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Investment Fraud

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Houston Investment Fraud Lawyer

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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 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 massive 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 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 three 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 substantial 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 statements resulted in tremendous losses for defrauded investors. Investors who lost money, as a result, may be entitled to recover losses.
  • In May 2006, an 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.

The Madoff Investment Fraud Case

Bernard Madoff is a modern-day Ponzi schemer responsible for an estimated $50 billion in investor losses. He began his career on Wall Street in 1960 and his firm, Bernard L. Madoff Investment Securities, quickly became one of the largest and most trusted independent trading operations in the industry. Madoff was highly respected and looked to for advice. Madoff even spent three years as the Nasdaq chairman. Like other Ponzi schemers, Bernard Madoff attracted investors with promises of high returns and low fees. When, in these uncertain economic times, investors began to ask for their returns (this is done with redemption notices), Madoff was unable to pay them off.

According to authorities, $7 billion was requested in redemption notices and Madoff apparently did not have it. Like all Ponzi schemes, the Madoff investment fraud collapsed when multiple investors simultaneously requested returns and Madoff was no longer able to pay one with another's money. It is said that his firm, Bernard L. Madoff Investment Securities, controlled over 25 funds and handled approximately $17 billion of investor money. After his arrest, however, it was reported that Madoff's investment losses are estimated to be as much as $50 billion. Bernard Madoff faces 20 years in prison and a $5 million fine for what is likely the largest Ponzi scheme in Wall Street history.

Stanford Investment Fraud

R. Allen Stanford of the Stanford Financial Group is accused of a massive, ongoing $8 billion investment fraud. If you have incurred a serious financial loss as a result of the Stanford investment fraud, you may be entitled to recover losses from those responsible. Contact a Houston litigation attorney to learn more about your options.

With an estimated net worth of $2.2 billion, R. Allen Stanford, is the 205th wealthiest person in the U.S. He began his career in the Houston real estate market in the early 1980s and claims he moved on to take over his grandfather's company, Stanford Financial Group. Although claims assert that Stanford Financial Group was established in 1932, there are no records of the bank before the 1980s. Stanford quickly expanded Stanford Financial Group into a global wealth management and investment banking firm, opening offices in North America, Latin America, and Caribbean. R. Allen Stanford has enjoyed an extravagant lifestyle with multiple homes, private jets, and high profile, political friendships.

Over the last decade, he has given millions to politicians and lobbyists, reportedly thought of as an attempt to preserve and expand tax breaks in the U.S. Virgin Islands and purport credibility. After news of fraud allegations and his offices being raided, many recipients of his donations vowed to forward the money to charities. Another indication of Stanford's luxurious lifestyle is his involvement in sports sponsorships. He is a title sponsor for many professional sports, particularly sailing, cricket, golf, and tennis. Some of his sponsorships include the PGA Tour, Stanford St. Jude Championship, and professional golfer Vijay Singh. Stanford also established cricket grounds and tournaments in Antigua for which he was knighted; his motivation for this is thought to be not only an exhibition of his wealth but also an attempt to appear charitable and good-hearted.

On February 17, 2009, the U.S. Securities and Exchange Commission raided Stanford's Houston, Memphis, and Tupelo offices, alleging $8 billion in investment fraud.

According to allegations, Stanford Financial Group convinced clients to invest in a certificate of deposit program that offered extremely high returns in short periods of time. Stanford duped affluent investors by presenting them with hypothetical investment results as historical results. It is believed Stanford has been selling "improbable, if not impossible" returns for 10+ years.

In 2000 the company claimed their Stanford Allocation Strategies Program, a managed mutual funds program, had positive returns of 18.04%, when, in reality, it lost 7.5%. In 1995 and 1996, the company submitted identical returns suggesting that the scam has been going on for at least 13 years.

Although Stanford told clients their investments were being handled and monitored by a large team of analysts, the majority of investments were managed by Stanford himself and James Davis, Stanford International Bank's chief financial officer, who is also being charged in the case. The third person charged in the case is Laura Pendergast-Holt, chief investment officer.

Contact Arnold & Itkin's Proven Investment Fraud Lawyers

If you have incurred a serious financial loss as a result of inappropriate advice, misrepresentation, or other fraudulent acts of a brokerage firm, stockbroker, financial advisor or other securities professional, speak to a 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 about your options for recovery. Your consultation is free and confidential. Give us a call at (888) 493-1629 today!

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