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Investment Fraud & Businesses in Texas

Investment fraud occurs when investors are enticed to make investments based on misleading information, when the risks of a particular investment are not fully disclosed, or when an advisor makes inappropriate recommendations. When representing an investment opportunity, securities professionals such as brokerage houses, investment advisors, financial planners, and stockbrokers are legally and ethically obligated to several important duties. Among these professional obligations are the duty of disclosure and the duty to provide suitable recommendations.

The duty of disclosure requires that securities professionals inform investors of the risks associated with an investment. The duty to provide suitable recommendations requires that securities professionals recommend investments that are appropriate for and consistent with the following:

  • Financial condition of the investor
  • Their investment objectives and priorities
  • Their tolerance for risk

Investment Fraud in Mutual Funds & Hedge Funds

Several high profile instances of investment fraud have occurred recently resulting in hundreds of billions of dollars in losses for defrauded investors. In the wake of the crumbling subprime mortgage market, the values of mortgage backed securities with ties to subprime mortgages have plummeted. Unfortunately for many investors, mutual and hedge funds were heavily invested in mortgage backed securities which, in turn, had ties to risky subprime mortgages. As a result, the funds experienced precipitous declines in value resulting in huge losses for their investors.

All investments involve a certain amount of risk and periodic losses are common. However, what makes these hedge and mutual fund losses constitute investment fraud is how the funds were represented. If a fund that is heavily invested in risky securities like subprime mortgages is marketed as conservative, a material misstatement of fact has occurred. Such misstatements constitute investment fraud and those responsible can be held accountable.

Recent Investment Fraud Cases

The Wachovia Evergreen Ultra Short Opportunities Fund was pitched to investors as a fund that seeks "current income consistent with preservation of capital and low principal fluctuation." However, because the fund has invested over 70% of its assets in mortgage securities including subprime mortgages, it lost 20% of its value in 16 days. Such a significant loss in less than 3 weeks is inconsistent with representations Wachovia made to investors and represents a failure to disclose the underlying risks associated with the fund so heavily invested in subprime related securities. Investors who incurred significant losses may be entitled to recover losses.


Investors in some Regions Morgan Keegan mutual funds have suffered serious financial losses as a result of the funds' disproportionate investments in securities linked to subprime mortgages. Despite fund descriptions as having "conservative credit posture" and being "without excessive credit risk", several Morgan Keegan funds have lost between 50% and 75% of their values as a consequence of their heavy investments in mortgage backed securities with ties to risky subprime mortgages. Investors who invested in these funds based on representations of them as conservative funds have been defrauded by Morgan Keegan and may be entitled to recover losses.


Only days after Bear Stearns executives bolstered investor confidence by publicly downplaying the company's financial problems, Bear Stearns' stock value experienced one of the sharpest declines ever recorded for a blue chip stock—more than 96% in four days. On March 12, 2008, Bear Stearns stock was trading at more than $60 per share. Four days later, Bear Stearns agreed to be acquired by JP Morgan Chase for $2 per share to avoid bankruptcy. This egregious failure to disclose material facts about the company's actual financial state resulted in tremendous losses for defrauded investors. Investors who lost money as a result may be entitled to recover losses.


In May 2006 a NASD (now FINRA) arbitration panel awarded $22 million to ExxonMobil workers who were defrauded by an investment advisor who recommended inappropriate investments to them. The employees turned over their retirement savings to the broker who put the money in variable annuities and mutual fund shares. It turns out that the variable annuities were inappropriately recommended because the broker could make more commission on them. He also traded their mutual fund accounts without their knowledge, trading them into and out of very aggressive funds—funds that were too risky for the retirement savings of the workers who ranged from age 55 to 67.

Talk to a Houston Business Litigation Attorney

If you have incurred a serious financial loss as a result of inappropriate advice, misrepresentation, or other fraudulent acts of a brokerage firm, stock broker, financial advisor or other securities professional, speak to a Houston business litigation attorney. You may be entitled to recover losses from those responsible for yourself or your business.

Contact a Houston investment fraud attorney to learn more about your options.

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