Category Archives: Bond Losses

A firm originally founded by investor Martin Whitman has announced that it is barring investor withdrawals while it attempts to liquidate its high-yield bond fund, an unusual move that highlights the severity of the months-long junk-bond plunge that has swept Wall Street.

The decision by Third Avenue Management LLC means investors in the $789 million Third Avenue Focused Credit Fund may not receive their money back for months, if not more.

Third Avenue Management, in a letter to investors dated December 9, 2015, said that investor redemption requests, coupled with the general reduction of liquidity in the fixed income markets, have made it “impracticable” for the Third Avenue Focused Credit Fund to honor requests for those investors who want their money back.

The move at Third Avenue Focused Credit Fund is intended to facilitate an orderly liquidation of the fund, which recently had $789 million in assets, down from more than $2.4 billion earlier this year.

If you are an individual or institutional investor who has any concerns about your investment in the Third Avenue Focused Credit Fund, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

On July 17, 2015, The Wall Street Journal reported on a growing number of investors who are concerned as to whether a crisis is brewing in the expanding world of exchange-traded bond funds. (“Carl Icahn Fuels Criticism of Bond ETFs”)

Bond ETFs have emerged as one of Wall Street’s most lucrative niches in recent years, promising buyers the steady income of bonds in a package that is as easy to trade as stocks. Now, a building chorus of investors – including activist investor Carl Icahn – is warning that this best-of-all-worlds pitch may be a mirage. They argue that troubles could arise if the bond market has a sharp showdown, perhaps due to higher interest rates, and investors in ETFs start heading for the exits.

At a hedge-fund conference in New York on July 15^th, Mr. Icahn is reported to have said that “some ETFs have bought so many riskier and infrequently traded bonds that it isn’t clear who will buy them, or at what price, should the funds be forced to sell during a market panic.” In doing so, he joins skeptics who say “ETF selling could spread the effects of a downdraft, because the ETFs are widely held by individual investors, who often flee in a market downturn.”

As noted in the Wall Street Journal article, Bill Gross, who helped found bond giant Pacific Investment Management Co. and now runs a fund for Janus Capital Group Inc., sent a note to investors last month bemoaning the lack of liquidity and how “mutual funds, ETFs, and even index funds” might be hit in a downturn. “The obvious risk – perhaps better labeled the ‘liquidity illusion’ – is that all investors cannot fit through a narrow exit at the same time,” Mr. Gross wrote.

If you are an individual or institutional investor who has any concerns about Bond ETF investments having been recommended for purchase in either your retirement or non-retirement accounts, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

The hype surrounding the movie “The Wolf of Wall Street” – which chronicles the rise and fall of broker-turned-investment swindler Jordan Belfort – shines yet another spotlight on the inner-workings of Wall Street and, specifically, what is and isn’t being done to protect investors from fraudsters like Belfort.

Last year, Frontline addressed this very subject in a documentary to mark the fifth anniversary of the global financial crisis of 2008. Titled The Untouchables, the documentary explored a number of questions. Among them: Why had no major bank or top executive been found criminally liable and prosecuted for the crisis or the fraud tied to the sale of toxic mortgages? Why were federal prosecutors so reluctant to act on credible evidence that Wall Street knowingly packaged and sold bad mortgage loans to investors? Are banks simply too large to prosecute and therefore too big to jail? Will Wall Street ever be held accountable for its wrongdoings and excessive risk taking?

Following interviews with top prosecutors, government officials and industry whistleblowers, Frontline reveals that many Wall Street bankers ignored pervasive fraud when buying pools of mortgage loans. Tom Leonard, a supervisor who examined the quality of loans for major investment banks like the now-defunct Bear Stearns, said bankers instructed him to disregard clear evidence of fraud. “Fraud was the F-word, or the F-bomb. You didn’t use that word,” said Leonard. “By your terms and my terms, yes, it was fraud. By the [industry’s] terms, it was something else.”

Former Sen. Ted Kaufman (D-Del.) was one of the individuals who was determined to see bankers punished for their bad behavior and their involvement in the financial crisis.  “I was really upset about what went on Wall Street that brought about the financial crisis,” Kaufman recalls. “That doesn’t happen if there isn’t something bad going on.”

As the documentary shows, Kaufman became increasingly frustrated by the lack of criminal prosecutions and left office in 2010.  Meanwhile, Jeff Connaughton, Kaufman’s chief of staff, remains convinced that the U.S. Department of Justice never made prosecuting Wall Street one of its top priorities. “You’re telling me that not one banker, not one executive on Wall Street, not one player in this entire financial crisis committed provable fraud?” asks Connaughton in the documentary. “I mean, I just don’t believe that.”

Given the heightened attention that the movie, The Wolf of Wall Street, is creating about the greed and excesses of Wall Street, if you missed The Untouchables last year, it may well be worth your time now. You can view it online here.

Disgraced “Wolf of Wall Street” broker Jordan Belfort is no longer doing business in the securities industry, but some of his cohorts in crime continue to be on the radar of regulators.

As reported yesterday by Investment News, one of those brokers is Christopher Veale, who was charged Wednesday by Massachusetts Secretary of the Commonwealth William F. Galvin of engaging in abusive sales practices, churning a client’s account and using markups to conceal commissions in the account of an 81-year-old investor.

Regulators allege that the elderly Rhode Island investor put $873,622 into his account with Veale. He also was charged $319,818 in commissions and hidden fees. A colleague of Veale’s at Brookville Capital Partners LLC, Ali Habib Mayar, also is named in Galvin’s complaint.

The elderly client ultimately suffered out-of-pocket losses of almost $1.6 million as a result of the brokers’ alleged actions and Brookville Capital’s alleged failure to supervise their actions, the complaint says.

“[The] Senior Investor attempted to close his Brookville account twice, but both times was convinced to keep the account open. Specifically, Veale persuaded Senior Investor that he could turn the account around and promised Senior Investor that he would significantly increase profits, but that the only way Veale could make that happen was if Senior Investor put in another $200,000,” Galvin stated in the complaint.

The complaint seeks to revoke the registration of the two representatives and firm and permanently bar them from the securities industry in Massachusetts. Rhode Island also has filed a similar action against the two brokers and Brookville.

Veale infamously began his career in the securities industry in 1995 with the now-defunct Stratton Oakmont. Stratton Oakmont is credited with being one of the first ‘boiler room’ operations whose brokers aggressively cold called potential investors and pushed them to buy penny stocks that were manipulated by Stratton Oakmont.

Stratton Oakmont and its creator, Belfort, are now the subject of Hollywood in the movie, “The Wolf Wall Street.”

After Stratton Oakmont was put out of business by federal authorities, Veale went on to work with some 17 other broker/dealers, including the now-defunct John Thomas Financial.  That company closed its doors last year over fraud allegations. In December 2013, Anastasios “Tommy” Belesis, the founder of John Thomas Financial, agreed to be banned from the securities industry in a settlement with U.S. regulators who had accused him of defrauding investors in two hedge funds.

Veale currently works for Legend Securities, according to his BrokerCheck report with the Financial Industry Regulatory Authority (FINRA).

The top stories in the investment world for 2013 ran the gamut, from non-traded REIT deals that soured to a stampede of broker/dealers closing up shop. Among the highlights in 2013:

Non-Traded Real Estate Investment Trusts (REITs). In June, William Galvin, Secretary of the Commonwealth of Massachusetts, announced settlements with Ameriprise Financial Services Inc., Commonwealth Financial Network, Lincoln Financial Advisors Corp., Royal Alliance Associates and Securities America over sales involving non-traded REITs.  As part of the settlement, the five firms agreed to make $6.1 million in restitution to investors and pay fines totaling $975,000.

LPL Financial. In February, LPL Financial LLC was order by the Massachusetts Security Division to pay restitution of more than $2 million to investors who bought shares of non-traded real estate investment trusts (REITs). In addition to the restitution order, Massachusetts regulators levied a $500,000 administrative fine against LPL.  The settlement stemmed to allegations that LPL failed to supervise brokers who sold investments in non-traded REITs. LPL also agreed to review all other non-traded REITs offered to Massachusetts residents and to make restitution to investors in the state whose transactions violated Massachusetts or company rules.

Separately, a former adviser affiliated with LPL Financial LLC was charged in May by the Securities and Exchange Commission (SEC) of defrauding investors and stealing $2 million from at least six clients. According to the civil complaint, the adviser, Blake Richards, misappropriated client money that “constituted retirement savings and/or life insurance proceeds from deceased spouses.”

In one instance, Richards allegedly tried to gain an investor’s trust by delivering pain medication during a snowstorm to a client’s husband who had been diagnosed with terminal pancreatic cancer, according to the SEC complaint.

Private Placements.  Four culprits behind a massive multimillion-dollar private-placement fraud known as Provident Royalties were given jail sentences by U.S. District Judge Marcia A. Crone. Brendan Coughlin, 46, and Henry Harrison, 47, were sentenced to 21 months in federal prison. They founded and controlled Provident along with Joseph Blimline, 35, who already had been sentenced to 12 years in prison. Paul Melbye received a sentence of 18 months in prison.

Columbia Property Trust. Non-traded REITs again made headlines when Columbia Property Trust went public in October at $22.50 a share. Before going public, however, the REIT underwent a complicated reverse 4-for-1 share split, raising its price to around $29 a share from just over $7.33. Investors who initially bought into the REIT at $10 a share essentially were offered the opportunity to cash out at a net asset value of around 45% less than the price they paid at their initial purchase.

Making matters worse is the fact that Columbia Property Trust had cut its distributions twice since 2009.

Bambi Holzer. Known as the broker to the stars, Bambi Holzer made a name for herself in the securities industry by providing financial advice to Hollywood names like Julia Louis-Dreyfus (who ultimately sued Holzer over a dispute concerning $4.4 million invested in annuities). In October 2013, the Financial Industry Regulatory Authority (FINRA) also sued Holzer for allegedly lying to one of her former firms, Wedbush Securities, about the net worth of several clients when she sold preferred shares of one of the series of fraudulent deals issued by Provident Royalties LLC in 2008.

In December 2013, Holzer was officially barred from the securities industry as part of a settlement with FINRA.

Elder Fraud. Elder financial fraud and abuse came to the forefront of the big investment stories in 2013 as several research studies reported that the elderly were losing more than $3 billion every year to financial fraud and investment scams. Many of the scams involved unsuitable investments, variable annuities and alternative financial products like non-traded REITs and private placements.

Protecting investors – and especially the elderly – was in part behind a move by the Securities and Exchange Commission (SEC) to release a special bulletin warning investors about the myriad of financial titles in existence today. Among other things, the bulletin stressed that financial professional designations and licenses are not the same and that investors should never rely solely on a title to determine whether a financial professional has the expertise they need.

UBS Puerto Rico Bonds. In November, a unit of UBS AG offered to repurchase shares of closed-end municipal bond funds invested in Puerto Rico muni securities from certain clients. During the summer, the market for Puerto Rico’s $70 billion muni debt went south after Detroit filed for bankruptcy in July. UBS Financial Services of Puerto Rico is a huge player in the muni debt market in Puerto Rico, packaging and selling $10 billion in proprietary closed-end bond funds through the end of 2012. Meanwhile, the net asset value (NAV) of the 14 UBS closed-end funds have plummeted.

Investors purchased the proprietary bond funds for $10 a share. According to a story by Investment News, the NAV for the $375 million Puerto Rico Fixed Income Fund was $3.63 at the end of October, down 85% since the end of June. The NAV for the $449 million Puerto Rico Fixed Income Fund III was $4.08 at the end of October, a decrease in value of 68% since June.

Legal problems tied to UBS Financial Services of Puerto Rico and, specifically, to sales of a group of troubled closed-end municipal bond funds, are big and getting bigger. Now, investors who suffered financial losses from the investments are taking action against the UBS brokers who sold them the products.

The market for Puerto Rico’s $70 billion muni debt went south when the city of Detroit filed for Chapter 9 bankruptcy protection on July 18.  The bankruptcy filing made Detroit the largest city in U.S. history to do so. The UBS unit in Puerto Rico is a major player in the muni-debt market in Puerto Rico, packaging and selling $10 billion in proprietary closed-end bond funds as of the end of last year.

As reported earlier today by Investment News, disgruntled investors are filing arbitration claims with the Financial Industry Regulatory Authority (FINRA) against individual brokers at UBS Puerto Rico. One of those brokers, Jose Gabriel Ramirez Jr., has had seven investor complaints totaling nearly $51 million filed against him, according to his BrokerCheck report.

The seven complaints range from $1 million to $26 million in alleged damages. In each complaint, investors allege actions of overconcentration and misrepresentation of the closed-end funds by the UBS brokers.

According to the Investment News story, Ramirez currently is on administrative leave from UBS Puerto Rico.

The value of the closed-end bond funds at the focus of investors’ claims with FINRA plummeted by 50% to 60% during the second half of this year.

A unit of UBS AG has offered to repurchase shares of closed-end municipal bond funds invested in Puerto Rico muni securities from certain clients. The story was first reported Nov. 25 by Investment News.

During this past summer, the market for Puerto Rico’s $70 billion muni debt went south after Detroit filed for bankruptcy in July. UBS Financial Services of Puerto Rico is a huge player in the muni debt market in Puerto Rico, packaging and selling $10 billion in proprietary closed-end bond funds through the end of 2012.

Meanwhile, the net asset value (NAV) of the 14 UBS closed-end funds have plummeted.

Investors purchased the proprietary bond funds for $10 a share. According to the Investment News story, the NAV for the $375 million Puerto Rico Fixed Income Fund was $3.63 at the end of October, down 85% since the end of June. The NAV for the $449 million Puerto Rico Fixed Income Fund III was $4.08 at the end of last month, a decrease in value of 68% since June.

So far, investors who’ve been contacted by brokers have not been told a set price – or given a guarantee – for their shares.

Massachusetts’ chief securities regulator William F. Galvin is beginning an inquiry into the impact of Puerto Rican debt on Massachusetts mutual fund investors. Specifically, Galvin wants to know the extent of Massachusetts’ investors’ risk exposure, if investors were made aware of the risks, and when firms that marketed and sold the funds became aware of the risks associated with Puerto Rican debt.

The state also plans to review whether the bonds were properly priced since July 2012.

Galvin has sent letters of inquiry to Fidelity Investments, OppenheimerFunds Inc., a unit of Massachusetts Mutual Life Insurance Co., and UBS Financial Services.

Puerto Rican municipal debt obligations are popular for their yield and their tax-exempt status. However, Puerto Rico is nearly insolvent today, making the risks of such investments extremely high.

In a settlement announced Wednesday, Citigroup Global Markets has agreed to pay a $30 million fine to Massachusetts regulators to settle charges that a former Citi analyst in Taiwan improperly shared research with four major clients one day before making that information available to all of the firm’s clients.

Massachusetts Secretary of State William Galvin said in a statement that by giving the information to a select large U.S. hedge fund and institutional clients in advance, it allowed them to profit from weaker sales of Apple iPhones.

The $30 million fine is one of the biggest that state securities regulators have collected to date and more than 15 times the $2 million fined to Citi one year ago for improperly disclosing research on Facebook’s initial public offering.

As reported by Reuters, former Citigroup analyst Kevin Chang emailed the unpublished research about Hon Hai Precision Industry Co., a major supplier of Apple Inc. iPhones, to SAC Capital Advisors (a group of hedge funds founded by Steven A. Cohen in 1992), T. Rowe Price, Citadel and GLG Partners.

Among other things, Chang’s research included lower order forecasts for Apple’s iPhones in the first quarter of 2013, which would have had a detrimental effect on Apple, Massachusetts Secretary of State William Galvin said.

After receiving the information from Chang, SAC, Citadel and T. Rowe Price all sold Apple stock, the complaint alleges.

Chang, who worked for Citigroup in Taiwan, was terminated last month, the complaint noted.

Many investors who purchased bonds as the “safe” investment in their portfolio could soon be in for an unwelcome surprise when they see their account statements. That’s because of an anticipated rise in interest rates as the Federal Reserve begins to start slowing its bond-buying program sometime this year.

When the Fed will actually begin tapering its asset-purchase program – known as quantitative easing – is anyone’s guess. And that lack of clarity translates into confusion for many investors.

During times of higher interest rates, bond funds are at a particular risk for both investors who are invested in an individual bond, as well as shareholders in a bond fund. When interest rates rise, bond prices go down. For shareholders in a bond fund, however, the issue is compounded by the fact that the fund manager of the bond fund may be forced to prematurely sell off individual bonds within the bond fund to meet redemption requests by shareholders wanting to liquidate their shares. This, in turn, can have a catastrophic effect on the net asset value of the bond fund.

Making matters even worse is the fact that the majority of investors appear to be unaware about the impact of rising interest rates on their investment portfolio and, more important, what they should do.

A recent Edward Jones survey showed that 63% of the individuals surveyed believe that rising rates matter but don’t know what to do about it in their 401(k) or IRA. Another 24% of Americans said they “do not understand this at all.”

The bottom line: It’s impossible to predict the future when it comes to the current financial climate, but preparation is and always will be key.