FinancialCounsel

AARP Warns Seniors Of Reverse Mortgages; SNSFE Investigating

The American Association of Retired Persons (AARP) has warned seniors of reverse mortgages.  Reverse mortgages can carry high costs -- as much as 7% of a home's value.  They also have been subject to abusive marketing practices.  AARP urges seniors to review the affordability of these loans and other less costly options.  SNSFE is investigating abuses and reverse mortgages and would look forward to information from those who have been abused.

SEC Files Hedge Fund Fraud Charges Against Former UBS Financial Broker Justin Paperny In Connection With GLT Venture Fund, L.P.

On January 14th, the Securities and Exchange Commission filed settled charges against Justin Paperny, a former broker at UBS Financial Services for his role in a hedge fund fraud.  The SEC alleged that Paperny participated in a fraudulent offering of limited partnership interests in a hedge fund known as the GLT Venture Fund, L.P.  Paperny was GLT's broker and he falsely told GLT investors that GLT had access to so-called hot IPOs and had achieved high average annual returns. 

The complaint alleged that Paperny arranged for new GLT investors to place their funds in GLT through UBS Financial and executed thousands of GLT securities trades using funds of GLT and its investors who, Paperny knew, were being defrauded by the fund manager.  In exchange, Paperny received approximately $220,000 in commissions and in additional payments from the hedge fund manager. 

Without admitting or denying the SEC's charges, Paperny consented to the entry of a judgment, which among other things, requires him to pay disgorgement with prejudgment interest and a civil penalty in amounts to be determined.

Exercise Caution In Purchasing Structured Investments, The Latest Hot Product From Wall Street

Two seminars that I recently attended both shared the common element of having a speaker discuss the virtues of "structured investments", or "structured products" as they sometimes are called.  A financial publication recently ran a story entitled, "The Next Big Thing; Structured Products May Be Difficult to Define, Explain and Track - Yet They're Touted As the Next 12 Figure Asset Class."  Indeed, both seminar speakers claimed that, in Europe, structured products are so popular that investors can buy them at the post office!  Hype or reality?  No one can be sure, but we know that for 2007, analysts predict that investors will purchase $100 billion of them.

What are structured products?  According to a website promoting them, structured products "create an investment product that combines some of the best features of equity and fixed income - namely upside potential with downside protection."  As the website recognizes, it is the "mix of investments in the basket" that determines risk and return, and it can vary dramatically.  Indeed, in 2005 the National Association of Securities Dealers (now FINRA), issued a notice to member financial services firms that based upon its review, "NASD staff is concerned that members may not be fulfilling their sales practice obligations when selling these instruments, especially to retail customers."

Let's examine the NASD's notice to members to highlight the characteristics and risks of structured products.

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Qualified Pension Plan Participants Should Look Forward To Receiving Specific Investment Advice

The Pension Protection Act of 2006 (the "PPA") should benefit plan participants (and beneficiaries) by providing participant education.  Under the PPA, qualified "Fiduciary Advisers" will help plan participants navigate through their investment selection and allocation decisions.  Although we await the issuance of regulations by the Department of Labor to amplify the provisions of the PPA, let's review the PPA and what plan participants may expect to receive by way of guidance.

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Securities Regulator Probes Sale Of CMO (Collateralized Mortgage Obligation) Investments To Retail Investors

Securities regulators have asked several brokerage firms for information about the marketing and sale of mortgage-related products, specifically those sold to individual investors.  These collateralized mortgage obligations are pools of residential home mortgages.  Investors can receive income from the cash that flows from the underlying mortgage payments.  They can be risky investments, however, if the homeowner falls behind or cannot pay the mortgages.  The value of CMOs has suffered amid the increasing number of defaults in high-risk home mortgages.

The letters were sent to more than a dozen brokerage firms believed to be involved in the CMO market.  The letters, dated December 14th, asked for PowerPoint presentations, sales scripts and detailed customer-account information from June of '06 through July of '07.  The letter sent by FINRA, the Financial Industry Regulatory Authority, is looking into whether brokers sold these risky investments to individuals just as the market for related products was collapsing.  FINRA specifically asked for offering documents on products sold, created or distributed during the months of March and June of 2007.  The mortgage market had weakened since the previous fall and fell sharply over the spring and summer.

Regulators are probably also looking to see whether firms sold the products to investors without disclosing the risks, or to investors who didn't have the financial wherewithal to take on riskier investments. 

On the other side of the regulatory front, a spokesman for the SEC has said that the SEC's examination division plans to conduct its own sweep examination in coordination with FINRA. 

SEC's Rand Corporation Report Confirms Investor Confusion Over Differences Between Brokerage Services And Investment Advisory Services

The Securities and Exchange Commission has published on its website the long-awaited Rand Corporation report that was to examine differences between brokerage firms and investment advisory firms, and whether or not consumers were confused. 

The 219 page report indeed states, "It is not surprising that the typical retail investor finds it difficult to understand the nature of the business from which he or she receives investment advisory or brokerage services."  The study also identifies concerns, including investors'  unhappiness with disclosure documents.  The study said that today's written disclosures are of little value because few investors read them. 

While the study stayed clear of regulation, it detailed how the brokerage and advisory businesses have become more similar over time and questioned whether traditional distinctions between brokers and advisers make sense. 

It remains to be seen how the SEC responds to the report.  But one thing is certain, a response is needed, and clarification for investors' sake is demanded.

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