiring a corporate bond instead of a similar federal instrument. As illustrated in the graph below, the spread is demonstrated as the yield curve of the corporate bond and is plotted with the term structure of interest rates. Remember that the term structure of interest rates is a gauge of the direction of interest rates and the general state of the economy. Corporate fixed‑income securities have more risk of default than federal securities and, as a result, the prices of corporate securities are usually lower, while corporate bonds usually have a higher yield. When inflation rates are increasing (or the economy is contracting) the credit spread between corporate and Treasury securities widens. This is because investors must be offered additional compensation (in the form of a higher coupon rate) for acquiring the higher risk associated with corporate bonds. When interest rates are declining (or the economy is expanding), the credit spread between Federal and corporate fixed‑income securities generally narrows. The lower interest rates give companies an opportunity to borrow money at lower rates, which allows them to expand their operations and also their cash flows. When interest rates are declining, the economy is expanding in the long run, so the risk associated with investing in a long‑term corporate bond is also generally lower. Now you have a general understanding of the concepts and uses of the yield curve. The yield curve is graphed using government securities, which are used as benchmarks for fixed income investments. The yield curve, in conjunction with the credit spread, is used for pricing corporate bonds. Now that you have a better understanding of the relationship between interest rates, bond prices and yields, we are ready to examine the degree to which bond prices change with respect to a change in interest rates. DURATION The term duration has a...

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