Securities fraud is a lot more common than investors expect. Brokers and advisors will tell you that they put your best interests first. They will give you lots of assurances and show you complicated graphs, charts, and graphics to prove their point. But in firms both large and small, there are advisors and brokers who are putting your money at risk by committing securities fraud.

Investing is a complex business, and securities misconduct and fraud comes in many forms.

Common Examples of Securities Fraud and Stockbroker/Financial Advisor Misconduct:

  • Financial Exploitation of the Elderly
  • Variable Annuities
  • Alternative Investments
  • Failure to Supervise
  • Oil And Gas Partnerships
  • Leveraged ETFs (Exchange Traded Funds)
  • Mutual Fund Switching
  • Private Placements
  • Breach of Fiduciary Duty
  • Excessive Trading
    (Churning)
  • Failure to Diversify /
    Overconcentration
  • Margin Account Abuse
  • Misrepresentation and Omissions (Common Law Fraud)
  • Pump and Dump Schemes
  • Self-Dealing
  • Suitability – Were Recommendations Suitable?
  • Quantitative Suitability
  • Tenants In Common (“TIC”) 1031 Exchange
  • Unauthorized Trading
  • Securities Fraud
  • Sector or Stock Overconcentration
  • Failure to Follow Instructions
  • Breach of Contract
  • Selling Away
  • Promissory Notes
  • Ponzi Schemes
  • Improper Variable Annuity Sales and Exchanges
  • Business Development Companies [BDCs]

  • Elder Fraud (Financial Exploitation of the Elderly)

    Seniors often fall prey to unscrupulous brokers who disregard their investment goals and tolerance for risk. Misleading “free lunch” sometimes promote the sale of financial products that are often completely unsuitable for seniors. The elderly are the fastest growing segment of our society and they are also the financial backbone to our country’s economy. They are living longer and need to save more than ever before. We as a society do not always recognize the threats to this vulnerable population. Threats include physical and mental health issues such as stroke, Alzheimer’s, isolationism, and other causes still exist in spite of our best efforts to protect our seniors.
    A broker and brokerage firm’s procedures and controls should take into consideration the age, work-life, and life stage (whether pre-retired, semi-retired or retired) of their customers. Of particular concern is the suitability of recommendations to senior investors, communications targeting older investors, and potentially abusive or unscrupulous sales practices or exploitation targeting senior investors. For example, certain securities such as private placements, penny stocks and other speculative securities may not be suitable for a senior investor relying on their investments for income.
    Dealing with senior citizens and those approaching retirement requires special care and planning, as well as providing for their special needs of liquidity, income and safety. If you or a loved one find that the portfolio having experienced greater than expected losses and you are in or approaching retirement, you may have an actionable claim.
    To help us evaluate your chances for a successful recovery for an “Elder Fraud” claim we offer a free and confidential claim evaluation.


    Variable Annuities

    To help us evaluate your chances for a successful recovery for a “Variable Annuity” claim we offer a free and confidential claim evaluation.


    Alternative Investments

    Investment recommendations must be consistent with a client’s investment objectives and risk tolerance. Some brokers and advisory firms have recently been sanctioned by regulators for excessive sales of illiquid ‘Alternative Investments’, where there is a very limited secondary market. ‘Alternative Investments’ can include Non-Traded REITs [NTRs], Variable Annuities, Business Development Companies, Oil and Gas Partnerships and other Direct Participation Programs. State and Federal regulators have recently sanctioned many broker-dealers and advisory firms for excessive sales of these ‘Alternative Investments’. Regulators found that these firms failed to reasonably supervise the sales of NTRs, Variable Annuities, Leveraged ETFs, and other products sold to their customers.
    Some of these firms attempt to make ‘remediation offers’ to former and present clients for excessive sales of these ‘Alternative Investments’. If you receive one of these ‘remediation offers’, or have a concentration of these ‘Alternative Investments’, you may have a claim for recovery.
    To help us evaluate your chances for a successful recovery for “Alternative Investments” claim we offer a free and confidential claim evaluation.


    Failure to Supervise

    Under FINRA Rules, each brokerage firm must “design and implement written procedures” in order to properly and effectively supervise the activities of each of its financial advisors, brokers, and other employees. When an individual broker or financial advisor is negligent or acts in an improper manner against the interests of the client and that client suffers damages as a result of such wrongdoing, the firm may be held liable for the investor’s losses.
    There are also instances in which a brokerage firm may be held liable for failure to supervise without the individual broker or advisor being held responsible for damages. Brokers are required to complete standardized training and pass exams administered by the FINRA. If it is found that a brokerage firm did not properly train a broker or advisor, did not ensure the broker obtained the necessary licenses, or furnished the broker or advisor with incomplete information, the brokerage firm alone may be liable for damages caused by the broker or advisor’s negligence or misconduct. Additionally, brokerage firms are responsible for conducting due diligence on the securities products they sell and developing a written supervisory system to achieve compliance with the securities laws.
    To help us evaluate your chances for a successful recovery for a “Failure to Supervise” claim we offer a free and confidential claim evaluation.


    Concentration in Oil and Gas Partnerships

    Maintaining a diverse portfolio is one of the most basic principles of prudent investing. Unfortunately, when the oil and gas sectors were booming in recent years, many unscrupulous brokers and advisors encouraged an overconcentration of investments in this one area. Eventually those sectors went into decline, and investors experienced out-sized losses exactly because of this overconcentration. This is an example of improper behavior on the part of the brokers and advisors because as fiduciaries, brokers and advisors are required to put their client’s financial best interests first and foremost. This means avoiding unnecessary risks and advocating for a diversified portfolio. Overconcentration, whether in energy and gas or in any other sector, is a fundamentally risky investment strategy and may also be a breach of the responsibilities legally required of a fiduciary.

    Some brokers and advisors will try to justify their reliance on overconcentration by pointing to the stratospheric gains in the oil and gas sectors. But even if there was money to be made, a strategy based around overconcentration is inherently unbalanced. No investor’s interests are served by putting all their eggs in one basket. That means not only investing in multiple companies, but also in multiple sectors.
    To help us evaluate your chances for a successful recovery for an “Overconcentration in Oil and Gas” we offer a free and confidential claim evaluation.


    Leveraged “ETFs” (Exchange Traded Funds)

    Exchange Traded Funds (ETFs) were developed to create a more liquid market in sector funds. However, leveraged ETFs are designed to be tactical trading instruments, specifically not for “buy and hold” investors. Because of strict leverage requirements, even if you are correct about the direction of a market sector or the underlying investment, the complexity and leverage of the ETF can completely destroy the performance. As a result, leveraged ETFs make up only a very small percentage of the ETF marketplace.

    Because of the misuse of ETFs, FINRA issued a Regulatory Notice which warns investors that because inverse and leveraged ETFs are typically reset every day, they are unsuitable for retail investors who plan to hold them for more than one trading session. If your broker or advisor has sold you any leveraged ETFs or Inverse ETFs, or purchased any leveraged ETFs or Inverse ETFs in your accounts, and you have lost money on these investments, you may be entitled to recover these losses.
    To help us evaluate your chances for a successful recovery for a “Leveraged Exchange Traded Funds” claim we offer a free and confidential claim evaluation.


    Mutual Fund Switching

    Mutual Fund Switching is a violation of Industry Rules and it is well settled that mutual funds have long been categorized as suitable only as long-term investments and not a vehicle for short-term trading. A pattern of switches from one fund to another where there is no indication of a change in the investment objectives of the customer is not reconcilable with the concept of suitability. Mutual Fund Switching occurs when a broker or advisor is excessively buying and selling stocks and mutual funds. Class A funds have sales loads or commissions that generally last 6 years; that is why trading different families of mutual funds has resulted in sanctions and discipline for the brokerage firms and representatives that permit this pernicious practice. The short term trading of long-term investments is patently unsuitable for investors with liquidity needs. It may be a violation of Industry Rules if a broker or advisor is aware of a client’s liquidity needs and continues to recommend speculative and short term trades for the accounts when there is no change in the client’s investment objective that justified the trading pattern.
    When a broker or advisor practices improper and abusive mutual fund switching, directly contrary to the basic premise of proper asset allocation, the client’s portfolio may have no meaningful diversification among the major asset classes. A broker or advisor’s recommendation to make mutual fund switches may be completely inappropriate for the client’s needs.
    To help us evaluate your chances for a successful recovery for “Mutual Fund Switching” claim we offer a free and confidential claim evaluation.


    Private Placements

    For many years, Wall Street was overwhelmed and fraught with “penny stock” brokerage firms. After overwhelming abuse and tremendous losses to the investing public, the regulatory authorities stepped in and closed the violating firms. Similar abuse has resurfaced in the form of “private placement investments” touted and promoted by firms highlighting the benefits of the private placements investments to retirees, but failing to provide a fair and balanced presentation of the risks and rewards of the proposed investments. Often times, the wrong-doing doesn’t become clear until the distributions that were touted by the advisor or broker are in doubt and/or some of the companies file bankruptcy. Investors may not realize until it is too late that the investments their broker or advisor assured them would generate reliable retirement income is neither reliable nor generating any income and is worthless.
    To help us evaluate your chances for a successful recovery for “Private Placements” we offer a free and confidential claim evaluation.


    Breach of Fiduciary Duty

    Financial advisors and securities firms often have fiduciary duties to their clients. A fiduciary is obligated to place the interests of the person to whom he owes the fiduciary duty (the investor) above his own interests. When a broker or advisor agrees to manage client assets and/or obtain permission to place orders on their behalf, the brokers have additional duties to these clients. Investment Advisors have an even greater fiduciary duty to their clients, and advisors and their firms are often considered fiduciaries to their clients when performing the same function.

    Since investors are encouraged to place their trust and confidence in their financial advisors on whom they rely upon for expertise in making investment decisions, the broker is held to an extremely high standard not to abuse that trust. A fiduciary is charges with an obligation to provide diligent and faithful service similar to that of a trustee. A broker may also be subject to liability as a fiduciary for a pension or retirement plan assets under the Employee Retirement Income Security Act (“ERISA”).
    To help us evaluate your chances for a successful recovery for “Breach of Fiduciary Duty” we offer a free and confidential claim evaluation.


    Churning (Excessive Trading)

    Churning is a particularly vicious and invidious type of fraud. It differs little from outright theft, except that churning is harder to detect. It is a direct violation of the duty owed by a broker to his customer to exercise good faith in his dealings with his client and to make recommendations based solely on the customer’s goals and objectives. It is one of the more injurious types of fraud possible.

    Excessive trading, often referred to as “churning,” involves a broker or advisor trading securities in the account in an excessive manner for the purpose of generating additional commissions and fees. In this type of case, the broker places his own interests ahead of those of his customer. When brokers buy and sell securities in an account to generate commissions, they often convince their clients to take profits. While these reasons seem valid, these are often excuses for the broker or advisor to charge excess commissions. While churning often occurs by trading in and out of stocks, excessive trading can also occur by short-term activity in bonds, mutual funds, or annuities. Churning may often result in substantial losses in the client’s account, and even if profitable, may generate a tax liability for the client.

    To establish that your broker or advisor has churned your account, the account activity will reflect a pattern of trading in your account that was excessive. This is demonstrated by calculations to determine the annualized rate of return that would be necessary to cover the commissions charged in your account; the number of times the equity in your account was turned over to purchase securities; and the purchase and sale trading activity that occurs in your account.
    To help us evaluate your chances for a successful recovery for a “churning” claim we offer a free and confidential claim evaluation.


    Failure to Diversify / Overconcentration

    Diversification is necessary for prudent investing. One of the time-honored investment maxims is that risk can be reduced by diversification. It is important to have in one’s portfolio stocks that do not all depend on the same economic variables, such as consumer spending, business investment, housing construction, and so forth. A broker or advisor must diversify unless it is clearly prudent not to. Diversification is a universally recognized characteristic of prudent investing and, in the absence of specific instructions from the client to do otherwise, a broker or advisor’s lack of diversification of a client’s account may constitute a breach of that broker or advisor’s fiduciary obligations.
    Whether or not the broker or advisor is a fiduciary, the expected treatment in the broker-customer relationship is a diversified portfolio. Anything that deviates from that needs to be fully substantiated and justified. The decision not to diversify must be consistent with the customer’s investment objectives and risk tolerances, as well as fully grounded in the broker’s research into (a) the portfolio design and (b) the specific securities selected. It should not be sufficient simply to have a reasonable basis for recommending a particular security; rather, the broker must also have reasonable grounds for deviating from the norm of prudent investing.
    To help us evaluate your chances for a successful recovery for “Failure to Diversify” or “Overconcentration” claim we offer a free and confidential claim evaluation.


    Margin Account Abuse

    A “margin account” is an account offered by brokerage firms that allows investors to borrow money to buy securities. An investor might put down 50% of the value of a purchase and borrow the rest from the brokerage firm. The brokerage firm charges the investor interest for the right to borrow money and uses the securities as collateral.
    The most important thing to understand about margin is that buying on margin is essentially gambling with borrowed money. It is risky because the customer must repay the amount borrowed with interest, even if the securities purchased on margin lose value. As such, the customer can lose more than the amount deposited into the margin account. Using margin is a high risk method of investing and is only appropriate for sophisticated investors. Despite these risks, some brokerage firms automatically open margin accounts for investors.
    Claims for the inappropriate use of margin often occur where a substantial portion of the client’s investable assets were traded on margin, the broker failed to disclose or adequately explain the risks of margin trading, and the risks made the use of margin unsuitable given the client’s investment objectives, risk tolerance and time horizon.
    To help us evaluate your chances for a successful recovery for “Margin Account Abuse” claim we offer a free and confidential claim evaluation.


    Misrepresentation and Omissions (Common Law Fraud)

    Often the misrepresentations or omissions disguise the risks associated with a particular investment. A broker has a duty to fairly disclose all of the risks associated with a recommended investment. A brokerage firm or broker can be held liable if that firm or broker misrepresents material facts or omits to disclose material facts to the investor regarding an investment, and that client subsequently loses money on that investment. An omitted piece of information is considered “material” if knowing the information would have caused you to reconsider the decision to make the investment.
    To help us evaluate your chances for a successful recovery for a “Misrepresentations and/or Omissions” claim we offer a free and confidential claim evaluation.


    Pump and Dump Schemes

    Pump and dump is a form of microcap stock fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price. These schemes often involve fraudulent sales practices, including high pressure tactics from “boiler room” operations where a small army of sales personnel cold call potential investors using scripts to induce them to purchase stock. The information conveyed to investors often is at best exaggerated and at worst completely fabricated. With the advent of the internet, this illegal practice has become even more prevalent, with these stocks are being touted on the internet by unregistered promoters. The promoters of these companies typically hold large amounts of stock and make substantial profits when the stock price rises following intense promotional efforts. Once the price rises, the promoters, insider and brokers sell, realizing their profits.
    To help us evaluate your chances for a successful recovery for a “Pump and Dump Scheme” we offer a free and confidential claim evaluation.


    Self-Dealing

    Self-dealing is the conduct of a broker or advisor that consists of taking advantage of his or her position in a transaction and acting for his own interests rather than for the interests of the client. A fiduciary is legally obligated to act in the best interest of their clients. If a broker or advisor breaches this obligation, the client may be able to sue for damages. The most common case of self-dealing occurs when a broker or advisor knowingly advises clients to purchase products which would cause them harm, but would pay the broker a generous commission.
    To help us evaluate your chances for a successful recovery for “Self Dealing” we offer a free and confidential claim evaluation.


    Customer Specific Suitability

    Are you an investor who has lost money because you believe your broker or advisor made investment recommendations that were inconsistent for your age, income, investment objectives and/or risk tolerance? If so, you may be the victim of something called “unsuitability.” In making an investment recommendation to a client, a broker must make recommendations that are consistent with the customer’s risk tolerance, needs and investment objectives. A broker has a duty to know his client and only recommend investments and trading strategies that are suitable for that client. An investment may be unsuitable if a client does not have the financial ability to incur the risk associated with a particular investment, if the investment was not in line with the investor’s financial needs or if the client did not know or understand risks associated with certain investments.

    A broker has a duty to gather essential information in order to understand the risk tolerance of an investor, the tax considerations for the client, the client’s prior experiences and appetite for risk, and the level of return desired. It is the duty of a broker to make recommendations that are appropriate and suitable given his client’s circumstances. If a broker breaches those duties and makes unsuitable recommendations for a client, the broker may be liable to that client.

    A broker must also have a “reasonable basis for the recommendation.” The broker’s basis for the recommendation can be the firm’s research, in which case the firm must have a reasonable basis for its own recommendation.
    To help us evaluate your chances for a successful recovery for “unsuitability” we offer a free and confidential claim evaluation.


    Quantitative Suitability

    All brokers and broker-dealers must have a reasonable basis for recommending a series of transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the client when taken together in light of the client’s objectives. Thus, while a small investment in a particular product may be suitable for the investor, a large portfolio concentration in the same or similar products may be unsuitable for the same investor. In addition, the pattern and type of securities activity in the account can also be unsuitable for the investor. Factors such as turnover rate, cost-equity ratio, and use of in-and-out trading tactics indicate excessive activity that violates quantitative suitability standards
    To help us evaluate your chances for a successful recovery for “unsuitability” we offer a free and confidential claim evaluation.


    Tenants In Common (“TIC”) 1031 Exchange

    A Tenant in Common property (“TIC”) allows the seller of real estate to qualify for a 1031 tax free exchange of the property sold in exchange for an ownership interest in another investment property. Brokerage firms sell fractional ownership interests in real estate to persons who have recently sold or are considering the sale of an appreciated piece of property as an alternative investment vehicle that preserves the tax free status of a property exchange.
    It is imperative that broker-dealers selling TICs perform adequate pre-sale due diligence and on-going monitoring of the TIC investment. Pre-sale and subsequent due diligence are conducted by the brokerage firm’s due diligence department personnel. At the very minimum due diligence of the financial statements, background checks of the promoter and key persons and an appraisal of the underlying real estate must be performed.
    Warning signs that a TIC may be failing may include the failure of management to communicate with the investors or a freeze in dividend or interest payments.
    To help us evaluate your chances for a successful recovery for “Tenant In Common (TIC) 1031 Exchanges” we offer a free and confidential claim evaluation.


    Unauthorized Trading

    Unauthorized trading occurs when your broker buys or sells a security in your account without your prior approval. Unless you have previously agreed that your broker has discretion to manage your account without seeking prior approval for each transaction, your broker must follow rules designed to assure that you, in fact, approved each transaction on the day the transaction occurs. If not, the transaction may be unauthorized, or it may be
    considered to be a failure to complete required discretionary
    authority.

    Industry Rules explicitly prohibit brokers from making discretionary trades in a customers’ non-discretionary accounts. The SEC has also found that unauthorized trading violates just and equitable principles of trade and constitutes violations of Rule 10b and 10b-5 due to its fraudulent nature. There are certain exceptions however. For instance, if a customer has a margin account and the value of the account falls below the brokerage firm’s or regulator’s requirements, the broker may be able to sell the customer’s securities without consulting the customer beforehand.
    To help us evaluate your chances for a successful recovery for “Unauthorized Trading” we offer a free and confidential claim evaluation.


    Securities Fraud

    Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false or misleading information, resulting in losses, in violation of securities laws. The types of misrepresentation involved include providing false information, withholding key information, and offering bad advice.

    Investors are protected against fraudulent securities activities by several civil laws. The Securities Exchange Act of 1934 and Rule 10b-5 protect investors against deceptive and manipulative acts in the purchase or sale of securities. Rule 10b-5 makes it unlawful to employ a device or scheme to defraud, to make any untrue statement of material fact or omit to state a material fact not misleading, or to engage in any practice that would operate as a fraud.

    Additionally, a vast majority of states have passed “blue sky” laws that regulate the securities industry and protect investors. Even if a state has not enacted specific securities laws, an investor can still pursue a claim under theories of common law fraud.

    Investors can pursue claims against financial advisors or brokerage firms under the Rules of the Financial Industry Regulatory Authority (FINRA). FINRA rules require fair dealing with customers and covers a variety of improper sales practices including churning, false accounts, unauthorized trading, and misuse of customer funds.
    To help us evaluate your chances for a successful recovery for “Securities Fraud” we offer a free and confidential claim evaluation.


    Sector or Stock Overconcentration

    If you requested safe and secure investments but your financial advisor or broker invested a large percentage of your account into one security, one sector of the economy, or one type of investment, it is overconcentration. Failing to diversify your investments over asset class (type of security, i.e., stocks, bonds, mutual funds, cash, etc.) and sector (health care, financials, automotive, pharmaceuticals, oil and gas, consumer goods, technology, international, etc.), as well as “overconcentration” in any one of those areas may be the reason for your losses and an actionable claim against your broker. A broker or advisor who does not diversify his client’s portfolio is potentially liable if that investment declines in value.
    To help us evaluate your chances for a successful recovery for a “Sector or Stock Overconcentration” we offer a free and confidential claim evaluation.


    Failure to Execute

    Brokers have a duty to properly and promptly execute customer orders. Failure to execute trades, also known as a failure to follow instructions, occurs when a broker does not execute a trade ordered by a client. Other cases include the failure of the broker to obtain the best possible price during an authorized trade, make the trade in a timely manner, or carry out a pre-specified action at the price the client believes it will be. If a client directs his or her broker or advisor to sell or buy a given security and it is not done, or not done in a timely manner, the broker will be found in violation of his or her duties to the client.
    To help us evaluate your chances for a successful recovery for a “Failure to Execute” claim we offer a free and confidential claim evaluation.


    Breach of Contract

    A claim for breach of contract may be based upon any Customer Agreements which the client signs when an account is opened with a brokerage or advisory firm. These standard forms typically require the brokerage firm to handle the account in accordance with the rules and regulations of the industry. A breach of contract claim can include mismanagement of the account based upon implied warranties to handle the account with due care and diligence. A breach of an implied covenant of good faith and fair dealing may also provide the basis of a cause of action for breach of contract. You may have a claim for breach of contract if your broker, advisor, or brokerage firm failed to make suitable investments, engaged in improper sales practices, and otherwise violated federal, state and industry regulations in their handling of your account, contrary to the agreement to abide by industry rules and to provide competent and professional services.
    To help us evaluate your chances for a successful recovery for “Breach of Contract” claim we offer a free and confidential claim evaluation.


    Selling Away

    “The securities industry is highly regulated. Financial Advisors and Brokers must get approval from supervision for all of their activities, even those that might be considered “outside business activities.” Brokers and their brokerage firms are required to follow the federal and state securities laws, regulations issued by the SEC/FINRA and the rules of the brokerage firm itself.
    Although the broker pretend that he is acting in your best interest, he may be violation industry rules. Often, the customer does not even know that the investment the broker is recommending is forbidden by industry rules.
    A broker violates these rules when he or she recommends to a customer an alternative investment that is offered by a person or entity outside the brokerage firm. The broker may not tell the customer that the investment is being made outside of the brokerage firm. The broker may claim that the recommended “investment” is in the customer’s best interest, but the brokerage firm may not have reviewed or approved the “investment.” The brokerage firm may not have had the opportunity to complete any due diligence on the investment, and the “investment” might not have been recommended by the brokerage firm.
    Since the brokerage firm does not know about this investment, it cannot supervise the broker’s activities. This is why it is critical for the brokerage firm to monitor its sales force’s outside business activities, to ensure its customers are protected. If they have not, the customers may be entitled to recover their entire losses on such investments.”


    Promissory Notes

    “*Update: FINRA is reissuing this alert on the heels of its disciplinary action related to
    the fraudulent sale of promissory notes to NFL and NBA players. In June 2014, a FINRA hearing panel expelled Washington, D.C.-based Success Trade Securities, Inc. and barred its CEO and President for the fraudulent sale of more than $19 million in promissory notes. The alert details the risks associated with promissory notes and the continued threat of promissory note schemes whose sole objective is to defraud investors.
    Scams involving promissory notes rob investors of tens of millions of dollars. The promise of high guaranteed rates of interest (some as high as 26 percent) make these come-ons particularly attractive in today’s low-interest rate environment.
    Investors who consider buying promissory notes need to check them out thoroughly. Unlike many investments today, promissory notes sound simple and safe, and appear to be an attractive alternative to stocks and bonds. While they can be legitimate investments, some promissory notes sold widely to individual investors are fraudulent. Recent fraudulent schemes include promissory notes purported to be secured by investments in real estate, US Treasuries, brokerage firms and a variety of businesses including one that produced personal finance-related radio programming. Investors need to understand the investment they are considering, and be aware of warning signs that may signal a scam.
    A promissory note is a form of debt that companies sometimes use, like loans, to raise money. The company, through the notes, promises to return the buyer’s funds (principal), and to make fixed interest payments to the buyer in exchange for borrowing the money. Promissory notes have set terms, or repayment periods, ranging from a few months to several years.
    Problems with promissory notes fall into three main categories: fraud and deception of investors, unregistered securities and unregistered sellers.
    Fraudulent promissory note programs are often characterized by deceptive statements such as: 1) investors will receive very high, double digit returns; 2) returns are guaranteed; and 3) the notes are backed by collateral to guarantee them. Often, promissory note schemes target the elderly and their retirement savings.
    Often, these promissory notes are securities and must be registered with the SEC or the state they are sold in. If you are buying through a broker, ask if the note is being sold through the broker’s firm. If not, it is being “sold away,” and you will miss important investor protections that flow from the broker’s and the firm’s regulatory obligations. Be alert to red flags that your broker may be operating outside the oversight of the firm. These may include the use of a personal email address instead of one associated with the brokerage firm, statements about your investment that do not bear the firm’s letterhead or appear to originate from a new entity not related to the brokerage firm or printouts that look like they came from a home computer.
    Know that financial advisors and brokers should not guarantee a particular return. Even if the note has a fixed interest return, the investment may not pay that amount—or return your principal—to you. Moreover, the seller may say the notes are insured, but not mention that the insurer may not be legitimate or creditworthy. *Excerpted from FINRA.org [http://www.finra.org/investors/alerts/promissory-notes-can-be-less-promised]”


    Ponzi Schemes

    “The term “Ponzi Scheme” derives from the notorious Charles Ponzi, who stole millions of dollars from Boston investors in 1920 and describes a financial fraud which is perpetrated by utilizing monies obtained under false pretenses from subsequent investors to pay “interest” or “dividends” and return of principal to earlier investors who have no reason to suspect that no legitimate enterprise is actually generating revenues to make these payments.
    A Ponzi scheme will only last as long as there are new investors who part with their investment funds anticipating unusually high returns. Eventually, the house of cards will have to collapse usually leaving the later-in-time investors holding the bag and the con- artist promoters in jail.”


    Improper Variable Annuity Sales and Exchanges

    Add category for “Improper Variable Annuity Sales and Exchanges” with the following description:
    “Variable annuity products are complex. Regulators have enacted strict requirements governing the sales and exchanges of variable annuities, including the following:
    a) that the customer must have the ability to fully appreciate how much of the purchase payment or premium is allocated for insurance or other costs, and a customer’s ability to understand the complexity of variable products generally.
    b) the customer’s need for liquidity and short term investment.
    c) the customer’s immediate need for retirement income.
    d) the customer’s investment sophistication and whether he or she is able to monitor the investment experience of a separate account.
    NASD Notice to Members 99-35 requires that financial advisors and brokers may be responsible for variable annuity losses as a result of their:
    (a) Failure to make reasonable efforts to obtain comprehensive customer information, including the customer’s occupation, martial status, age, number of dependents, investment objectives, risk tolerance, status, previous investment experience, liquid net worth, other investment and savings and annual income.
    (b) Failure to “discuss all relevant facts with the customer, including liquidity issues such as potential surrender charges and the Internal Revenue Service penalty; fee, including mortality and expense charges, administrative charges and investment advisory fees; and any applicable state and local government premium taxes; and market risk.”
    (c) Failure to “insure that the variable annuity application and any other information provided by the customer….is complete and accurate and promptly forwarded to a registered principal for review.”
    (d) Failure to “review the customer’s investment objectives, risk tolerance, and other information to determine the variable annuity contract as a whole and the underlying sub-accounts recommended to the customer are suitable”.
    (e) Failure to “have a thorough knowledge of the specifications of each variable annuity that is recommended, including the death benefit, fees and expenses, sub- account choices, special features, withdrawal privileges, and tax treatment”.
    (f) Failure to give current Prospectus when the variable annuities in question were recommended.
    (g) Violation of Rule 2210 by using sales material not approved by a registered principal of the Respondents Corporation.
    (h) Failure to “Inquire about whether the customer has a long term investment objective and failure to make sure that the customer understands the effective surrender charges on redemptions”.
    (i) Failure to “establish procedures to require a principal’s careful review of variable
    annuity investments that exceed a stated percentage of the customer’s net worth”.
    (j) Failure to “disclose to the customer that the tax deferred accrual feature is provided by the tax qualified retirement plan [in t case the Claimant’s IRA roll over} and that the tax deferred accrual feature of the variable annuity is unnecessary.’
    (k) Failure to “conduct an especially comprehensive suitability analysis prior to approving the sale of a variable annuity with surrender charges to a customer is a tax- qualified account subject to plan minimum distribution requirements”.


    Business Development Companies [BDCs]

    “BDCs have been a growing asset class that markets itself to investors as an alternative investment. However, BDCs are speculative, suffer from high commissions and fees, and are inappropriate for most investors. Commissions and fees on Non-Traded BDCs can be as much as 11.5 to 12 percent. Also, BDCs often have additional incentive compensation.
    One of the largest BDC managers is Franklin Square Capital Partners which manages multiple Non-Traded BDC funds including the FS Investment Corporation (NYSE:FSIC) FS Investment Corporation II (FSIC II), FS Investment Corporation III (FSIC III), FS Investment Corporation IV (FSIC IV), FS Energy and Power Fund (FSEP), and FS Global Credit Opportunities.
    There are a couple of reasons for closing the funds to investors including serious problems with their lack of transparency and the interrelationship with affiliated companies. In addition, the proposed new fiduciary standards for advisers and mandated fee disclosures is causing the industry to question whether these products can be sold anymore. Basically, the industry is worried that Non-Traded REITs are not in investors best interests, an opinion our firm has echoed before. (See Controversy Over Non-Traded REITs: Should These Products Be Sold to Investors? Part I)
    One would think that given the pending collapse and/or major shakeup of the Non-Traded REIT market Non-Traded BDCs would be similarly effected with the same concerns. Not so fast. Slap the “small business” label on any investment and lawmakers line up to make this failed investment class even riskier for retail investors. According to InvestmentNews, The House Financial Services Committee on November 4, 2015, approved the Small Business Credit Availability that would allow BDCs to raise their leverage limits from 1:1 to 2:1 and increase the amount of money that they can invest in financial firms among other changes. Non-Traded BDC investments are illiquid and likely to face poor performance.”