Securities arbitration lawyer Robert W. Pearce, a Florida based securities lawyer with a practice that is primarily representing investors in FINRA arbitrations against broker dealers and advisors, answers one of the more frequently asked questions: What type of investments and strategies are frequently the subject of stockbroker fraud?
My name is Robert Pearce, and there are opportunities for stockbroker fraud in connection with every investment in every investment strategy. However, some investments are frequently the subject of stockbroker fraud, and those investments generally involve promissory notes, real estate investment trusts, annuities(both variable and indexed annuities), and structured fixed income products, etc. Private placements are also frequently involved in stockbroker fraud.
Investments in promissory notes are frequently used by the perpetrators of Ponzi schemes because of the high rate of interest that they pay. And what these Ponzi schemers do is they promise the high interest and they pay it with investments being made by someone who invested in the scheme after you. And so, promissory notes are often a vehicle of Ponzi schemes. And even when they’re not involved in Ponzi schemes, promissory notes are often issued by underfunded companies, new companies that overstate their financial condition or the stockbrokers overstate their financial condition. They’re not registered with any government agency. They’re not reviewed by any regulator, and generally not even reviewed by the broker dealer for that matter.
Other types of products often the vehicles for stockbroker fraud are the non-traded real estate investment trusts. The issuers of these trusts promise high dividends and you’re supposed to get all your money back because they’re invested in solid real estate investments. However, frequently, stockbrokers don’t tell you about the excessive acquisition fees, management fees, sales commissions. Oftentimes, the company running the trust has to produce a return of over 25% just to make up for those fees before you earn a single dollar. Now, while you may be getting your interest or dividend, you don’t know that the principal value of your investment is really much less than what you paid for the investment. That’s because the real estate investment trust is non-traded. There’s no public market for it, and prices on your statements are often arbitrary and often fixed at the original purchase price when they might be really worth 25% less that what is reported on the statements.
Another type of investments often the subject of stockbroker fraud are variable annuities or indexed annuities an investment in which stockbrokers rarely disclose the high degree of risk or the excessive surrender fees that you might incur, maybe as high as 18% when you try to surrender a fixed index annuity product.
Structured fixed income products are often the subject of stockbroker fraud. They’re not necessarily structured fixed income products. They might be nothing more than a promissory note from the company that issues them. And the success of that investment is dependent upon that entity, the broker dealer maybe, paying you the monies in the end, if its still a viable company.
Private placements are often the subject of stockbroker fraud. They’re unregulated, they’re unregistered oftentimes, and they’re often based upon promises of financial success without any reasonable basis.
With respect to investment strategies that are often the subject of stockbroker fraud, I think the most common is option strategies, and options strategies that many stockbrokers truly don’t understand. The most common one today is the UBS YES strategy or the Merrill Lynch Rampart strategy.
Another investment strategy that is commonly associated with stockbroker fraud is margin trading or the use of securities backed lending schemes.
There are many, many different types of stockbroker fraud involving many different types of securities, investments, investment strategies, and you need a securities arbitration attorney to truly evaluate whether you have a claim because these investments can cost you all of your money invested, and a lot of heartache.