California Securities Lawyer Jeffrey A. Feldman
Typically speaking, a bad or defective product is sold based on misrepresentations, as practically no one would purposely buy a faulty product. 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 many other broker/dealers also hawked. 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. Examples of today’s bad products include:
- Structured products
- Variable life insurance products
- Leveraged and inverse ETFs and ETNs
- Options trading programs
With purely a sales practice case, you are making claims typically based on the purchase of a product that is not necessarily inherently bad, but it may be a bad fit 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.
It should be added 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.
Types Of Bad Product Cases
Many product cases come in waves. 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.
In the years of the mortgage and financial crisis, other bad products have been exposed in the news, such as Lehman Brothers principle protected notes, reverse convertible notes, and other structured products, Morgan Keegan investment funds, Schwab YieldPlus Funds, and other risky investment products sold as conservative investments.
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 waves we are currently seeing in product cases is for the variable annuity and structured products. Not every person who is sold a variable annuity will have a case, but in general, variable annuities are a bad idea. 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 guarantee your original starting principal.
What is not explained, unfortunately, is that the only way that this 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 be 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 FINRA (formerly the 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.
Contact An Experienced Securities Attorney
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. Jeffrey Feldman is here to protect the individual investor, and do what he can to limit Wall Street’s penchant for trying to enrich itself at the expense of his clients.
Contact me online to discuss if you may be able to recover losses from bad investment products.
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