Types of Bad Products

Typically speaking, a bad or defective product is sold on the basis of misrepresentations, as practically no one would buy such a product if the facts had been accurately represented.  An example of a bad product, which was front and center when I became a lawyer, was the 1980's-era limited partnership, most notably sold by Prudential Securities, but which was also hawked by many other broker/dealers.  This product, the 1980's limited partnership, was designed by the firms and the general partners with such high fees that it was virtually impossible for the investor to make any money. Of course, if this had been disclosed to investors, who would have purchased them?  In most product cases it is the investment which is going to be the main issue.

With purely a sales practice case, you are making claims typically based on the purchase of a product that is not inherently bad, but it may be bad for the particular client, or was traded in the client's account in an inappropriate manner.  Take a churning case for instance.  With churning, you are not typically going to look at each underlying investment purchased and sold in an account, but rather the amount of purchasing and selling going on, thus enriching the broker at the expense of the client.  It is the practices of the broker which are at issue, not the product.  I hasten to add that just because a product is of high risk, it does not mean it is a defective product, or would be inappropriate for everyone.  A highly risky product, such as a bond of a company which is insolvent, or even in bankruptcy, may not be suitable for most people, but as long as all the disclosures are made, it may be a very suitable investment for certain investors, and may even produce an extremely high return.

Many product cases come in waives. The limited partnership cases started showing up in the late 80's and went on for years.  There have also been waves of note cases, viatical cases, long-term CD cases, and more recently, variable annuity cases.   All of these products start to get pushed at the same general time by Wall Street.  Each of these products has serious flaws that are not disclosed to investors, or are otherwise misrepresented to the investing public.   It is these misrepresentations, which are typically entrenched in the way Wall Street sells these securities, which make product cases different then your typical sales practice case. 

It would appear that the big waive we are currently seeing in product cases is for the variable annuity.  I would caution that not every person who gets sold a variable annuity will have a case, but in general, variable annuities are a bad product.  Variable annuities are typically extremely high-fee products, restrict withdrawals by requiring the payment of very high surrender fees, often on a declining basis over seven or more years, limit returns (because of the fees), and do not afford very much flexibility because you are limited to where your money can be invested to the sub-accounts set up by the insurance company offering the annuity.  Annuities are also often marketed with the promise that you cannot lose money, as the insurance company will guaranty your original starting principal.  What is not explained, unfortunately, is that the only way that insurance pays off is if you die.  If the sub-accounts lose ground before you die, and you want to take your money out, you are stuck with your losses to principal.  So this benefit, for which the annuity holder pays a fee every year, is really no benefit at all, except perhaps to your beneficiaries. 
It is possible to argue that every variable annuity sold in an IRA would make the basis of a good case, as the main benefit on which most annuities are touted is that gains and income generated are tax deferred.  Your income and realized gains in an IRA are of course already deferred until withdrawal.  So you are paying the high fees and being saddled with restrictions to your money with no additional tax benefit at all.

What is interesting so far about annuities is that Wall Street does not seem to backing away from selling them, notwithstanding withering criticism of the product in the press and by experts, as well as action taken by the SEC and NASD.  These annuities are so profitable for Wall Street and the insurance companies who sell them that Wall Street appears to be sticking it out. 

The one thing that Wall Street has made clear over the years is that it will always find new products that benefit it at the expense of its clients.  I am here to protect the individual investor, and do what I can to limit Wall Street's penchant for trying to enrich itself at the expense of my clients.
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Jeffrey A. Feldman, Attorney at Law