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Articles Tagged with unsuitable recommendations

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If you have invested in HMS Income Fund (“HMS”) upon the recommendation of your financial advisor, you may be able to recover your losses through arbitration before the Financial Industry Regulatory Authority (“FINRA”).  A Maryland corporation formed in 2011, HMS is sponsored by Hines Interests Limited Partnership (“Hines”).  HMS is structured as a closed-end management investment company, and pursuant to the Investment Company Act of 1940 operates as a public, non-traded business development company (“BDC”).  HMS’s business focuses on providing mezzanine debt and equity financing to various private middle market companies.  As of June 30, 2017, HMS has provided debt financing to 119 companies across a spectrum of industries.

As an investment vehicle, BDCs have been available since the early 1980’s (when Congress enacted legislation making certain amendments to federal securities laws allowing for BDC’s to make investments in developing companies and firms).  Frequently, financial advisors have recommended BDCs, allowing for Mom and Pop retail investors to participate in private-equity-type investing.  Many income-oriented investors are attracted to BDCs because of their characteristic enhanced dividend yield.

Traded BDCs that are listed (and thus sold and resold) on national securities exchanges may offer an attractive investment opportunity (although with enhanced dividend yield comes additional risk).  However, non-traded BDCs are altogether different, and should be regarded as risky, complex and illiquid investment products.  As their name implies, non-traded BDCs do not trade on a national securities exchange, and are therefore illiquid products that are difficult to sell.  Typically, investors can only sell their shares through redemption with the issuer, or through a fragmented and inefficient secondary market.  Moreover, non-traded BDCs such as HMS usually have high up-front fees (typically as high as 10%), which are paid to the financial advisor selling the product, his or her broker-dealer, and the wholesale broker or manager.

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With increasing frequency retail investors are encountering scenarios in which they are offered an opportunity to invest in a private placement. A private placement – often referred to as a non-public offering – is an offering of a company’s securities that are not registered with the Securities & Exchange Commission (“SEC”). Under the federal securities laws, a company may not offer or sell securities unless the offering has been registered with the SEC or an exemption from registration applies.


When an investor decides to purchase shares in a publicly traded company, or for that matter purchase shares in a mutual fund or exchange traded fund (“ETF”), he or she will have the opportunity to first review a comprehensive and detailed prospectus required to be filed with the SEC. When it comes to a private placement, however, no such prospectus need be filed with the SEC – rather, these securities are typically offered through a Private Placement Memorandum (“PPM”).

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Cushing Royalty & Income Fund (NYSE:SRF), an exchange-traded fund that traded at $25 in February 2012 ,currently trades at less than $5. It is a leveraged fund which invests in oil and gas royalty trusts that was reportedly sold in some cases to elderly and conservative retirees who did not understand the risky nature of the fund. The fund is believed to have lost value due to drops in the prices of oil and gas. In addition to the risky nature of this investment, the fees and commissions associated with its sale are believed to have exceeded 6% in some instances.

 15.6.15 offshore rig no logoThe Fund describes itself as a non-diversified, closed-end management investment company, with an investment objective of seeking a high total return with an emphasis on current income, that seeks to provide shareholders with a tax-efficient vehicle to invest in a portfolio of energy-related U.S. royalty trusts, exploration and production master limited partnerships.

Cushing & Royalty Income Fund was underwritten by these broker-dealers

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Securities Litigation Consulting Group of Fairfax, Virginia has estimated that shareholders of non-traded REITs are about $50 billion worse off for having put money into non-traded REITs rather than exchange-traded REITs. The estimate is based on the difference between the performance of more than 80 non-traded REITs and the performance of a diversified portfolio of publicly-traded REITs over a period of twenty years. According to research by the consultancy, the difference in performance between the two asset groups is largely due to the relatively high up-front expenses associated with non-traded REITs.

15.6.15 money whirlpoolNon-traded real estate investment trusts (REITs) are investments that pose a significant risk that the investor will lose some or all of his initial investment. Non-traded REITs are not listed on a national securities exchange, limiting investors’ ability to sell them after the initial purchase. Such illiquid and risky investments are often better suited for sophisticated and institutional investors, rather than retail investors such as retirees who do not wish to have their money tied up for years, or risk losing a significant portion of their investment. Non-traded REITs usually have higher fees for investors than publicly-traded REITs and can be harder to sell.

A partial list of non-traded REITs is as follows (not all of the REITs listed have performed poorly):

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Securities attorneys are currently investigating claims on behalf of the customers of Christopher B. Birli and Patrick W. Chapin, who suffered significant losses as a result of misrepresentations and unsuitable recommendations of variable annuities. Reportedly, Birli and Chapin received significant sales commissions for allegedly unsuitable recommendations to their customers.

Customers Could Recover Losses for Unsuitable MetLife Variable Annuity Recommendations

On March 27, a complaint was filed with the Financial Industry Regulatory Authority Office of Hearing Officers against Birli and Chapin regarding the State University of New York retirement program. According to the complaint, Birli and Chapin recommended their customers switch MetLife variable Annuities with new ones held outside the retirement plan in MetLife IRA accounts.

Allegedly, Birli and Chapin circumvented their firm’s general prohibition of direct annuities exchange by recommending to their customers that they surrender their annuities to purchase another product available within the retirement program, wait 90 days, and then sell the second product in order to purchase the MetLife IRA annuity.

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Securities fraud attorneys are currently investigating claims on behalf of investors who suffered significant losses as a result of doing business with Douglas Guarino, Lawrence Lee or Robert E. Lee and Rockwell Global Capital. The investigations are regarding fraud, unsuitable recommendations and churning that the three men allegedly conducted while registered with Rockwell Global Capital as financial advisors.

According to stock fraud lawyers, firms have an obligation to fully disclose all the risks of a given investment when making recommendations, and those recommendations must be suitable for the individual investor receiving the recommendation given their age, investment objectives and risk tolerance. Churning, on the other hand, is a form of broker misconduct in which the broker performs excessive trading to generate personal profit.

In addition, a firm has an obligation to properly supervise brokers and financial advisors while they are registered with the firm. If it fails in this duty, securities fraud attorneys say it may be held liable for customer losses. One Statement of Claim has already been filed with the Financial Industry Regulatory Authority against the firm, alleging that Douglas Guarino, Lawrence Lee and Robert E. Lee had churned a client’s account. The claim is seeking damages for excessive trading, churning, fraud and unsuitable recommendations.

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Investment fraud lawyers currently are investigating claims on behalf of investors who suffered significant losses as a result of unsuitable recommendations of real estate investment trusts, or REITs. Though the risks of non-traded REITs are now well-known, publicly-traded REITs also are not without risks. Reportedly, many investors suffered significant losses in 2013 because they were invested in these products for the wrong reasons.

Loss Recovery REIT Investors Suffer Significant Losses in 2013

Reportedly, from January until May 2013, investors spent $10.3 billion on real estate funds.  However, in May 2013, the Federal Reserve began discussing tapering  its purchase of assets under the so-called “quantitative easing” policy, causing a spike in interest rates, and REITs suffered a loss of 5.9 percent in that month alone. As prices fell, investors pulled $2.5 billion out of REITs, suffering significant losses. Then, last month, the Federal Reserve tapered its bond-buying program from $85 billion per month to $75 billion per month.

According to a Wall Street Journal article last month, “You should own REITs because you want to diversify some of the risks of stocks and bonds and to combat inflation — not because you are chasing high dividend yields or because you think the hot returns of the past will persist.” The articles goes on to say, “Anyone who overpays for lower-quality, higher-yielding assets could be crushed if interest rates rise sharply.” 

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