Bonds can be suitable investments for those seeking a safe and reliable stream of income. A bond pays interest at regular intervals. Its market value may fluctuate, but its interest payments are regular and reliable. At the end of the bond’s term, the issuer redeems it at face value. In an often-uncertain investment universe, this provides bondholders with a useful financial anchor.
Like any investment, however, bonds carry risk. This is true throughout the big universe of bonds: state and municipal, Treasuries, and corporates. The risk to consider is that the issuer will have financial troubles and fail to pay interest. As a last resort, the issuer may go into bankruptcy and ask a court to cancel the bonds altogether.
To assess these risks, investors rely on professional rating agencies. These firms make it their business to measure the safety of bonds. Bond ratings are publicly available scores that anyone can research through a brokerage website, the company’s own financial documents, or via a personal financial planner.
When Problems Arise
The bond business and the bond rating system rely on trust. An investor should believe that the analysts behind a ratings company score know how to assess risk, and that they have no personal stake in their decisions. A brokerage needs to convey accurate information, and a personal financial planner has to be knowledgeable and competent.
Unfortunately, however, advisors and ratings agencies can violate the trust of their clients. Many different such scenarios have played out in the past, including:
- A broker can fail to disclose the risks of low-grade bonds, also known as junk bonds.
- A ratings agency may mislead clients with an inaccurate rating and risk assessment.
- A company that issues bonds may produce deceptive financial statements.
- A financial advisor may steer a conservative investor into riskier assets, including high-yield junk bonds.
The consequences of such misconduct can be severe. In a worst-case scenario, bonds are rendered worthless by a company bankruptcy. When this happens, investors don’t just lose interest payments. They may be forced to sell the bonds at a loss or write off the entire investment. In many cases, they were misled by advisors into thinking the bonds were a safe investment.
Elderly investors can be even more vulnerable to financial misconduct and fraud. Many have retirement savings and an essential stream of income at stake. The financial system is complex, and it’s often difficult for laymen and novice investors to get a clear understanding of why or how they’ve suffered a financial loss. This is where an experienced legal representative may be able to help.
Investors should always prepare for these issues by doing some basic research into the bond market. This is especially important when considering an investment into low-grade corporate or “junk” bonds.
A junk bond (or, more politely, a high-yield bond) is also known among investment professionals as “non-investment grade.” High-yield junk bonds are issued by companies with poor financial prospects or low credit ratings. These bonds pay a higher rate of interest than investment-grade bonds.
The reason for the high yield is the perceived risk: companies with an uncertain financial future have to pay higher interest to compensate bondholders for the higher probability of default. Junk bonds can pay double the interest rate, or more, of companies considered financially sound.
If the company is running into trouble, the price of its bonds may fall as traders and investors sell the bonds. When that happens, the yield rises, as the interest payments increase as a percentage of the bond’s price. The tradeoff for bondholders of safe, strong companies is a lower interest yield and a higher market price when buying the bonds.
The crucial job of a financial advisor is to keep abreast of company news and financials and steer each client into investments with the appropriate level of risk.
Junk Bond Ratings
Ratings agencies assign a range of scores to high-yield bonds. Moody’s, for example, places high-yield bonds at a rating of “Ba 1” or lower for longer term investments (longer than a year). For Standard and Poor’s and Fitch, these bonds are rated “B” or “C” over a short term, and “BB+” for a longer term.
Brokers and financial advisors should have these ratings readily available. A clear understanding between an investor and his/her advisor on the desired level of risk should be established.
Besides the interest rate, the price of the bond is an important consideration, as is the remaining term. The closer to redemption, generally, the closer the price will be to the bond’s original face value. If the bond trades at a discount to its face value, then at redemption the investor will have a gain. If the market value is above face value, when the bond is redeemed the investor will have to accept a loss on the purchase.
A financial firm that has failed to disclose the risks of a junk bond investment may have failed in their “fiduciary duty.” This legal concept holds that a broker or financial advisor has an obligation to work in the best interests of a client.
A breach of fiduciary duty may come in several forms. A broker that has failed to disclose the risks of a junk bond investment, for example, has failed in their fiduciary duty. This is also true of a broker who has placed a client in an unsuitable investment, such as a high-risk bond purchase for a client for whom preservation of capital is essential.
Legal misconduct also occurs when an unlicensed financial advisor takes control of investment accounts, takes actions to profit the brokerage and not to benefit clients, diverts money to a personal account, moves funds without knowledge or permission of the account holder, or otherwise violates regulations of the Securities and Exchange Commission (SEC) and/or FINRA, the Financial Industry Regulatory Authority.
Arbitration and Mediation
Investors involved in broker disputes over high-yield junk bonds can file a claim to FINRA for arbitration and/or mediation services. An arbitration claim can be settled without resorting to a lawsuit and the civil court system. FINRA rules set a statute of limitations, however, of six years from the date of the alleged misconduct.
In arbitration, the parties first agree on a third-party arbitrator. After considering the evidence and arguments from both sides, the arbitrator issues a binding and final award decision. FINRA provides the forum for the case, but the agency takes no part in the award decision, which precludes any future court action. Claims of more than $100,000 in the FINRA process require a hearing and a decision by a three-arbitrator panel.
In mediation, the parties go through an informal negotiation. A third-party mediator facilitates the process, in an attempt to have the parties come to a settlement. Mediation can take place before or during arbitration, and is a simpler and less expensive alternative to both arbitration or a civil lawsuit.
If proven, a breach of fiduciary duty is grounds for a full restitution of junk bond losses. But even with less costly remedies such as arbitration and mediation, legal representation is essential. A good junk bond loss attorney brings experience and knowledge of this specialized practice area. Of course, the first step on the road to a successful settlement of your case is to find a qualified attorney, and there are many offering their services.
Why Choose Wolper
The Wolper Law Firm has successfully represented many victims of high-yield investment fraud. The firm serves a nationwide clientele and has earned some glowing reviews from their clients, including Peter M, who reports:
“I solicited Wolper Law Firm to help me with an investment issue. Matt Wolper… is a good listener, smart, knowledgeable, articulate and very resourceful. It was a very difficult case, but Matt navigated for the best results under the circumstances. I will recommend the Wolper Law Firm to anyone.”
Another client, Earl S., stated simply that “I was scammed by an investment firm and used Wolper Law Firm. I highly recommend this law firm to anyone. Very easy to work with and honest.”
The junk bond loss lawyers of this firm enjoy a 99 percent success rate in junk bond-related litigation, including the following wins:
- A $625,000 settlement for a broker’s misrepresentation, unsuitable investments and failure to supervise, meaning the broker’s firm failed to properly oversee the broker’s actions.
- A $1.075 million recovery from a brokerage firm for unsuitable investments and unauthorized trading.
- A $500,000 recovery from a national firm for a failure to supervise on behalf of an elderly investor.
At the Wolper Law Firm we offer a free consultation, during which an attorney can review a portfolio of high-yield junk bonds and advise on the best course of action. The consultation can be done through an online form or via phone consultation.
If you’ve suffered losses in the high-yield junk bond market, contact the firm at 954-406-1231 or (toll-free) 800-931-8452. There’s no obligation or fee charged for this preliminary review of your case.
For further information on the firm, visit us here.