Lure of High Returns Make Retail Investors Easy Targets for Securities Fraud Involving Complex Financial Products

In the wake of the recent financial crisis, retail investors, especially those seeking to save for retirement and who lost much when their stock portfolios and mutual funds dropped, are feeling compelled to get involved in complex products that until recently were targeted to their more sophisticated counterparts. Many want better returns than what they can get via government bonds and bank deposits. Unfortunately, regulators now have to contend with a barrage of related investor fraud claims.

According to The New York Times, tens of thousands of retail investors placed money into speculative bets that were marketed by aggressive financial advisers. Many of these alternative investments have started to go bad and are being named in a huge bulk of the more recent prosecutions and securities lawsuits.

It was just earlier this month that Massachusetts Secretary of the Commonwealth William Galvin ordered LPL Financial (LPLA) to pay $2.5 million in a REIT case for the allegedly improper sale of nontraded real estate investment trusts to hundreds of state residents. Approximately $28 million was invested in seven REITs involving 597 transactions. Galvin’s office accused the financial firm of not properly supervising its agents, who pushed the sales, and of engaging in business practices that were “dishonest and unethical.” The state contends that LPL made at least $1.8 million in commissions from the sales, which took place between 2006 and 2009. Meantime, in Arkansas, most of the 66 securities cases that are currently open reportedly involve unsophisticated investors that placed their funds in complex instruments.

While those seeking to get rich quickly have often been easy targets for brokers selling bad investments, now saver investors that used to depend on more traditional investments can be added to this mix. As financial firms continue to seek more revenue from alternative investments, which also tend to come with higher commissions than stocks and mutual funds, regulators are cautioning that investment fraud risks from complex instruments are not likely to go away soon.

Private placements have been among the top complex investments that are proving to be a problem for investors chasing yield. Supposedly geared toward sophisticated, rich investors, a number of loopholes, including less stringent procedures for confirming financial worth, is allowing less sophisticated investors to get involved.

REITs have also become popular-especially as there aren’t many rules about how investors are allowed to invest in them. Once mainly found in funds traded on public exchanges, they can now only purchased and sold in private transactions. While this private state means that REITs are not as likely to fluctuate with the stock market-a selling point-this is has also made it tougher for investors to exit or value their holdings.

Speculative Bets Prove Risky as Savers Chase Payoff, The New York Times, February 10, 2013
Secretary Galvin Orders LPL Financial to Return $2 Million to Investor Victims,, February 6, 2013

More Blog Posts:

David Lerner Associates Must Pay $14M Over Apple REIT Ten Sales and Allegedly Excessive Markups Involving CMOs and Municipal Bonds-$12M to Go to Investors, Institutional Investor Securities Blog, October 22, 2012

Private REITs: The Need for Tougher Oversight?, Institutional Investor Securities Blog, June 28, 2011
Wells Investment Securities Agrees to $300,000 Fine by FINRA for Alleged Use of Misleading Marketing Materials for REIT Offerings, Institutional Investor Securities Blog, November 23, 2011