Monthly Archives: September 2011

Insider trading, in which trades are made based on certain “inside” knowledge or information about a major corporate happening, is a crime – and one that cheats everyone. A Sept. 25 article in Investment News describes what happens when insider trading occurs and why the perpetrators involved should be punished to the fullest extent of the law.

“Every owner of shares manipulated by insider trading is a victim,” the article says. “In addition to direct investors, the victims of insider trading are the thousands, if not millions, of 401(k) plan participants, mutual fund shareholders and bank trust customers who received lower prices for their shares because a few cheaters had inside information.”

Several individuals accused of insider trading are gearing up to face their sentences. One of them is hedge-fund titan Raj Rajaratnam. Rajaratnam, co-founder of Galleon Group LLC, was convicted on May 14 of conducting the world’s biggest insider-trading scheme. His sentencing is set for Oct. 13. The government, hoping to send an loud and clear message that illegal insider trading will not be tolerated, is asking the judge in the case to sentence Rajaratnam to 20 to 24 years in jail.

Last week, the Securities and Exchange Commission (SEC) issued subpoenas to hedge funds and other financial firms as it investigates possible insider trading prior to the downgrading of the U.S. government’s credit rating by Standard & Poor’s.

Insider trading allows people like Rajaratnam to profit from non-public information. In making their profits, insider traders are slowly but surely undermining the faith and trust that investors place in the financial markets. And that harms all of us.

Elder abuse is on the rise – something Donna LeBoeuf, a Pittsburg resident in the early stages of dementia, knows only too well. Playing a “game” with her caregiver, LeBoeuf unknowingly signed her name several times on pieces of paper, unaware that the innocent act would put her financial future in jeopardy.

As reported Sept. 25 by the Contra Costa Times, LeBoeuf initially was grateful that her caregiver, Mary Genai, helped her with life’s daily tasks. That included watching over LeBoeuf’s finances. LeBoeuf never suspected that her gratefulness might come back to haunt her.

LeBoeuf’s son later discovered that his mother had signed away control of her money and medical decisions, and that Genai, the caregiver, had got away with stealing “thousands of dollars” from LeBoeuf.

Specifically, Genai gained LeBoeuf’s power of attorney, deposited her Social Security checks into her own checking account, named herself the beneficiary of a $100,000 life insurance policy and got control of LeBoeuf’s medical decisions in the event she became incapacitated, according to the Contra Costa article.

Today, Genai faces six felony counts of financial elder abuse. She has pleaded not guilty and is free on $402,000 bail pending an Oct. 4 court date.

The “fine print” of many an investment product has come back to haunt investors over the years. The latest name on the watch list? Stable-value funds.

Despite their name, stable-value funds are far from risk free. Most contain restrictions on transfers and withdrawals – something many investors are unaware of until after the fact.

“Some of those restrictions may not be clearly communicated until a participant tries to make a transaction, and then they’re prevented from making it,” said Jeff Elvander, chief investment officer of a California company that consults with employers who offer defined-contribution retirement plans, in a Sept. 21 article by Bloomberg.

Stable-value funds – and the holdings they contain – also have a reputation for being opaque and complex. Unable to determine the quality of the underlying assets, investors oftentimes have no way of knowing the level of risk they are really taking on.

Stable-value funds refer to funds that pool one or more retirement plan’s assets, to insurance contracts and annuities that are offered within defined-contribution retirement plans like a 401K. In general, stable-value funds invest in short- to intermediate-term bonds and buy insurance on their portfolios. The contracts themselves are issued directly to a retirement plan sponsor or to its participants, and provide an interest rate that resets periodically.

In August 2011, stable-value funds returned 0.22 percent, compared with a 5.68 percent decline in the Standard & Poor’s 500 Index, according to the Bloomberg article. The returns are achieved, in part, by purchasing insurance contracts.

Once the darling investment product of broker/dealers, some B-Ds are cutting back on the number of REIT products they intend to sell to investors. Their concerns have to do with several issues, including the risk levels of certain REITs, various expenses and how the REITs actually pay for their dividend.

Non-traded REITs have been in the news for some time now, with names like Behringer Harvard REIT, Apple REITs, Inland American Real Estate Trust and Desert Capital garnering top space in the headlines for the financial problems they’ve caused investors.

Non-traded REITs are considered public companies, whose shares are registered with the U.S. Securities & Exchange Commission, but they don’t trade publicly. In recent months, this lack of transparency has been thrust into the spotlight, along with problems tied to inaccurate valuation estimates, excessive broker fees, complex redemption policies, illiquidity and distribution issues.

In late May, the Financial Industry Regulatory Authority (FINRA) filed a complaint against David Lerner Associates related to distribution and valuation issues. In the complaint, FINRA questioned the value of various Apple properties, noting that investors were consistently told that their shares were worth $11 each when that was no longer the case. Some of the Apple REITs had to return investor capital – maintaining the perceived payout, but “eating the seed corn that normally grows those dividends,” according to a July 21 article by MarketWatch. That money, at the very least, should have been deducted from the share price, the MarketWatch article says.

In response, more broker/dealers are taking a new look at non-traded REITs. As reported Sept. 18 by Investment News, National Planning Holdings, a network of four broker/dealers with 3,663 affiliated reps and advisers, has reduced the number of non-traded REITs on its platform to 10 from 15 so far this year.

Other B-Ds like Next Financial Group are following a similar path. Next Financial, which maintains 923 affiliated reps and advisers, cut its number of non-traded REIT products to five from seven. Two years ago, the firm offered twice as many non-traded REITs for its reps to sell.

A number of non-traded real estate investment trusts (REITs) have turned sour for investors in the past year. Among them: Behringer Harvard REIT, Desert Capital, Inland American, Cornerstone Growth & Income, Cole Credit Property, as well as others.

These and other non-traded REITs are considered public companies, but their shares are not listed on a stock exchange. This lack of transparency, along with inaccurate valuation estimates, excessive broker fees, complex redemption policies and illiquidity has come back to haunt many non-traded REIT investors. Cases in point: Behringer Harvard REIT, Inland American Real Estate Trust, Inland Western Retail Real Estate Trust and Desert Capital.

In May 2011, facing creditor claims of more $43 million, Desert Capital was forced into involuntary Chapter 11 bankruptcy. Similar cash-flow issues have plagued Inland Western. In 2009, Inland Western defaulted on several property loans, as well as pushed back maturity dates of others. As of May 2009, Inland Western subsidiaries defaulted on six mortgage loans – totaling $54.9 million – according to a quarterly report filed with the Securities and Exchange Commission (SEC).

As a result, Inland Western slashed its dividend by 70% in 2009. It also suspended its share-repurchase program, putting shareholders who wanted to sell their investment in limbo.

Investors in Behringer Harvard REIT I are in similar financial turmoil. This particular non-traded REIT has never generated profit for investors and is now completely illiquid.

Many investors in non-traded REITs thought they were buying a conservative, relatively low-risk investment. Their assumption was based on the recommendations and information they received from their brokers. Instead, many of these investors are facing suspended redemption policies and an illiquid investment.

If you’ve suffered investment losses in non-traded REITs, contact us to tell us your story.

Legal problems tied to private placements sales in Medical Capital Holdings and Provident Royalties have proved to be the undoing for yet another broker/dealer. Last week, CapWest Securities announced it had filed withdrawal papers with the Financial Industry Regulatory Authority (FINRA).

As reported Sept. 4, by Investment News, CapWest’s profile status with both FINRA and the Securities and Exchange Commission (SEC) is no longer “active.” Instead, it’s listed as “termination requested.”

Representatives for CapWest sold $22 million in private placements issued by Provident Royalties and $30.6 million of Medical Capital notes. Both companies were charged with fraud by the SEC in 2009.

The closing of CapWest comes on the heels of several other broker/dealer closings over private placement deals gone bad, including GunnAllen Financial, Jesup & Lamont Securities Corp. and QA3 Financial Corp.

Earlier this year, CapWest lost a $587,000 FINRA arbitration claim to four clients who claimed negligence and misrepresentation in the sale of oil and gas ventures offered by Provident and Striker Petroleum LLC.

CapWest is owned by Capstone Financial Group.

Exchange-traded funds (ETFs) have exploded in popularity over the years, but they also come with a number of potential drawbacks. Earlier this summer, the North American Securities Administrators Association (NASAA) expressed concern in an advisory notice that many investors may not fully understand the hidden risks associated with ETFs or how the investments actually work – until it’s too late.

“As with any investment, investors should know what they are investing in. They should understand the risks, costs and tax consequences before investing in ETFs. Check under the hood,” said NASAA President and North Carolina Deputy Securities Administrator David Massey in a June 27 ETF notice.

Exchange-traded funds started in 1993 when State Street sponsored the first ETF in the form of the SPDR Trust. The investments – which are designed to mimic the performance of an underlying index or sector – can be characterized as baskets of investments, and include stocks, bonds, commodities, currencies, options, swaps, futures contracts and other derivative instruments.

The problem is that all ETFs are not created equal. Some traditional ETFs may be appropriate for long-term investors, but other ETFs, such as exotic leveraged and inverse ETFs, may require daily monitoring, notes NASAA in its June ETF notice.

Other risks associated with some ETFs include liquidity. Does the value of the ETF equal that of its underlying securities? The number of ETFs that have been shut down or liquidated is up 500% in each of the last three years over 2007 levels. That comes to one ETF every week.

Huge fees are another issue investors need to be aware of when it comes to some exchange-traded funds. For example, leveraged and inverse ETFs must be traded all the time; that means you will pay a commission or fee each time a share is bought or sold.

The bottom line: The complexity, potential risks and substantial fees of exchange-traded funds may make them unsuitable investments for some investors.