Yield Chasing – Current Wave of Securities Fraud Litigation

According to a report in the New York Times, regulators across the country are confronting a wave of investor fraud that is saddling retirement savers with steep losses on complex, high-risk products that until a few years ago were pitched only to the most sophisticated investors.

This report goes on to discuss the fact that the victims of these products are often the millions of Americans whose mutual funds and stock portfolios plummeted in the wake of the financial crisis, and who started searching for ways to make better returns than those being offered by bank deposits and government bonds with minuscule interest rates.

Tens of thousands of them put money into speculative bets promoted by aggressive financial advisers.  Those alternative investments are now making up a majority of complaints and prosecutions.  The majority of cases filed by this firm, for one, involve alternative investments like non-traded REITs, oil and gas partnerships, equipment leasing funds, and other high-risk private placements.

Of course, financial advisors promoting bad investments to unsophisticated investors is nothing new.  The problem is that it has become increasingly difficult to generate any kind of meaningful or reliable returns in the market and retirees are increasingly turning to alternative investments because of the income that these investments promise.  Unscrupulous financial advisors downplay the risks of these investments while emphasizing the income that the investments claim to provide.

Regulators are warning investors that the dangers are unlikely to recede, given the Federal Reserve’s pledge to keep interest rates near zero and the push among financial firms to earn more revenue from so-called alternative investments marketed to retail investors. Brokers are eager to sell these investments because they often bring in higher commissions than standard mutual funds and stocks (often as high as 7-10%).

The money that retail investors have in alternative investments in the United States more than doubled from 2008 to 2012, to $712 billion from $312 billion, according to McKinsey & Company.

The phenomenon of investors’ actively moving money in pursuit of higher interest rates, known as chasing yield, is reverberating through the economy.

There is no agreed-upon list of the financial products that have caused problems for yield-chasing investors, but regulators say certain ones come up particularly often:

(1) Private placements, investments in largely unproven private companies, have been on the list of top enforcement concerns published by the national organization of state securities regulators every year since 2007.

Private placements are supposed to be available only to wealthy, sophisticated investors, but several loopholes, including relaxed procedures for verifying wealth, have allowed them to end up in the portfolios of less sophisticated retirement savers.

(2) Real Estate Investment Trusts (REITs) have been one of the most heavily sold products because there are few rules about who can buy them. Popular for years, they used to come primarily in funds that could be traded on public exchanges. The hot new version – the type that got LPL Financial in trouble in Massachusetts – can be bought and sold only in private transactions.

The outstanding amount of such nontraded REITs grew to $65 billion last year, from $43 billion in 2009, according to Direct Investments Spectrum. The private nature of these investments has been advertised as a good thing, because it means they are less likely to move up and down with the stock market. But it has also made it hard for investors to value their holdings or to get out when they need the money.

Notwithstanding the regulatory scrutiny of these types of investments, they are not going away.  One of the newest products being sold to retail investors: so-called business development companies, has many of the same trademarks as no-ntraded REITs and private placements – high commissions, no readily available market, and a promise of high yields.  Money in such investments grew to $4.5 billion last year from $8 million in 2008, according to MTS Research Advisors.

The White Law Group continues to investigate potential claims involving alternative investments.  These claims generally focus on the brokerage firm or financial professional that sold the investment.

Financial advisors and broker-dealers have a duty to their clients to perform the necessary due diligence on an investment before offering it for sale to their clients and to ensure that any investment recommendation that is made is suitable in light of the client’s age, investment experience, net worth, and investment objectives.    Unfortunately, many brokers often down play or hide the risk involved in non-traded REITs and sell the investments as safe, income producing investments.

If you suffered losses in an alternative investment and would like to discuss your litigation options, please call the securities attorneys of The White Law Group at 312/238-9650 for a free consultation.

The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Boca Raton, Florida.

For more information on The White Law Group, visit http://whitesecuritieslaw.com.