Dec 22, 2020

What Is Hedge Fund Fraud?

Hedge funds are an increasingly popular investment tool, often suggested as an alternative to other pooled fund investments. However, because the Securities and Exchange Commission (SEC) provides less regulation over them, hedge funds carry a greater risk. Over the past two decades, investors have lost billions of dollars to fraud involving hedge funds. As an investor, it is important to be aware how hedge funds operate and how they can be fraudulent. If you believe you’ve been the victim of investment fraud, contact an investment fraud attorney right away. They can assess your case and advise you on your potential options for recovery. What Is a Hedge Fund? Simply put, hedge funds are a type of investment partnership. Like a mutual fund, a hedge fund is built from the pooled funds of many different investors. These investors give their money to fund managers, who invest it according to the fund’s overall objectives. Hedge funds are an attractive option to many investors because they are more aggressively managed than other investment vehicles. Hedge funds invest in a variety of non-traditional assets beyond stocks and bonds, including foreign currencies, real estate markets, and even derivatives. This kind of investment strategy does have its benefits. At the same time, however, the enormous complexity of hedge funds makes them a higher risk. Investors may not know exactly how their money is tied up at any given time. What Is Hedge Fund Fraud? There is no single way that hedge fund managers defraud investors. Instead, hedge fund fraud can take the form of several common types of investment scam, including: Embezzlement; Insider trading for the personal benefit of the hedge fund managers; Securing an investment through misrepresentations about about the investments within the fund or its promised returns; Securing your investment without properly disclosing the risks of the fund; and Hiding investment losses. Occasionally, a hedge fund covers up an outright investment scam from the beginning. Bernie Madoff’s infamous Ponzi scheme, for example, involved a hedge fund. Many hedge funds are legitimate, but investors must always be wary of who is managing their money. What Are the Signs of Hedge Fund Fraud? As with other types of investment fraud, hedge fund fraud can take a number of forms. In general, however, if the promises made about a hedge fund seem too good to be true, they probably are. No two hedge fund fraud cases are exactly alike, but there are several red flags you can look for. When researching a potential investment, pay attention to Promises of excessive returns; Promises of consistent returns regardless of market strength; Vague or complicated communication about your investment; Whether an independent accounting firm regularly audits the fund; and Whether the fund has a balance of liquid and illiquid investments. In addition, the conduct of a hedge fund manager is a good way to judge the legitimacy of a hedge fund. Unlike brokers at a brokerage firm, hedge fund managers do not receive commissions for the securities they sell. Instead, reputable hedge funds charge a management fee of between 1% and 4% of the total assets managed and a performance fee based on the total profit the fund generates. If you plan to invest in a hedge fund and the manager indicates that they are paid on commission, it’s probably best to stay away. Why Is Hedge Fund Fraud So Common? Hedge funds have two primary characteristics that make them a prime target for investment fraud. First, compared to other investments, hedge funds are relatively unregulated. And second, hedge funds involve larger investments and wealthier investors. Hedge Funds Operate with Less Oversight from the SEC Hedge fund fraud is more common because hedge funds operate with less oversight from the SEC. The SEC requires certain types of investment companies to register with the Commission before commencing operations. As a condition of registration, these companies must file certain reports with the SEC. This additional oversight makes it harder for these regulated investment funds to engage in fraudulent behavior. Hedge funds organize themselves as private investment limited partnerships so that they fall within an exception to these registration requirements. This exception allows hedge funds to operate without registering with the SEC and exempts them from the same mandatory reporting requirements as registered investment companies. Hedge Funds Involve More Money Compared to Other Funds Hedge funds are a common target for investment fraud because they involve investors with a higher net worth than in other pooled funds. Compared to other types of investments, hedge funds require sizable upfront investments to join. What’s more, the SEC permits only accredited investors to trade in unregistered securities. The SEC considers an investor to be “accredited” if they have an individual income in excess of $200,000 per year or a net worth of more than $1 million. In August 2020, the SEC amended the definition of “accredited investor” to include investors that meet certain minimum thresholds of professional knowledge, experience, or certifications. In a sense, accredited investors are those that the government believes are sophisticated enough to make riskier investment decisions on their own. However, even diligent and knowledgeable investors may fall victim to particularly clever investment fraud schemes. Unscrupulous hedge fund managers know this and may see these wealthy investors as an opportunity for fraud. Should I Hire an Investment Fraud Attorney? If you’ve suffered investment losses after investing in a hedge fund, it is important to speak with an investment fraud attorney right away. As an investor, there are a number of legal theories on which you can rely to hold a hedge fund and its managers liable for your losses. For example, even though hedge funds are not required to register with the SEC, hedge fund managers are still investment advisers obligated to act as fiduciaries to their investors. As fiduciaries, hedge fund managers owe both a duty of loyalty and a duty of care to their investors Thus, in addition to claims for misrepresentation, breach of contract, or other theories of liability, hedge...

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Dec 22, 2020

How To Recover Your Investments from a Ponzi Scheme

If you are an investor who has suffered investment losses as a result of a Ponzi scheme, you’re not alone. In fact, Ponzi schemes are reaching levels that haven’t been seen in a decade, putting many investors in a difficult position. Losing your hard-earned money to a Ponzi scheme can be devastating. And frequently, it can also be surprising. This is because many investors often don’t realize they’ve fallen victim to a Ponzi scheme until it’s too late.  While this can be difficult to process, know that it’s not the end of the road. There are ways that you can fight to recover your investments.  If you need help figuring out how to recover from a Ponzi scheme, the Law Offices of Robert Wayne Pearce, P.A., is ready to help. Investment loss attorney Robert Pearce specializes in getting individuals their money back from bad investments. He has been helping his clients recover for over 40 years and will fight to do the same for you.  Ponzi Schemes: An Overview According to one source, there were an estimated 60 Ponzi schemes uncovered in 2019. In total, these schemes resulted in $3.245 billion in losses to investor funds.  But what exactly is a Ponzi scheme?  Knowing the answer to this question can help you identify whether you may have fallen victim to a Ponzi scheme. If you have, contact our team today to find out how we can help you recover.   Where Does the Name “Ponzi” Scheme Come From? In the 1920s, a man named Charles Ponzi promised investors they would receive a 50% return within 45 days by purchasing discounted reply coupons in other countries and redeeming them at face value in the United States as a form of arbitrage. Ponzi, in reality, was using the funds of later investors to pay the earlier investors to fund his scheme.  Ponzi operated this scheme for over a year, resulting in over $20,000 in losses to investors. What Is a Ponzi Scheme?  A Ponzi scheme is a form of financial fraud. Typically, a ponzi scheme operates by inducing investments from unsuspecting investors often by promising high, risk-free returns over a short period of time from a purportedly legitimate business venture.  In a Ponzi scheme, money funded by new investors is used to pay returns to older investors, rather than money actually made by the purported business. Essentially, the scheme relies on the constant flow of new investor money to survive.  Key Elements of a Ponzi Scheme A Ponzi scheme is a specific type of investment fraud that has a few distinct characteristics. The key elements of a Ponzi scheme involve: Using new investor funds to pay earlier investors; Representing that the returns are generated from a purported business venture; and Attempting to hide the lack of economic success of the purported venture or defer the realization of loss. If these elements exist in your scenario, there is a chance you may be the victim of a Ponzi scheme. An investment loss attorney can help you determine whether this may be the case and what you can do to recover.  Warning Signs of a Ponzi Scheme Knowing the definition of a Ponzi scheme is one thing. But being able to identify one is another thing entirely.  In fact, identifying a Ponzi scheme is more difficult than you might think. However, knowing the warning signs of a potential Ponzi scheme is the first step to avoid potentially being involved in one.  The Securities Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have published a list of characteristics that are common to most Ponzi-like schemes. When attempting to identify a potential Ponzi scheme, look for these red flags. Promises of High Returns with Little to No Risk All investments inevitably carry some risk. Thus, any promise of a “guaranteed” high-return investment should be treated with skepticism. Typically, investments that yield high returns are riskier than investments that yield low returns. If the promise of returns seems “too good to be true,” it probably is. Overly Consistent Returns It is well-known that the market can be very volatile. Thus, investments usually go up and down over time, rather than remaining constant or going up consistently without any fluctuation.  If you are receiving all positive returns, even during times of market volatility, this could be a red flag. Seek more detailed information about your investments, and if something seems off, contact an attorney to discuss your options.  Unregistered Investments You should always be weary of investments that are unregistered.  Registration provides investors with access to important information about the company offering the investment. If a broker is selling or recommending investments that are unregistered, this may be a sign of a potential Ponzi scheme.  Unlicensed Sellers Always be suspicious of sellers who claim they are exempt from licensing.  In fact, federal and state laws require sellers to be licensed or registered. Many Ponzi schemes involve unregistered sellers or unregistered broker-dealers. Difficulty Receiving Payments As an investor, you should have the ability to cash out your investments when you choose to do so.  If you are unable to cash out your investments easily or if you have received multiple offers to “roll over” your promised payments for an even higher return, this could be a red flag.  I May Have Invested in a Ponzi Scheme—Now What Can I Do? If you believe you might be the victim of a Ponzi scheme, you might feel tempted to give up. But don’t do so quite yet.  Parties that defraud investors through a Ponzi scheme can be held liable for the losses caused by their actions. This includes brokers, financial advisors, and brokerage firms.  Additionally, if a broker-dealer is registered with FINRA, you may be able to file a FINRA arbitration against the broker who defrauded you and caused you to lose money.  So what’s next? Here’s what you need to know about how to recover from a Ponzi scheme.  Gather All Relevant Information If you suspect that you are...

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Dec 15, 2020

LPL Financial LLC Sued For Scott Lanza’s Sales Of REITs And BDCs

LPL Financial LLC (“LPL”) is a securities brokerage firm with offices in Boca Raton, Florida and elsewhere. It is regulated by Financial Industry Regulatory Authority (“FINRA”).  LPL offered and sold to Claimants the investments at issue in this arbitration, namely, non-traded Real Estate Investment Trusts and Business Development Companies through Scott Lanza (“Mr. Lanza”) an individual registered with FINRA as an “Associate Member” of LPL.  The brokerage firm LPL has been sued because it is vicariously liable for Mr. Lanza’s acts, omissions and other misconduct described more fully herein.

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Dec 1, 2020

Non-Discretionary vs. Discretionary Investment Accounts

When investors first set up an account with a brokerage firm, that account is designated as either discretionary or non-discretionary. Unfortunately, many investors are simply unaware of the status of their account or what it means. This is usually because investment brokers fail to properly explain each type of account. However, knowing what kind of investment account you have is important. The claims available to a victim of investment fraud or broker misconduct depend on the status of your account. Discretionary vs. Non Discretionary Accounts A discretionary account is an investment account in which an investment advisor has the power to make individual trades without requiring client approval. A non-discretionary account is one in which the client has complete control over whether or not to execute a trade. Need Legal Help? Let’s talk. or, give us a ring at 561-338-0037.

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Sep 10, 2020

Securities-Backed Lines of Credit Can Ce More Dangerous Than Margin Accounts

Many investors have heard of margin accounts and the horror stories of others who invested on margin and suffered substantial losses. But few investors understand that securities-backed lines of credit (SBL) accounts, which have been aggressively promoted by brokerage firms in the last decade, are just as dangerous as margin accounts. This is largely due to the fact that the equity and bond markets have been on an upward trend since 2009 and few investors (unless you are a Puerto Rico investor) have experienced market slides resulting in margin calls due to the insufficient amount of collateral in the SBL accounts. Securities-Backed Lines of Credit Overview It is only over the last several months of market volatility that investors have begun to feel the wrath of margin calls and understand the high risks associated with investing in SBL accounts. For investors considering your stockbroker’s offer of a line of credit (a loan at a variable or fixed rate of interest) to finance a residence, a boat, or to pay taxes or for your child’s college education, you may want to read a little more about the nature, mechanics, and risks of SBL accounts before you sign the collateral account agreement and pledge away your life savings to the brokerage firm in exchange for the same loan you could have obtained from another bank without all the risk associated with SBL accounts. First, it may be helpful to understand just why SBL accounts have become so popular over the last decade. It should be no surprise that the primary reason for your stockbroker’s offering of an SBL is that both the brokerage firm and he/she make money. Over many years, the source of revenues for brokerage firms has shifted from transaction-based commissions to fee-based investments, limited partnerships, real estate investment trusts (REITs), structured products, managed accounts, and income earned from lending money to clients in SBL and margin accounts. Many more investors seem to be aware of the danger of borrowing in margin accounts for the purposes of buying and selling securities, so the brokerage firms expanded their banking activities with their banking affiliates to expand the market and their profitability in the lending arena through SBL accounts. The typical sales pitch is that SBL accounts are an easy and inexpensive way to access cash by borrowing against the assets in your investment portfolio without having to liquidate any securities you own so that you can continue to profit from your stockbroker’s supposedly successful and infallible investment strategy. Today the SBL lending business is perhaps one of the more profitable divisions at any brokerage firm and banking affiliate offering that product because the brokerage firm retains assets under management and the fees related thereto and the banking affiliate earns interest income from another market it did not otherwise have direct access to. For the benefit of the novice investor, let me explain the basics of just how an SBL account works. An SBL account allows you to borrow money using securities held in your investment accounts as collateral for the loan. The Danger of Investing in SBL Accounts Once the account is established and you received the loan proceeds, you can continue to buy and sell securities in that account, so long as the value of the securities in the account exceeds the minimum collateral requirements of the banking affiliate, which can change just like the margin requirements at a brokerage firm. Assuming you meet those collateral requirements, you only make monthly interest-only payments and the loan remains outstanding until it is repaid. You can pay down the loan balance at any time, and borrow again and pay it down, and borrow again, so long as the SBL account has sufficient collateral and you make the monthly interest-only payments in your SBL account. In fact, the monthly interest-only payments can be paid by borrowing additional money from the bank to satisfy them until you reach a credit limit or the collateral in your account becomes insufficient at your brokerage firm and its banking affiliate’s discretion. We have heard some stockbrokers describe SBLs as equivalent to home equity lines, but they are not really the same. Yes, they are similar in the sense that the amount of equity in your SBL account, like your equity in your house, is collateral for a loan, but you will not lose your house without notice or a lengthy foreclosure process. On the other hand, you can lose all of your securities in your SBL account if the market goes south and the brokerage firm along with its banking affiliate sell, without prior notice, all of the securities serving as collateral in the SBL account. You might ask how can that happen; that is, sell the securities in your SBL account, without notice? Well, when you open up an SBL account, the brokerage firm and its banking affiliate and you will execute a contract, a loan agreement that specifies the maximum amount the bank will agree to lend you in exchange for your agreement to pledge your investment account assets as collateral for the loan. You also agree in that contract that if the value of your securities declines to an amount that is no longer sufficient to secure your line of credit, you must agree to post additional collateral or repay the loan upon demand. Lines of credit are typically demand loans, meaning the banking affiliate can demand repayment in full at any time. Generally, you will receive a “maintenance call” from the brokerage firm and/or its banking affiliate notifying you that you must post additional collateral or repay the loan in 3 to 5 days or, if you are unable to do so, the brokerage firm will liquidate your securities and keep the cash necessary to satisfy the “maintenance call” or, in some cases, use the proceeds to pay off the entire loan. But I want to emphasize, the brokerage firm and its banking affiliate, under the terms of almost all SBL account agreements,...

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Sep 8, 2020

UBS Puerto Rico Misrepresents Safety of Bond Funds to Investor

The Law Offices of Robert Wayne Pearce, P.A. filed yet another claim against UBS Financial Services Incorporated of Puerto Rico (UBS Puerto Rico). A summary of the allegations the Claimant made against the Puerto Rico based brokerage is below. If you or any family member received similar misrepresentations and/or misleading statements from UBS Puerto Rico and its stockbrokers or found yourself with an account overconcentrated in closed-end bond funds, or if you borrowed monies from UBS Puerto Rico and used your investments as collateral for those loans, we may be able to help you recover your losses. Contact our office for a free consultation about your case.

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Sep 1, 2020

Investors With “Blown-Out” Securities-Backed Credit Line and Margin Accounts: How do You Recover Your Investment Losses?

If you are reading this article, we are guessing you had a bad experience recently in either a securities-backed line of credit (“SBL”) or margin account that suffered margin calls and was liquidated without notice, causing you to realize losses. Ordinarily, investors with margin calls receive 3 to 5 days to meet them; and if that happened, the value of the securities in your account might have increased within that period and the firm might have erased the margin call and might not have liquidated your account. If you are an investor who has experienced margin calls in the past, and that is your only complaint then, read no further because when you signed the account agreement with the brokerage firm you chose to do business with, you probably gave it the right to liquidate all of the securities in your account at any time without notice. On the other hand, if you are an investor with little experience or one with a modest financial condition who was talked into opening a securities-backed line of credit account without being advised of the true nature, mechanics, and/or risks of opening such an account, then you should call us now! Alternatively, if you are an investor who needed to withdraw money for a house or to pay for your taxes or child’s education but was talked into holding a risky or concentrated portfolio of stocks and/or junk bonds in a pledged collateral account for a credit-line or a margin account, then we can probably help you recover your investment losses as well. The key to a successful recovery of your investment loss is not to focus on the brokerage firm’s liquidation of the securities in your account without notice. Instead, the focus on your case should be on what you were told and whether the recommendation was suitable for you before you opened the account and suffered the liquidation.

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Aug 15, 2020

UBS Yield Enhanced Strategy Investors: How Do You Recover Your “UBS-YES” Investment Losses?

If you are reading this article, you probably invested in the UBS Yield Enhanced Strategy (“UBS-YES”) and were surprised to learn the UBS-YES program you invested in was not exactly a “market neutral” investment strategy during the recent COVID 19 market crash. Despite your UBS stockbroker’s representations about the UBS-YES managers ability to “manage risk” and “minimize losses” through its “iron condor” option strategy you still realized substantial losses. You are not alone because that is just what many other UBS-YES investors have told us about the pitch made to them to invest in the UBS-YES program and their recent experience.

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Aug 5, 2020

UBS Financial Services, Inc. Sued for Florida and Ohio Advisor’s Alleged Misconduct Involving a Credit-Line Investment Strategy

UBS Financial Services, Inc, (“UBS”) employed a financial advisor (the “FA”) who has offices in Bonita Springs, Florida and Sylvania, Ohio. UBS held out the FA and other UBS employees on his team as investment advisers, investment managers, financial advisers, and financial planners with special skills and expertise in the management of securities portfolios and financial, estate, retirement, and tax planning matters.

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