private placement investment

Lose Money in a Private Placement Investment?

Jul 20, 2020

Private Placements are Risky  As an individual investor, you may be offered an opportunity to invest in an unregistered offering or private placement. You may be told that you are being given an exclusive opportunity. You may have seen an advertisement regarding the opportunity. The securities involved may be, among other things, common or preferred stock, a REIT, a limited partnership, a membership interest in a limited liability company, or an investment product such as a note or bond. Private securities offerings are generally limited by law to certain institutional and high net worth investors called “accredited investors”. This limitation exists because of the greater risks involved in private offerings as compared to, for example, investing in a publicly-traded stock. Keep in mind that private placements can be very risky and any investment may be difficult, if not virtually impossible to sell.     A private placement is a securities offering that is exempt from registration with the SEC, and is also referred to as an “unregistered offering.” For the most part, private placements are not subject to some of the laws and regulations that are designed to protect investors, such as the comprehensive disclosure requirements that apply to registered offerings. Private and public companies engage in private placements to raise funds from investors. Hedge funds and other private funds also engage in private placements.  How do I know if I Bought a Private Placement or Unregistered Security? Unregistered offerings often can be identified by capitalized legends placed on the offering documents and on the certificates or other instruments that represent the securities. The legends will state that the offering has not been registered with the SEC and the securities have restrictions on their transfer. You should read the offering documents carefully to understand the risks involved, and the broker must make fair and balanced communications to you when  Earlier this month, the Financial Industry Regulatory Authority (“FINRA”) issued guidance to brokerage firms on communicating with retail customers about private placement offerings. It found that there were problems with the way firms communicated the risks of private placements to their retail customers making those communications misleading.  Private Placement Retail Communications Due to the fact that many brokers were not providing complete information on the risks of private placements when communicating with investors, FINRA provided guidance to brokers focused on disclosures regarding risk to the retail investor. The new guidance notes that in FINRA’s recent reviews of retail communications concerning private placement offerings found certain deficiencies including the failure of member firms to balance claims of potential investment benefits with the disclosure of risks.  FINRA reminded the brokers that  Rule 2210(d)(1) requires the following: 1. That all member firm communications be fair, balanced, and not misleading. 2. Communications that promote the potential rewards of investment also must disclose the associated risks in a balanced manner. 3. Communications must be accurate and provide a sound basis to evaluate the facts with respect to the products or services discussed. 4. It prohibits false, misleading, or promissory statements or claims, as well as and the publication, circulation, or distribution of communication that a member firm knows […]

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lost money options trading


Jun 29, 2020

With the market’s wild fluctuations in 2020, many novice investors were lured into the stock market with dreams of hitting it big in the stock market. The rise of discount brokerage firms has given many inexperienced investors easy access to the financial markets including the ability to trade options, sometimes exposing them to unlimited risk. Investors with little cash to invest are being educated by discount firms that they may be able to “leverage” their investment in stock by trading options. While some options strategies such as covered calls are relatively safe in that losses are limited, other options strategies can not only wipe out an investor’s account, but can expose that investor to a large debit balance in their account that they cannot afford to repay. Many have suffered investment losses in speculative options trading that they should not have been approved for. While brokerage firms require a customer to fill out questionnaires in order to be approved for options trading, there has recently been criticism of brokerage firms in allowing and approving inexperienced customers to trade options. The online platform Robinhood has committed to beef up its options eligibility requirements and investor education as a result of such criticism. Other firms, such as Fidelity Investments and Schwab have online investor education tools that attempt to inform investors who are trading options. Investors must meet certain criteria to be approved for specific levels of options trading.  Movements in the market caused many options investors who were new to options trading or sophisticated options strategies to not only suffer investment losses but additionally caused them to be on the hook for large margin debits in their accounts. Many did not fully understand or appreciate the risks to which they were exposed. The SEC Has Set Guidelines for Options Trading Approval Before you can trade options, your broker must approve your account for trading. You will have to first fill out your broker’s options agreement by providing information that will assist your broker in determining your knowledge of options and trading strategies, as well as your general investing knowledge and your financial ability to bear the risks of options trading. Based on the information you provide, your broker will determine whether options trading is suitable for you and, if so, what level of options trading may occur in your account. According to the Securities and Exchange Commission (“SEC”), the information you will need to provide in an options agreement generally includes: 1. Investment objectives such as capital preservation, income, growth, or speculation; 2. Trading experience such as the number of years you have been trading stocks and/or options, the number of trades you make per year, the average size of each trade, and information about your general knowledge of investing; 3. Personal financial information such as liquid net worth (investments easily sold for cash), total net worth, annual income, and employment information; and 4. An indication of what types of options you would like to trade. You Need Approval for Options Trading Levels The information you provide allows your brokerage firm to determine which option trading levels if any, you qualify […]

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401k Fraud

Fraudsters Recommend Using Borrowed 401(k) Funds to Invest

Jun 22, 2020

The rules in place for taking early withdrawals from your retirement account for a hardship permanently reduce your retirement savings because ordinarily you are not allowed to put the money back into the retirement account after the hardship has passed and you must pay income tax on it. In addition, you must pay a 10 percent penalty if you withdraw funds before reaching the retirement age of 59½. THE CARES ACT Allows You to  Borrow From Your Retirement Account As explained by the Securities and Exchange Commission (“ SEC”), the CARES Act provides significant, temporary relief from these provisions for individuals who experience adverse financial consequences as a result of COVID-19 related events. The CARES Act allows qualified individuals impacted by the coronavirus pandemic to pay back funds withdrawn from a qualified retirement plan over a three-year period, and without having the amount recognized as income for tax purposes. The new law also temporarily waives the 10 percent early withdrawal penalty for coronavirus-related distributions (CRDs) made between January 1 and December 31, 2020.  In addition, the CARES Act exempts CRDs from the 20 percent mandatory withholding that normally applies to certain retirement plan distributions.  The CARES Act also doubles the ordinary retirement plan loan limits for qualified individuals to the lesser of $100,000 or 100 percent of the participant’s vested account balance. You will not owe income tax on the amount borrowed from the 401(k) if you pay it back within five years. In addition, qualified individuals with an outstanding loan from their plan (meaning a loan taken before the CARES Act was enacted) that has a repayment due between March 27 and December 31, 2020, can delay their loan repayments for up to one year. However, interest will continue to accrue on these delayed payments. This CARES Act benefits greatly reduce the costs of accessing funds held in retirement accounts, particularly for short term needs, such as severe economic hardship, when the investor expects to return the funds.   With every new source of cash, however, there are always fraudsters seeking to prey on victims.   Some unscrupulous individuals are using these CARES Act benefits, which are intended for those facing economic hardship from COVID-19, to promote high-risk, high-fee investments and other inappropriate products and strategies using borrowed retirement funds. These include products and strategies that have high fees and costs, are not designed to be temporary and, as a result, are unlikely to provide investors with the intended benefits of the CARES Act, particularly over time.  Ways to Protect Yourself from Fraudulent CARES Act Promotions If you are contacted by a professional who recommends that you withdraw money from your retirement savings to invest in securities—either through their firm or in your own self-directed investment account—be sure to first confirm whether they are licensed to give advice or sell investments.  You can verify the status of investment professionals and find out whether they have a history of customer complaints by using free tools from the SEC and FINRA. Also, always be on the lookout for the red flags of fraud: Unlicensed investment professionals Aggressive sellers who may provide exaggerated or false credentials Offers […]

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UBS yield enhancement strategy

“Low Risk” UBS Yield Enhancement Strategy Losses

Jun 15, 2020

Have you Lost Money in the YES Strategy? Have you been the victim of the supposedly “safe” UBS Yield Investment Strategy (“YES”)?  In truth, clients seeking safety should have said “NO” to the YES program. Using the “Iron Condor” trading strategy, a name invoking an invincible James Bond-like method of investment protection, UBS reportedly marketed the YES program to clients as a neutral or low-risk way to generate returns through sophisticated options trading strategy.  The YES program, which at one point in 2018 peaked with holdings around $6 billion, used a strategy that effectively borrowed against a clients’ holdings at UBS using the proceeds to trade options. The product is like a margin loan against existing holdings. The risk is that any losses could compel an investor to put in extra cash or securities. Although clients say that their UBS financial advisers told them the strategy was conservative, in reality, it often subjected the investors to risky bets that the markets would not take large swings— a gamble resulting in many investors losing 20% or more. It has been reported that the Securities and Exchange Commission is looking into how the YES program was marketed.  Just what is the Iron Condor Strategy? According to, the Iron Condor strategy uses four different options contracts with the same expiration date but different exercise prices, usually for an index (YES used European-style contracts for S&P 500 Index futures). Traders create two spreads by simultaneously selling calls and puts to generate income or premium, and buying calls and puts to hedge risk and contain potential losses. As long as the price stays within the breakeven points created by the spreads, the strategy makes money. However, sudden price swings can blow past the breakeven points of the Iron Condor, resulting in losses for most of the positions and a losing trade.  Brokers were Incentivized to Sell the UBS “YES” program It has been reported that UBS incentivized its financial advisers to promote the YES strategy with promises of big commissions paid from the large fees it charged. Investors paid a fee of up to 1.75% of their so-called “mandate” – meaning the amount of collateral dedicated to the strategy – whether the assets were actually traded or not. If, for example, a client authorized a $5 million maximum for YES, only $3 million of which was used, UBS would still charge the YES fees on the full $5 million. Those charges were layered on top of any fees clients may already have been paying on the underlying assets. Because of the large fees which were paid on YES program assets, even those which were not traded, UBS  financial advisors were encouraged to solicit mandates from clients which far exceeded the amounts clients intended to commit to YES.  Recent Market Swings Can Cause the YES Investments to Decline If you have lost money in a “Yield Enhancement Strategy”, or “YES,” investment, contact the offices of Former Wall Street lawyer Melanie Cherdack for a free consultation. Because she has been in the trenches as a former Wall Street attorney, investor fraud lawyer Melanie Cherdackand her team […]

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Principal Protected Note

How Do I Know If My Account Was Churned?

Jun 8, 2020

What Is churning?  Although most stockbrokers and investment professionals act with the utmost professionalism, unfortunately, there are always a few “bad apples” who are in it just for themselves. When a broker is trading your account simply to make commissions on the trading, this is called churning. As an investor, you need to be able to detect whether your brokerage account has been or is still being churned, and know what to do about it if you suspect you have been the victim of this activity. According to the Securities and Exchange Commission (“SEC”) churning occurs when a broker engages in excessive buying and selling of securities in a customer’s account chiefly to generate commissions that benefit the broker. For churning to occur, the broker must exercise control over the investment decisions in the customer’s account, such as through a formal written discretionary agreement, although a broker can be deemed to have control without such an agreement-especially if the customer always accepts the broker’s investment recommendations. Frequent in-and-out purchases and sales of securities that don’t appear necessary to fulfill the customer’s investment goals may be evidence that your account is being churned.  Churning is both illegal and unethical. Churning violates both the Federal and state securities laws, as well as FINRA industry regulations and standards. Such conduct may also violate a myriad of other laws, such as those requiring that brokers act as fiduciaries and always put their client’s interests first. Churning also violates FINRA’s suitability rules. What Does Churning Stocks Mean? Churning Stocks There are a number of types of churning investors should watch for. The most common is when a broker makes excessive trades in stocks. Excessive trading generates commissions for the broker but provides very little if any, the benefit to the investor.  One way churning is measured is by how many times the equity in the account is traded in a year. This is called the “turnover ratio” The turnover ratio can be calculated a number of ways. The simplest turnover measure divides total security purchases by the average month-end equity balance and then annualizes the turnover ratio by dividing it by the number of years covered in the analysis. More simply put, if the average yearly value of your securities account is 100,000 and a broker executed 300,000 worth of trading in a year, the turnover ratio would be 3x. The other measure of churning is called the cost-to-equity ratio. Cost-to-equity ratios are calculated by dividing the costs such as commissions, fees, margin charges, mark-ups, and mark-downs incurred in an account by the average yearly equity. In this measure, cost-to-equity ratios calculate the portion of the average equity in the account that is eaten up by the trading costs. A simple example would be if the average equity of the account was 100,000 but the costs of the trading in the account were 10,000. In this example, the cost-to-equity ratio would be 10%–meaning that the customer would have to earn at least 10% on the trading before breaking even.  Churning Bonds, Mutual Funds, Annuities, and Life Insurance While most people think of churning in the […]

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unit investment trust

What is a Unit Investment Trust Switch?

Jun 1, 2020

Recently, the Financial Industry Regulatory Authority (“FINRA”) announced that it ordered Stifel, Nicolaus & Company, Incorporated

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Ponzi scheme

How To Spot a Ponzi Scheme?

May 18, 2020

What is a Ponzi Scheme? In a classic Ponzi scheme, the scammer uses funds from new investors to pay the so-called “ returns” to existing investors.

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COVID-19 margin calls

Investors To Sue Over COVID-19 Margin Calls

May 4, 2020

Many individual and institutional investors received bad news this spring— large margin calls. According to the Financial Times, these investors are preparing possible legal actions against U.S. banks active in wealth management. This is unwelcome news to such banks who routinely offer margin loans to their customers, such as JPMorgan Chase, UBS, and Goldman Sachs. According to the Financial Industry Regulatory Association  (“FINRA”) investor purchases of securities on margin averaged over $592 billion during the first 10 months of the last year. Merrill Lynch, Morgan Stanley, UBS, and Wells Fargo all reported increases in their client loan balances last year.  What Claims Do I Have for and Improper Margin or Margin Call? There are several ways investors can recover on claims relating to improper margin or margin calls. If losses were incurred as a result of securities being sold on a margin call, it may be possible to make a claim asserting that the broker or firm should have first asked the customer to pay the loan through another source, deposit in more cash or securities, or allow the customer to choose what investments to sell to pay the margin call. It is also possible to bring a claim for losses if the margin loan given to the customer was an unsuitable investment strategy or too risky for the investor’s objectives. Finally, if a brokerage firm has sued you to collect on an unpaid margin loan, there are a number of defenses to this claim which can be raised. Please call us today or use our online contact form, for a free consultation.  How Does a Margin Call Work? A “margin account” is a type of brokerage account in which the broker-dealer lends the investor cash, using the account as collateral, to purchase securities. Margin increases an investor’s purchasing power but also exposes investors to the potential for larger losses.   The mechanics of how a margin call works are simple. When stocks fall, brokers can be forced to call up clients and ask for more cash or securities to secure the margin loan. Under some contracts, brokers can sell the investments in the account to pay the margin loan even without first calling the client.  The Securities and Exchange Commission has published an investor alert explaining to investors how margin accounts work.  You Should Understand How Margin Works Margin loans are a tool that allows customers to leverage their accounts to make a greater return. Let’s say you buy a stock for $50 and the price of the stock rises to $75. If you bought the stock in a cash account and paid for it in full, you’ll earn a 50 percent return on your investment (your $25 gain is 50% of your initial investment of $50). But if you bought the stock on margin – paying $25 in cash and borrowing $25 from your broker – you’ll earn a 100 percent return on the money you invested (your $25 gain is 100% of your initial investment of $25). You may also owe your broker interest on the $25 you borrowed. There is a downside to using margin, which is […]

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beware of fraudulent investments related to COVID-19

Beware of Fraudulent Investments related to COVID-19

Apr 20, 2020

The Commodity Futures Trading Commission (“CFTC”) has recently issued a warning to investors to be on the lookout for scams seeking to take advantage of recent COVID-19 related market volatility. The Securities and Exchange Commission (“SEC”) has also issued a recent warning to investors to be especially vigilant in investing in microcap stocks where brokers or promoters claim that a company’s products or services can help stop the coronavirus.   According to the SEC, fraudsters often use the latest news developments to lure investors into scams. There have been a number of recent Internet promotions, including on social media, claiming that the products or services of publicly-traded companies can prevent, detect, or cure coronavirus and that the stock of these companies will dramatically increase in value as a result. The promotions often take the form of so-called “research reports” and make predictions of a specific “target price.” The SEC urges investors to be wary of these promotions and to be aware of the substantial potential for fraud at this time When it comes to options investing, recent market volatility may cause fraudsters to try to promote options or futures strategies to take advantage of this market. This too has special risks which investors should be aware of. It is true that some types of options do allow traders to hedge against market risk. For example, historically, gold futures and other precious metals have seen short-term increases in times of economic uncertainty. And, over-the-counter digital asset or foreign exchange (forex) traders may be able to identify pairings that go up in value when other markets are in decline.  However, the CFTC warns that there is no such thing as a risk-free strategy, and no person or program can guarantee future results. Also, you should know that all risks, fees, and expenses should be disclosed to the investor upfront.  According to the CFTC, here are things you should look out for: If it Looks to Good to Be True, It Probably is Trading and investing come with a number of biases and emotions that influence decision making. Recent market losses due to the impact of COVID-19 may motivate some traders to recoup losses, while others may seek safety. Fraudsters know this and design their pitches to appeal to these instincts. Examples include claims of special insider knowledge or insights, promises of unusually large returns, guarantees, surefire trading signals, or low costs to open accounts. And these offers are timed to hit your inbox or social media feed when you are most interested. The common advice is “if it looks too good to be true, it probably is.” But frauds are often successful because they do look good. The problem, even for experienced traders, is that when biases get in the way, they make it difficult to recognize what’s too good.  Experienced Investors Can Often be Scammed Numerous studies have revealed that those who are more financially literate and experienced are more likely to be victimized by investment fraud. It could be correlation: Those who are more financially literate are more likely to trade and therefore more likely to encounter fraud. Or, as some researchers […]

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Securities arbitration

Do You Need an Attorney for Securities Arbitration?

Apr 13, 2020

As an investor, you depend on your broker or brokerage firm to put your interests first when handling your investments. After all, that is why you chose them, because they are supposed to be experts in the field of investing your money wisely. But what happens when they fail you? What happens when they put their interests over yours? What happens if instead of your financial gain, they use your money to their own benefit instead of yours? Or, if they are negligent in making recommendations that are not in your best interests or are unsuitable for you? The answer is that you should complain about this conduct and seek damages.   If You Have a Brokerage Account, Most Likely You Agreed to FINRA Arbitration  Most brokerage firm contracts have a clause requiring that all disputes with customers be handled through FINRA arbitration. Notwithstanding this, all brokers and firms who are FINRA members are required to arbitrate their customer’s claims through their forum. So, most likely, any dispute you have with your broker or firm will be handled in a securities arbitration proceeding before FINRA. Accordingly, you would be wise to consult with a securities arbitration attorney familiar with the FINRA rules and processes to assist you in that process.  In this article, we will discuss the securities arbitration process, and what an attorney’s role in that process. If, after reading this blog, you have additional questions or feel that you may have a claim, we invite you to contact Former Wall Street attorney Melanie Cherdack. Ms. Cherdack is a securities arbitration attorney who understands the plight of those who were victims of investment fraud. She has represented hundreds of investors and has “seen it all” when it comes to the schemes that investment brokers use to defraud their clients. We invite you to contact us today on our online contact form, or by calling 888-768-2499. The Importance of FINRA The purpose of the Financial Industry Regulatory Authority, or “FINRA,” is to protect investors, regulate brokers, and guarantee integrity in all stages of the investment process. FINRA provides investors with protections and avenues for recouping lost dollars when brokers are negligent, break the rules, or cheat investors. FINRA provides the forum of securities arbitration for those wronged by brokers. It is a process that is faster than filing a lawsuit, geared towards the issues that investors have with brokers and is private. Laws and regulations governing these issues can be complex, and you will need to prepare your case, file documents, meet deadlines, know which issues are paramount to your case, figure out how to show they breached a contract or violated rules and regulations or any other numerous issues. That is why you need a good attorney to help you through the securities arbitration process.     Your Attorney’s Help During Arbitration Although you are not required to hire an attorney for securities arbitration, it is in your best interest to do so. There are numerous benefits to having an attorney assist you. Even the FINRA website suggests hiring an attorney, as follows:   “You should consider hiring an attorney to represent you […]

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