Investment Fraud Leading to Loss in Securities, Stocks & Bonds

Investment Fraud

Investments can be a great way to achieve your long-term financial goals. However, the investing world can be challenging to navigate, especially avoiding investment fraud. Typically, investors who are investing for the first time, choose to work with a financial advisor/broker to avoid this.

Working with a broker/advisor can help you determine which investment suits your goal, objective, financial needs and risk level. However, many new and inexperienced investors easily fall victim to investment fraud. Sometimes it is because you are misled into unsuitable investment options by a financial advisor or stockbroker.

Our investment fraud lawyers at Shepherd Smith Edwards and Kantas, LLP have worked with many investors across the United States. We help them recoup losses from fraudulent actions carried out by their broker-dealers, broker and financial advisors.

Investment Fraud Claims: Verbiage

Being unsure of the verbiage when first making an investment fraud claim or dealing with a securities lawyer is common. Learning the common verbiage experienced investment fraud attorneys use when working on cases involving investment fraud can be extremely helpful.


Buying shares of a company's stock is a way to own a piece of that company. They also come in a wide variety. Stocks can be based on the company's size, type, performance during market cycles and potential for short- and long-term growth.

  • "common" stock - which gives an owner no priority in the company.
  • "preferred" stock - which generally pays a specific dividend that companies must pay before any distributions to other stockholders.
Bonds / Fixed Income

A bond is an investor's loan to an organization in exchange for interest payments. Payments are made over a specified term plus principal repayment at the bond's maturity date.

Similar "fixed income" vehicles are structured with the same concept. The investor is paid interest for a certain period and then receives back their principal. The owner of the bond or fixed income generally has no equity interest in the company.

Types of Bonds/Fixed Income U.S. Treasury Securities

The federal government issues U.S. Treasury securities ("Treasuries"). They are considered to be among the safest investments an investor can make. This is because all Treasury securities are backed by the " full faith and credit" of the U.S. government.

Agency Securities

"Agencies" is a term used to describe bonds issued or guaranteed by U.S. federal government agencies. They also describe bonds issued by government-sponsored enterprises (GSEs)—corporations created by Congress to foster a public purpose.

Municipal Bonds

Municipal bonds, or "munis," are security bonds issued by states, cities, counties and other governmental entities. They are used to raise money to build roads, schools and a host of other projects for the public good.

These bonds function as a loan as the money is used to fund infrastructure, government projects, and generate cash flow.

International and Emerging Markets Bonds

These are bonds issued by foreign governments and companies. It is important to note that interest rate movements may differ from country to country. Therefore, international bonds are another way to diversify your portfolio but they carry their risks.

Corporate Bonds

Companies issue corporate bonds to raise money for capital expenditures, operations and acquisitions. Corporate bonds are segmented and issued by all types of businesses into major industry groups.

Investors who buy these kinds of bonds are lending money to the company so they can finance their activities. These include ongoing operations, M&A and business expansion opportunities. In return, the company will legally commit to paying interest on the principal.

Mortgage-Backed Securities

Mortgage-backed securities are bonds secured by home and other real estate loans. They are created when several of these loans, usually with similar characteristics, are pooled together.

Essentially these kinds of bonds turn the bank into an intermediary between the homebuyer and the investment company. The investor buying mortgage-backed security is lending the money in question to the homebuyers. To sell on the market, mortgage-backed securities must be issued by a government-sponsored enterprise (GSE) or a private financial company.

Bank Products

Deposits at banks and most credit unions are insured federally up to a limit set by Congress. Transaction (checking) accounts and deposit accounts offer liquidity, making it easy for you to access your funds for any reason. These include day-to-day expenses to a down payment or money for unexpected emergencies.

The interest earned from bank products—including certificates of deposit (CDs)—tends to be lower than potential returns from other investments.

Bank Products Include

  • Savings Accounts – Insured deposit accounts, which pay interest and allow the client to make as many deposits as possible. They have more withdrawal restrictions than checking accounts and higher minimum deposits.
  • Money Market Accounts - Deposit accounts that give safety, convenience, and liquidity to a savings account. They also provide a slightly higher interest rate.
  • Certificates of Deposit – An insured deposit account that offers a predictable return at high-interest rates than savings accounts. However, investors cannot withdraw money for a set term without a penalty.
Investment Funds

Investment funds — mutual funds, closed-end funds, exchange-traded funds—pool money from many investors and invest it according to a specific strategy. Investment funds can offer diversification, professional management and a wide variety of investment strategies and styles.

However, depending on the fund, they can involve leverage, derivatives or other riskier investments and investment strategies.

Annuities and Insurance Products Annuities

An annuity is a contract between an investor and an insurance company where the company promises to make periodic payments. The payments may either start immediately—called an immediate annuity—or at a future time—a deferred annuity.

Annuities can be for a fixed amount, or they can be variable. A fixed annuity is not tied to the market and provides steady payments at a fixed rate. On the other hand, a variable annuity would be tied to some part of the market, usually an index.

Although there are many forms these annuities can take, a typical variable annuity provides no guaranteed returns. However, it could give the investor the possibility of higher returns than a fixed product could.

Insurance companies have also created hybrid products, called indexed annuities. These products allow investors to participate in some upside of the market while having some protection. Annuities can be very complicated and potentially costly investments for investors, and they can also provide some tax benefits.

Life Insurance Products

Life insurance products can also be investments. Life insurance products come in various forms, including term life, whole life and universal life policies. Variations on these—variable life insurance and variable universal life—are considered securities.


Options are contracts that allow a purchaser to buy or sell a security, such as a stock or exchange-traded fund. They are sold at a fixed price within a specific period. Some options have unlimited upside and downside, while others can only result in losing the contract value.

Options are popular among speculators as they allow investors control many shares of an investment with minimal initial cash outlay. This inherent leverage adds significantly to the risk of options.

Futures Contracts – Commodities and Securities 

Commodity futures contracts are agreements to buy or sell a specific quantity of a commodity at a specified price. Commodities include metals, oil, grains, animal products, financial instruments, and currencies. With limited exceptions, brokers must execute trading in futures contracts on the floor of a commodity exchange.

Federal regulations permit trading in futures contracts on single stocks, also known as single stock futures, and specific security indices. As with options, futures contracts can have a significant degree of risk.

Private Placements

Private placements, also called alternative investments, are exempt from the registration requirements of §4(a)(2) of the Securities Act. Regulation D allows certain investments to be exempt from these registration requirements.

They are exempted if they are not marketed to more than a certain number of individuals not considered Accredited Investors. So long as the investment sells to accredited investors, they maintain this exemption.

There are several categories where an investor can qualify as an accredited investor under Rule 501 of Regulation D. The most commonly used criteria for identifying an individual investor as accredited are income and net worth. The investments include various products that may offer higher rates of return but with an increased risk.

Some common examples of private placements include:

  • Real Estate Investment Trusts (REITs)
  • Non-Traded REITs
  • Hedge Funds
  • Equipment Leasing Agreements
  • Tenants-in-Common
  • Various oil and gas limited partnerships

Additionally, private placements and other alternative investments are often not liquid. Therefore they are inappropriate for an investor that needs access to their cash.

Whoever handles your money or advises you on which investment opportunities to pursue should have your best interest in mind. However, brokers/advisors are usually more concerned with their bottom line than your investment portfolio and can mismanage your money.

At SSEK Law Firm, our investment fraud attorneys assess your case to ensure you get back what is rightly yours.

Financial Product Failures

Over the last 20 years, brokerage firms have become focused on selling "products" instead of individual stocks and bonds.

Some of these products are easily understood and explained, such as equity or bond mutual funds. However, problems arise when the firms and brokers attempt to supplement what was supposed to be just a simple investment.

Examples are the Morgan Keegan RMK Funds and the Schwab YieldPlus Funds. Both were touted and promised to investors as "safe and secure" investments; instead, they suffered unacceptable losses for such products.

The impetus for these financial product failures was primarily due to an investment called "derivatives." Derivatives are added to funds to bolster their returns. The brokerage firms and their brokers would advertise the superior returns as though returns were from the firm's market acumen.

In reality, all investors accomplished was an increased risk in the product while it was being advertised as relatively safe. Other products are gross misrepresentations of the very nature of the product.

One such glaring example is the Principle Protected Note ("PPN") . By the name alone, a reasonable investor would understand that the principal was somehow protected and guaranteed. In reality, many firms marketing materials on the product misled brokers into promising that to investors.

Securities Backed Loans ("SBL")

A current product that is popular amongst brokers is the Securities Backed Loan ("SBL"), or a brokerage firm credit line. The firms and brokers extoll the upsides of these products, painting them as a win/win investment.

An SBL is unlike a traditional bank line of credit, which is collateralized against real property. The SBL's collaterals are the assets in your portfolio.

Unlike a bank, when your portfolio’s value decreases, the brokerage firm sells off your assets to offset drops in value. By doing so, you lose any potential increases in value in the other assets in your portfolio.

Another financial product failure garnering a lot of national and international attention at the moment is GPB Capital private placements. Brokers have unsuitably recommended many investors these products even with the knowledge that they were dropping in value.

Free Investment Fraud Consultation

SSEK Law Firm’s securities lawyers have many years of experience helping investors wronged by investment fraud recoup their losses. Whether through a financial product failure or broker misconduct, we are confident that we can help you.

We offer a free, no-obligation case consultation. Get in touch with our team of lawyers today, at (866) 904-2456 and we can assess your situation.

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