Commonly Disputed Investment Products
1. Stocks & Bonds
Stocks and bonds are the most commonly owned securities among retail investors. Both stocks and bonds carry market risks and their value can be impacted by many factors, including the economy, the issuing company’s financial health, credit ratings, general market conditions, interest rates, news, corporate earnings, etc.
If your financial advisor recommended stocks and bonds, he or she is responsible for fully understanding the characteristics and risks of those investments and ensuring that they are consistent with your investment objectives and risk profile.
It is possible that when a financial advisor first recommends a stock or bond, it is suitable and appropriate. However, over time, due to an investor’s changing circumstances, changing market conditions or changes within the issuing company, the stock or bond may no longer be suitable. It is the financial advisor’s responsibility to recognize and understand these changes and advise you accordingly.
There is a common misconception among fixed income investors that bonds are safe and that they will never lose money. This is not true. Bonds carry a variety of highly complex risk factors that are impacted by interest rates, credit quality, and the bond’s particular features, including the bond’s maturity, callability and place in the debt structure of the issuing company.
If a portfolio is allocated correctly, investment losses can be mitigated or altogether eliminated. If you have experienced stock or bond loses, contact the Wolper Law Firm for a free consultation and case evaluation.
2. Energy Sector Concentration:
From 2011 through much of 2014, the energy sector experienced steady and significant gains led by rising oil prices. Beginning in late 2014, the energy sector sharply declined and many large companies that issued stocks and/or bonds connected to the energy sector, became insolvent and declared bankruptcy. This event caused massive investor losses.
Oil, gas, and energy stocks were heavily marketed to consumer investors, including to senior citizens and other conservative investors, as investments that would generate high income with little to no downside risk. There were inadequate institutional controls in place to monitor client exposure to energy sector investments if and when the market for these securities changed.
Many investors in oil, gas, and energy stocks, funds and master limited partnerships suffered steep declines in the value of their investments with little or no prospect of recovery in the near term. Examples of failed energy sector investments include:
- Sandridge Energy
- Linn Energy
- Seadrill, Ltd.
- Seadrill Ltd.
- Chesapeake Energy
- Peabody Energy
- Arch Coal
- Alpha Natural Resources
- Swift Energy
- OPI Steelpath MLP Income C
- Cobalt International Energy
- Cushing MLP Total Return Fund
- Goldman Sachs MLP Energy Return Fund
- Center Coast MLP & Infrastructure Fund
- Kayne Anderson MLP
- Clearbridge American Energy MLP
- Center Coast MLP Focus A
- CVR Refining
- Breitburn Energy Partners
- Atlas Resource Partners
- Vanguard Natural Resources
- Energy XXI
- Penn West Petroleum
- Natural Resource Partners
- EnerVest Oil and Gas Fund
- NorthEast Securities bond transactions
- Mountain V Oil and Gas Investment
- Wedbush Investments
- Ridgewood Energy Fund
- Atlas Resource Partners
- Mewbourn Oil Investments
- Peabody Energy
- Reef Oil and Gas Development Fund III
- Arch Coal
- Layton Energy Wharton LP
- Bradford Drilling and Exploration
- Texas Energy Exoro
- Alliance Resource Partners
- Cloud Peak Energy
- Pinacle Partners
The Wolper Law Firm has extensive experience handling claims involving energy sector investments. If you believe that you were improperly sold energy sector securities and have experienced unexpected losses in these investments, please contact the Wolper Law Firm for a free consultation and case evaluation.
3. Variable Annuities:
A variable annuity is complex hybrid financial and insurance product that offers investors a stream of income, tax deferment and a death benefit. The sub-accounts of an annuity are generally invested in mutual funds, the selection of which will dictate the potential performance of the annuity. While there are benefits of variable annuities, they are often outweighed by the risks and other features.
For example, variable annuities may include high annual management fees, surrender charges, lock-up periods, and mortality charges. In addition, it is commonly misunderstood that variable annuities offer guaranteed investment returns. They do not. Many financial advisors fail to disclose that investment returns may be impacted by market conditions.
Many financial advisors recommend annuities because they generate high sales commissions relative to other financial products. Unscrupulous financial advisors may also engage in annuity “switching,” which refers to the practice of selling one annuity and purchasing another. Often times the “switch” is justified by the financial advisor by suggesting that the annuity purchased has superior features when any such enhanced feature is actually outweighed by the cost of the “switch.”
The Securities Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) have cautioned customers to be aware of “bonus credits” offered to financial advisors for selling certain variable annuity products.
The Wolper Law Firm has extensive experience handling claims involving variable annuities. If you believe that you were improperly sold a variable annuity or have experienced unexpected losses in a variable annuity, please contact the Wolper Law Firm for a free consultation and case evaluation.
4. Junk Bonds and High Yield Bonds:
“Junk Bonds” refer to bonds that carry a credit of “below investment grade.” Bond rating agencies, such as Standard & Poors, Fitch and Moody’s are paid by the bond issuer to provide a credit rating. The credit rating is a direct indication of the bond issuer’s ability to pay interest during the life of an investment and return principal to the investor at maturity. Based on the Standard & Poors rating scale, AAA is the highest credit rating and is reserved for bond issuers that have the lowest risk of default. BBB- is the lowest credit rating a bond issuer can have and still be considered “investment grade.”
There are several factors that are considered by ratings agencies before a rating is assigned or adjusted. Some of the factors include the bond issuer’s economic health and stability, overall market conditions, and geographic/political considerations that may impact the bond issuer’s economic health going forward.
Each time a credit rating is lowered, the ratings agencies are informing the investing public that the bond issuer has a higher likelihood of default, which could result in a loss of principal and income for investors owning those bonds.
Many brokerage firms and financial advisors tout high yield or junk bonds to their clients for the purpose of generating higher levels of income. However, these same brokerage firms and financial advisors fail to adequately disclose the risks of owning junk bonds or monitor changes in the credit profile of the bond issuer after an investment is made. These misrepresentations and omissions preclude an investor from knowing all reasonable facts necessary to make an educated investment decision and may be a basis for a cause of action.
The Wolper Law Firm has extensive experience handling claims involving high yield or junk bonds. If you believe that you were improperly sold high yield or junk bonds or have experienced unexpected losses in these investments, please contact the Wolper Law Firm for a free consultation and case evaluation.
5. Structured Products:
Structured products are extremely complex investment instruments. Brokerage firms and brokers have recommended these investments to clients claiming that structured products are conservative investments (sometimes with guarantees that all principal will be returned) that generate current income and carry a high credit rating.
One of the most common structured products are those linked to a particular stock or sector of the market. The source can be a single security, a basket of securities such as a market index, commodities, or a real estate loan portfolio. Many structured products also have leverage features in order to enhance the investment returns and others incorporate purported downside protections to ensure that the investor will, at a minimum, receive a return of his/her principal. A key feature of structured products, which is often not disclosed, is illiquidity. Many structured products do not provide an investor an opportunity to sell the investment without incurring a significant penalty.
Brokerage firms have an obligation to perform a suitability analysis before recommending structured products to investors. In order to ensure that the structured product is suitable, firms must ensure that the investment is priced so that the potential yield is appropriate in relation to the volatility of the referenced asset. Brokerage firms must also ensure that the structured product is suitable for the individual investor based upon the investor’s investment objectives.
The Wolper Law Firm has extensive experience handling claims involving structured products. If you believe that you were improperly sold a structured product or have experienced unexpected losses in these investments, please contact the Wolper Law Firm for a free consultation and case evaluation.
Options are derivative securities that give the investor the contractual right, but not the obligation, to buy or sell a certain underlying asset (a stock or index) at a specific price on or before a certain date. There are many types of options strategies that can be employed, and many of them involve a great degree of risk. Options strategies are typically only suitable for investors with an aggressive or speculative risk tolerance who are willing to risk the loss of principal.
The Wolper Law Firm has extensive experience handling claims involving options strategies. If you believe that you were improperly sold options of any form or have experienced unexpected losses in these investments, please contact the Wolper Law Firm for a free consultation and case evaluation.
7. Private Placements and Private Equity:
Private placements is a broad term that describes securities that are not offered for sale through a public exchange. These can include promissory notes, private equity offerings, small, start-up businesses, etc. Private Placements are issued under Regulation D under the Securities Act of 1933. Regulation D provides exemptions from the more rigorous Securities and Exchange Commission (SEC) registration requirements and allows companies to offer and sell securities without extensive disclosures. The absence of standard disclosure requirements often creates.
The Securities Exchange Commission, federal courts, and FINRA have all found that brokerage firms have a duty to conduct a reasonable investigation concerning the private placements issuer’s representations concerning the security. A brokerage’s firm’s due diligence obligation also stems from suitability obligations requiring the broker to have reasonable grounds to believe that a recommendation to purchase, sell or exchange a security is suitable for the customer. In order to meet the due diligence obligation, the brokerage firm and/or financial advisor must make reasonable efforts to gather and analyze information about the private placement, the issuer and its management, the business prospects of the issuer, the assets held by or to be acquired by the issuer, the claims being made by the issuer in the offering materials, and the intended use of proceeds of the offering. The failure to determine this and other material information would necessarily preclude a financial advisor from disclosing to a customer the material aspects of a transaction.
The Wolper Law Firm has extensive experience handling claims involving private placements and private equity investments. If you have lost money investing in these or similar securities, please contact the Wolper Law Firm for a free consultation and case evaluation.
8. Real Estate Investment Trusts (“REIT”):
A real estate investment trust (REIT) is a security that invests in real estate directly either through properties or mortgages. Generally, REITs can be publicly or privately held. Publicly held REITs can be sold on an exchange and publicly traded. Non-traded REITs are sold through broker-dealers and are private. REITs are generally classified as equity, mortgage, or hybrid.
The most common REITs are equity and mortgage REITs. Equity REITs invest in and own property. The revenue for equity REITs come principally from the rent roll from the properties they own. Mortgage REITs invest and own property mortgages. Mortgage REITs loan money for mortgages to real estate owners, purchase existing mortgages, or mortgage-backed securities (MBS). The revenues for Mortgage REITs are earned through the interest that they earn on mortgage loans. Hybrid REITs combine investment strategies from equity REITs and mortgage REITs and invest in property and mortgages.
REITs have traditionally been sold to customers for their high dividend yield. However, many factors impact the ability of the REIT to maintain dividend and share price stability, including the fluctuation in interest rates, the amount and cost of leverage used by the REIT and collectability of the rents or mortgage payments that comprise the underlying assets within the REIT.
The Wolper Law Firm has extensive experience handling cases involving REITs. If you have lost money investing in REITs, please contact the Wolper Law Firm for a free consultation and case evaluation.
9. Penny stocks:
Penny stocks are traditionally defined as equity securities that trade below a market value of $5 per share. The companies that issue shares deemed to be penny stocks are small or micro-cap companies that generally have not gained positive momentum among investors. Penny stocks are speculative securities and are suitable for only aggressive investors that are willing and able to accept extreme market volatility and total loss of their investment. In addition, investors should be prepared to experience illiquidity, meaning they may not be able sell the penny stock on the open market due to a lack of demand.
Penny stocks have historically been the subject of “pump and dump” schemes whereby the financial professional recommends that a customer purchase a large quantity of a penny stock because he or she has a personal stake in the company. Because penny stocks are thinly traded securities, large purchases or sales can cause the stock price to rise or fall. With a customer’s large purchase, the penny stock prices rises, providing the financial professional an opportunity to sell his or her personal shares at a profit which, in turn, may cause the penny stock price to decline. This type of scheme generally leaves the investor “holding the bag” with all of the losses.
The Wolper Law Firm has extensive experience handling claims involving penny stocks. If your financial advisor or stockbroker recommended that you invest in penny stocks, and you experienced losses, please contact the Wolper Law Firm for a free consultation to discuss your rights and options.
10. Exchange Traded Funds (ETFs):
Exchange Traded Funds, or ETFs, are corporate structures that own a basket of underlying securities. The underlying securities may consist of stocks, bonds, or derivative products. Contrary to common belief, ETFs trade like equity securities and are subject to market volatility even if the underlying investments are fixed income oriented.
Many issuers of ETFs utilize leverage, often times 2x or 3x the underlying asset base, as part of their investment strategy to improve the return. This dramatically increases the risk of the ETF and may lead to substantial investment losses.
Other ETFs utilize “inverse” strategies that are intended to perform in a manner that is opposite to its benchmark. For example, there are inverse ETFs that track the overall performance of a sector of the market (e.g., gold, financials, technology). In the event that sector performs poorly, the inverse ETF will appreciate in value. Conversely, if the sector performs well, the inverse ETF will depreciate in value. Given the rapid pace at which financial markets move, leveraged and inverse ETFs often do not move in tandem with the benchmark, causing extensive investor losses.
The Wolper Law Firm has extensive experience handling claims involving ETFs. If your financial advisor or stockbroker recommended that you invest in ETFs, and you experienced losses, please contact the Wolper Law Firm for a free consultation to discuss your rights and options.