Alternative investments include a wide variety of investments that fall outside of traditional stock and bond categories. In theory, anything that is not a traditional equity investment – common stock and preferred stock – or a traditional bond – coupon and zero-coupon debt – qualifies as an alternative investment. Thus, the category of alternative investments includes structured products, reverse convertibles, hedge funds, private quality investments, high-yield (junk) bonds, non-traded REITs, exchange traded funds, and many others.
Alternative investments are generally quite complex and present wide-ranging risk and regulatory issues, including suitability and disclosure issues, limited liquidity, lack of transparency, opaque and often expensive fee structures, lack of secondary market activity, and difficulty in pricing. These characteristics make it difficult for both brokers and investors to fully understand and appreciate the dangers and risks associated with alternative investments. In turn, this makes it difficult, if not impossible, for a broker to provide full and balanced disclosure regarding the alternative investment and its risks.
In addition, most alternative investments pay high commissions to the brokerage firm that sells them and high fees to the firm that structures them (often the same firm). Accordingly, brokerage firms have major incentives to sell these investments.
Page Perry professionals are regularly involved in representing clients who purchased alternative investments and have assisted investors in recovering hundreds of millions of dollars lost in alternative investments in the past.
Page Perry regularly represents investors who have lost substantial amounts of money investing in hedge funds. “Hedge Fund” is a term that has been used to describe and promote a variety of investment pools. A common characteristic of these various types of hedge funds is that they operate without registration or supervision by the State or Federal securities regulators or any SRO. Given the shroud of secrecy surrounding most hedge funds, the adequacy of full disclosure is often a significant problem. Secrecy has also presented the opportunity to unscrupulous hedge fund managers to mislead and defraud investors.
Page Perry has recently represented clients who bought structured products. These products are complex, option-driven financial products that purport to pay higher yields. They are often marketed as offering safety but in reality are nothing more than the unsecured debt of the issuer. They are generally overpriced and illiquid. Most clients do not understand these complex products and, in many cases, neither do the brokers who sold the products.
Page Perry recently represented clients who have purchased structured products called Reverse Convertibles. Known by many names (e.g. Yield Optimization Notes), they are often sold to investors as safe income-producing investments. They are not. Reverse convertibles are, in reality, complex option combinations that put investors’ principal at risk. The high-yield, short-term note that investors think they are buying is linked to the performance of a “reference asset” such that, if the reference asset declines in value, the investor receives the depressed asset at maturity instead of a return of principal in cash. That is why FINRA has warned that these products are not suitable for investors with accounts not approved for options trading. These structured products are so opaque and complex that no ordinary investment advisor can properly evaluate them and disclose the risks to investors.
These funds have become enormously popular, but are plagued by a number of risks that have not been adequately disclosed, and are, therefore, not well understood by most investors. Exchange traded funds, like closed end mutual funds, can trade at a premium or a discount to their net asset value. While it is widely believed that the market prices of exchange traded funds vary only slightly from the underlying net asset value, this is only true of the most heavily traded and liquid exchange traded funds, such as the S&P 500 Index SPDR. Other more thinly traded and less liquid funds may trade at significant premiums or discounts to net asset value. Many ETFs are based on small market indices or niches and can be quite volatile. While many investors have invested in ETFs, a Charles Schwab survey concluded that the majority don’t understand the product.
Private placements (also known as Reg D offerings from the federal regulation that exempts them from the registration requirement) are a perennial item on state regulators’ Top Ten List of Investment Scams. In addition to the high risks associated with private placements even when there is no dishonesty involved, there is the risk of outright fraud. Unfortunately, the risk of fraud and other risks associated with private placements are often well-hidden until a group of them implode and receive press attention. Common sales practice abuses involve: (a) misclassifying investors as “accredited” (i.e., meeting certain minimum income and net worth criteria) when they are not, (b) misrepresenting and omitting to disclose facts and material risks, which, if properly disclosed, would cause an investor not to purchase the investment, and (c) recommendation of an unsuitable investment.
Closed end funds are types of investment companies that sell their shares on an initial public offering and then trade like stocks in the secondary market. They come in many varieties and have different objectives, strategies, risks, fees, and volatility. During the first eight months of 2011, investors reportedly lost over $1 billion in closed end funds.
These investments are illiquid, involve payments of exorbitant fees, involve substantial risks and falsely purport to have little or no volatility.
Page Perry is routinely involved in a number of variable annuity cases arising out of a brokerage firm’s inappropriate recommendations and explanations of variable annuities to their clients.
Page Perry has represented clients who have sustained damages as a result of the disaster in the sub-prime mortgage and CDO investment debacle. Many of these securities were improperly sold as very safe investment grade alternatives to AAA bonds.
Auction rate securities are long term debt instruments that paid interest at short term interest rates and were routinely marketed to investors as being safe, liquid “cash equivalents.” Such representations were simply untrue and, as a result, many investors have sustained serious damages.
Over recent years, Page Perry has been retained in an increasing number of cases that have involved financial abuse (mistreatment) of senior citizens. Unfortunately, senior citizens have become targets for a number of unscrupulous securities and insurance firms. In this regard, a recent study establishes that knowledge about financial matters falls 2% each year after age 60, while at the same time confidence in being financially knowledgeable increases. The study involved a test that measured knowledge of investments, insurance, credit and money basics. Those in their 60s scored 59% correct while those in their 80s and older scored 30% correct. People over the age of 60 control half the wealth in America. They are generally not only unaware of their diminishing capacity, but are overconfident about their ability to make financial decisions. Not only will Americans over the age of 60 tend to make more financial mistakes, they are tempting targets for fraud promoters. Seniors are 12% of the population but make up 35% of all fraud victims, according to the National Council on Aging. Fortunately, there are many protections that the law provides to senior citizens who have been victimized.
Page Perry attorneys have represented a number of baby boomers who worked their entire careers for large companies with traditional pension plans and who have elected to take a lump sum payout retirement option over the traditional pension. These retirees elected the lump sum option based on the advice of trusted financial professionals who recommended that option because it purportedly would provide higher monthly retirement income and also the opportunity to grow the investment with little or no risk. 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. The investors sustained substantial losses.
Page Perry has represented employees in the financial services industry in connection with potential whistleblower cases which may be actionable based upon the employees’ observations of fraud and other misconduct. Recently, laws have been changed to authorize rewards to be paid to financial services industry employees who provide material assistance to regulators in identifying and preventing a fraud. The law recognizes that employees in the financial services industry are often the “first line of defense” to detecting and preventing frauds from becoming more pervasive. Accordingly, the law authorizes the payment to financial services industry employees of rewards ranging from 10 to 30% of fines or penalties collected in excess of $1 million.
Page Perry is routinely involved in cases arising out of common acts of misconduct by a single broker and his firm. Such actions are based on misrepresentations of material facts and mishandling investor’s funds, among other things.
Page Perry continues to represent international investors who have suffered losses as a result of improper actions of U.S. firms. As the securities and financial services markets become more global in nature, the Firm expects this practice area to continue to grow rapidly.
Page Perry currently represents clients with claims based on improper handling/management of their accounts by registered investment advisor/professional money management firms.