Ten Red Flags for Investors

Ten Red Flags of Investment Fraud

We’ve updated our list of ten red flags that  investors should be aware of: danger signs that point to potential mismanagement of an account or investment fraud by a financial advisor. These red flags are useful as you evaluate your own investments, review the investments of an elderly relative, or if you’ve decided to change brokers.

From our firm’s first-hand experience in reviewing thousands of financial statements and successfully recovering investment money for many clients, these red flags of investment fraud are often a sign of trouble. If you notice any of these red flags and you have concerns, we encourage you to contact us for a free, confidential review. With early detection, investors have the potential to avoid a lot of heartache and significant financial loss.


Red Flags:

1. Your financial advisor didn’t discuss your risk tolerance with you, told you “not to worry” about that category when filling out account paperwork, or you somehow ended up with a higher risk portfolio than you wanted.  Any reported swing in portfolio value of more than 10% up or down, when you’re a conservative or moderate investor, is a red flag.

2. You discover that you cannot liquidate investments that you thought you could sell. Or you discover an unexpected high fee or surrender charge for selling.

3. Big portions of your portfolio are used to purchase “alternative investments” – things like interests in limited partnerships (LPs), non-traded REITs, private placements, promissory notes, and interests in limited liability companies (LLCs). Many of these investments come with a prospectus, require you to complete special forms just to purchase them, carry high risk for investors, and pay big commissions to the selling brokers.

4. You are encouraged to purchase investments where you must formally certify that you are an “accredited investor”. These investments also often carry a high degree of risk and are only designed for people who can afford to lose all of their investment.

5. You are advised to purchase investments the same day that they are offered to you, without giving you a chance to think about it, especially when your advisor says that the opportunity won’t last long. If you feel any sense of rush, surprise, or pressure to make any investment decision, that’s a red flag.

6. Your account statements stop arriving, your broker is suddenly hard to reach, or your advisor discourages you from discussing your investments with anyone else at the brokerage company.

7. You have investments that do not appear on the brokerage company’s account statements that you receive.   Or the statements otherwise look irregular, show frequent transactions that you don’t understand, or don’t add up.

8. Your financial advisor promises returns that seem too good to be true. In today’s market, there are no legitimate, safe and secure investments that can guarantee an 8% annual return year after year.  Any promised return that seems like an unusually good deal deserves closer scrutiny.  Risky, unsecured promissory note scams may be particularly targeted towards elderly investors as “fixed income” investments.

9. You are offered an investment that you do not understand.  Or your portfolio contains investments that, on closer examination, are not plausible or understandable.

10. You discover that your advisor has multiple disclosures when you look him or her up on FINRA’s BrokerCheck system (search by name at http://www.finra.org/Investors/ToolsCalculators/BrokerCheck). Disclosures may include prior client complaints, bankruptcy, termination from prior employers, regulatory investigations and sanctions, criminal charges, on-going or resolved client disputes.  These are all red flags about a broker’s prior conduct that you probably want to know about before entrusting them with your money.


If you have seen any of these red flags, and have questions about the legitimacy of your investments or seen large financial losses, do not ignore your suspicions. Call us for a free initial consultation.  We will tell you if your concerns are well founded and whether we can help.  Your call is confidential.

Please call us first, before contacting your financial advisor or any regulatory agency.  Why?  Because those calls are not confidential.  Once you contact the firm you can bet that your communications are being recorded, and the details you include or leave out may undermine your claim.  Securities regulators may be important allies in stopping wrongdoing, but they are not your attorney. By reporting a complaint to your state agency, FINRA or the SEC, you may be starting the clock on a statute of limitations for filing a claim, without understanding what that means.

The Investor Defenders at Samuels Yoelin Kantor LLP help investors get their money back from brokerage fraud, fraudulent investments, elder financial abuse, and other situations. Our specialized investment litigation practice combines familiarity with complex financial modeling, experience with specialized FINRA arbitration rules and securities laws, and empathy for our clients whose financial losses have become personal.

If you have concerns about how your money is being handled by your financial professional, or concerns that you or a loved one might be the victim of financial exploitation, call me at 1-800-647-8130. Consultations are free, and confidential.

Darlene Pasieczny’s practice at Samuels Yoelin Kantor LLP focuses on all stages of corporate and securities law issues, securities litigation and FINRA arbitration, fiduciary litigation in trust and estate disputes, elder financial abuse, and complex civil litigation. Darlene’s practice includes representing investors nationwide in investment disputes through FINRA arbitration.

Investor Alert – NASAA and SEC Warn about Cryptocurrency Related Investments

This past Thursday, the same day I posted about a recent FINRA Investor Alert regarding cryptocurrency, there was a new press release from the North American Securities Administrators Association (NASAA) with further guidance on the same topic. NASAA’s analysis and warning amounts to this:  Initial Coin Offerings (“ICOs”), and all other investment products related to cryptocurrency or the blockchain, pose a threat to investors.

“A NASAA survey of state and provincial securities regulators shows 94 percent believe there is a ‘high risk of fraud’ involving cryptocurrencies. Regulators also were unanimous in their view that more regulation is needed for cryptocurrency to provide greater investor protection.”

The same day, the SEC made a public statement from Chairman Jay Clayton and Commissioners Kara M. Stein and Michael S. Piwowar, in wholehearted agreement with NASAA:  “The NASAA release also reminds investors that when they are offered and sold securities they are entitled to the benefits of state and federal securities laws, and that sellers and other market participants must follow these laws. Unfortunately, it is clear that many promoters of ICOs and others participating in the cryptocurrency – related investment markets are not following these laws. The SEC and state securities regulators are pursuing violations, but we again caution you that, if you lose money, there is a substantial risk that our efforts will not result in a recovery of your investment.”

“High risk of fraud”?  That’s a polite understatement. The conditions in this cryptocurrency market are the perfect conditions for bad actors to harm investors and cause investment losses. How? Fraud through market manipulation. Fraud through technical manipulation. Fraud through plain theft. Adverse terms and conditions on a clickthrough agreement. Technical failure, incompetence, malfeasance on the part of the provider. Cyberthreats from third parties online, vandals or burglars. Misrepresentations of the real possibility that cryptocurrency is an object of temporary interest, the bubble will pop, and prices will drop.

And, of course, bad actor conduct includes flawed recommendations by financial advisors to jump in and buy these new, complicated products related to cryptocurrency.  If your portfolio contains investments that, on closer examination, are not plausible or not understandable, that’s one of the ten red flags of financial fraud.

As a securities attorney, I represent investors nationwide who have lost money due to the conduct of a financial professional or a defective investment product.

The Investor Defenders at Samuels Yoelin Kantor LLP help investors get their money back from brokerage fraud, fraudulent investments, elder financial abuse, and other situations.  Our specialized investment litigation practice combines familiarity with complex financial modeling, experience with specialized FINRA arbitration rules and securities laws, and empathy for our clients whose financial losses have become personal.

If you have concerns about how your money is being handled by your financial professional, or if your broker has stopped returning your calls, contact me for a free, confidential consultation at 1-800-647-8130.

Darlene Pasieczny’s practice at Samuels Yoelin Kantor focuses on all stages of corporate and securities law issues, securities litigation and FINRA arbitration, fiduciary litigation in trust and estate disputes, and complex civil litigation. Darlene’s practice also includes representing investors nationwide in investment disputes.

George Merhoff and Energy Stocks – The Investigation Continues

The Investigation of Klamath Falls Financial Advisor George Merhoff Jr. and Cetera Investments, Pacific West Securities, Inc. Continues

Customer Concerns Grow About Energy Stock Concentration and George Merhoff

Our office continues to investigate Cetera Investments and its representative George Merhoff Jr. Since our last reporting, even more investors have called us to report that they suffered significant losses in their accounts as a result of having virtually all of their investments in energy stocks. We continue to evaluate how widespread this problem is for our clients and potentially others who were customers of George Merhoff. Mr. Merhoff is currently a registered representative of Cetera Investments, and was previously a registered representative of Pacific West Securities, Inc.

If you are or were a customer of George Merhoff and are willing to share your information with us that might help us in this investigation, or if you have lost money in another investment or have concerns about the conduct of another financial advisor, please call our office at 800-647-8130 for a confidential, and free no obligation consultation.

Is Your Investment Portfolio Over-Concentrated in Energy Stocks?

Here is why we are conducting our investigation: When a portfolio is heavily weighted in one particular industry sector, we refer to it as a non-diversified, over-concentrated account. Over-concentration increases volatility and risk in investment portfolios. Licensed securities stockbrokers and have an obligation under the law and FINRA Rule 2110 to recommend only suitable investments and trading strategies, based upon the particular customer’s risk tolerance, investment objectives, investment experience, time frame, and other factors when recommending an investment. If a broker recommends the same types of concentrated energy sector portfolios to a broad array of clients, regardless of their needs for safety and moderation, that suggest that the securities laws may have been violated.

What is FINRA and what is the Suitability Rule?

FINRA (the Financial Industry Regulatory Authority) is the self-regulatory organization that is authorized by Congress to regulate the securities industry.

That includes brokers and brokerage firms. FINRA has various rules to do this including Rules 2110 and 2111, which provide that a broker’s investment recommendations must be “suitable” for the customer. Suitability includes reasonable-basis suitability (that the investment or investment strategy is suitable for at least some investors), customer-specific suitability (the recommendations are suitable for that specific customer), and quantitative suitability (that a series of recommended transactions, even if suitable in isolation, when considered together are not excessive and unsuitable for that customer). Violations of the FINRA suitability rules may implicate other laws such as negligence and breach of fiduciary duty, and financial losses caused by the unlawful conduct may be recoverable by the investor.

Do you have questions about losses in accounts managed by Cetera Investments or George Merhoff?

The fact that you invested with Mr. Merhoff or Cetera does not necessarily mean that there was wrongdoing. However, if your account was over-concentrated in energy stocks and you did not ask for those investments, we would like to hear from you. Bob Banks, a nationally recognized securities attorney, has fought for investors in court and FINRA arbitration since 1985. He has successfully represented investors in over-concentration cases where there has been a failure to diversify investments. He leads the Investor Defenders practice group at Samuels Yoelin Kantor LLP. If you have lost money in an investment, or if you have any concerns about the conduct of your financial adviser, please contact us, or call our office at 800-647-8130 for a free no obligation consultation.

Before Hiring a Financial Professional – Ask These Questions

It’s a new year and you’re looking to hire a broker or investment advisor to help you with your financial planning and investment decisions. What questions should you ask at that first meeting? FINRA recently released an Investor Education top 5 questions to ask:

1. What experience do you have working with people like me?

2. Are you registered with FINRA, the SEC or a state securities regulator?

3. Do you or your firm have an overarching investment philosophy?

4. Do you or your firm impose any minimum account balances on customers?

5. How do you get paid?

Before you entrust your retirement or other savings with a financial professional, it’s important that you understand the answers to these and other questions.

The Investor Defenders attorneys at Samuels Yoelin Kantor represent investors each day who were unlucky in hiring the wrong adviser. We work to recover investment losses caused by negligent portfolio management, unsuitable product sales, excessive transactions (“churning”), and other bad acts.

Investor Defender attorneys Robert S. Banks Jr. and Darlene Pasieczny have the experience, knowledge, and dedication to help you. Since 1985, they have represented clients nationwide. If you have concerns about your investments or the conduct of your financial adviser, please contact us for a free, confidential initial consultation with an experienced securities litigation attorney. For more information about different types of securities claims, the FINRA arbitration process, current investigations, sample cases and results, and our attorneys, visit our website at InvestorDefenders.com and SamuelsLaw.com.

LPL Financial In Trouble Again For Improper Sales of Non-Traded REITs

The North American Securities Administrators Association (NASAA) announced Wednesday a settlement with brokerage firm LPL Financial. The settlement is the result of a multi-state investigation led by the Nevada Secretary of State Securities Division into LPL’s failure to implement adequate supervisory systems and failure to enforce its own written procedures regarding sales of non-traded REIT shares.

Under the terms of the settlement, in addition to remediating certain investor losses, LPL will pay civil penalties of $1.425 million to be distributed among 48 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. LPL already reached a prior settlement with Massachusetts’s securities regulators in 2013, and a separate action by New Hampshire securities regulators is still pending.

This is only the latest sanction against LPL for improper sales of non-traded REIT shares to investors. In May, 2015, the Financial Industry Regulatory Authority (FINRA) ordered LPL to pay about $10 million for broad supervisory failures in the sales of non-traded REITs, non-traditional exchange-traded funds (ETFs), certain variable annuities and other complex products.

My advisor sold me a non-traded REIT…. I didn’t understand the risks. Can I get my money back from these state regulator settlements?

If you have any concerns about a sizable non-traded REIT purchase, contacting an attorney experienced in representing investors in securities litigation and FINRA arbitration is your first stop.   While the recent settlements between LPL and other brokerage firms with state securities regulators may include some limited compensation for certain investors, only a private action in court or FINRA arbitration is the best chance to rescind (unwind) an unsuitable investment sale, or otherwise recover your investment losses from improper investment recommendations.

What’s so Risky About Non-Traded REITs?

  • Not a “liquid” investment. Non-traded means not traded on a public securities exchange. It may be that the only way an investor can re-sell the shares is to take pennies on the dollar in a private secondary market.   A financial advisor should clearly explain this to you before you invest, and you should be willing to take the risk of not having access to your investment. Be wary if your advisor tells you not to worry, that the company will buy it back, or that they can make special arrangements for a sale. A non-traded REIT may occasionally offer to buy back a limited amount of investor shares at some highly discounted value, but the company is not required to do that and it is impossible to predict if or when it may happen.
  • Expected holding time can be long (7-10 years) and may never end. The idea behind a REIT is that it is a pooled investment fund for income-producing real estate with special tax breaks under the Internal Revenue Code. At some point, the real estate project may fully develop and the company has a “liquidity event” – the first date when an investor can sell his or her shares. But, that date can be years away – or never occur – if the underlying real estate investments are unsuccessful.   Retail investors are unsecured creditors if the company goes belly-up, putting you at the end of the line for a payout. Be wary if your advisor recommends a non-traded REIT without explaining the risk of a long time horizon or total loss of your investment, in particular if you are 60+ years old and thinking about retirement needs.
  • High front-end fees that may not be disclosed end up costing investors. Those fees can be up to 16%, so the $10,000 you put in is really only an $8,400 investment. That makes a big difference over time as to how dividend payments are calculated and your principal investment value.

A recent study by the Securities Litigation & Consulting Group found that investors are about $50 billion worse off for having put money into non-traded REITs, versus exchange-traded REITs (which do exist).

  • Those same front-end fees mean big commissions for the financial advisor. Your broker might earn 8 – 10% on the sale of a non-traded REIT. This can create an incentive to recommend unsuitable products to the investor. Be wary if your advisor does not (or cannot) explain the illiquidity, long time horizon, higher risk of loss of investment, and high costs of purchasing a non-traded REIT.

These are some of the most prominent risks of non-traded REIT sales. Many brokerage firms, not only LPL Financial, have been sanctioned for supervisory failures and other sales practice violations regarding these risky products. Whether a non-traded REIT is a suitable component of an investment portfolio is a case-by-case analysis, and the Investor Defender attorneys at Samuels Yoelin Kantor LLP may be able to help recover your money.

Investor Defender attorneys Robert S. Banks Jr. and Darlene Pasieczny have the experience, knowledge, and dedication to help you. Mr. Banks himself has over 30 years experience representing investors in recovering millions of dollars in investment losses, and he has served on FINRA’s own National Arbitration and Mediation Committee. If you have concerns about your financial advisor or investment portfolio, please contact us and visit our website at investordefenders.com.

New FINRA/SEC Report: Sales Practices Targeted at Seniors

As part of the “National Senior Investor Initiative”, in 2013 FINRA and the SEC conducted 44 examinations of brokerage firms that focused on how firms conduct business with senior investors (defined as age 65 and older) as they prepare for and enter retirement.  A newly issued report gives the results.

The exams found that among the top five revenue-generating securities based on sales to senior investors were the following:

  • Open-end mutual funds (77% of the examined firms)
  • Variable annuities (68% of the examined firms)
  • Equities (66% of the examined firms)
  • Fixed income investments (25% of the examined firms)
  • Unit Investment Trusts (UITs) and Exchange Traded Funds (ETFs) (almost 25% of the examined firms)
  • Non-traded REITs (almost 20% of the examined firms)
  • Alternative investments such as options, exchange-traded notes, hedge funds, private placements, Business Development Companies (BDCs), and leveraged inverse ETFs (about 15% of the examined firms)
  • Structured products such as structured notes and other market-linked securities, reverse convertible notes, principal-protected notes, and collateralize debt obligations. (11% of the examined firms)

Variable annuities, UITs, ETFs, non-traded REITS, alternative products and structured products often carry increased risks of investment loss and penalties for early withdrawal or an inability to liquidate that are inappropriate for senior investors needed access to retirement funds. These are complicated products that are not always explained when sold to investors. And many of these products are inappropriate for an individual retirement account (IRA). Variable annuities in retirement accounts are often completely unsuitable because any tax advantages of those products are lost in an IRA account.

The report notes that in the 44 exams:

“Staff found evidence indicating that 34% of the [examined] firms made one or more potentially unsuitable recommendations of variable annuities.”

“Approximately 14% of firms made potentially unsuitable recommendations to purchase alternative investments, which can be difficult to value, involve high purchase costs, have limited historical data, and often lack liquidity. For example, at one firm, representatives failed to consider the age (90) and low income of one investor, and the limited investment experience and ‘growth and income’ investment objectives of another. These senior investors held the positions for less than ten days and experienced significant realized losses.”

If you are a senior investor concerned about your investment portfolio or particular products, contact us for a free consultation.

Investor Defender attorneys Robert S. Banks, Jr. and Darlene Pasieczny represent investors in securities industry disputes in FINRA arbitrations across the U.S.   Bob Banks himself has over 33 years of experience in securities litigation and FINRA arbitration, and has served multiple times on the National Arbitration and Mediation Committee, an advisory board to FINRA on its rules, regulations, and procedures.  We know the rules, and we fight for our clients in recovering investment losses.

Previous posts on investment products:

Pasicezny Recognized For Her Work To Protect Investors

Investor Defender attorney Darlene Pasieczny was recognized recently at the 2013 Annual Meeting of the Public Investors Arbitration Bar Association (PIABA), in Orlando, Florida.

Pasieczny was commended for her work on PIABA’s SRO Committee, which monitors FINRA and SEC arbitration rule-making proposals that are of significant interest to the PIABA membership and investing public. With the approval of its Board of Directors, committee members research and prepare PIABA’s comment letters on proposed securities regulation rule changes.

Darlene Pasieczny’s practice at Samuels Yoelin Kantor LLP focuses on all stages of corporate and securities law issues, securities litigation and FINRA arbitration, fiduciary litigation in trust and estate disputes, and complex civil litigation. Darlene’s practice includes representing investors nationwide in investment disputes through FINRA arbitration.

Investment Product Warnings

Every year we receive dozens of calls from investors who have lost money in scams that involve unregistered products and brokers. Your options for recovery are minimal when a product or an adviser isn’t registered. This video posted in May warns investors of some such products.

REITs “In the Late Innings”

As a broad category, Real Estate Investment Trusts (REITs) may be losing attractiveness as an investment, according to market analysts who suggest they’ve been “fully valued at least” and “in the late innings”. REITs tend to be sensitive to interest rates, are less appealing than the available alternatives in an improving market, and are pressured in their own sector by a resurgence of commercial-mortgage-backed securities.

Significant questions have also been raised by continuing SEC and state regulatory investigations of non-traded REITs. One example is the December 2012 complaint of Massachusetts regulators against LPL Financial which reviewed 597 transactions. The state found regulatory violations in 569 of them.

(Investment News at www.investmentnews.com)

New Regulations for Derivatives Market

(May 17) The Commodity Futures Trading Commission has announced new regulations on derivatives trading. The failure of the derivatives market was a key cause of the 2008 economic crisis and many investor advocates have called for new oversight and transparency in this $700 trillion (yes, $700 trillion) market, 90% of it controlled by only five major banks. Those advocates are likely to be disappointed by the compromises in the new regime, which legitimizes the power of those five banks, even while it brings previously-secretive trades into a regulated and far more visible trading platform.

(New York Times)