MF Global’s Bankruptcy Reminds Investors of the Importance of Diversification

Despite regulatory efforts to curb derivative trading and leverage, MF Global declared bankruptcy after bets on European sovereign debt investments failed. MF Global clearly did not fall under the “too big to fail” category like some its investment banking brethren, and MF Global’s problems run deeper than poor trading. Customer trading accounts were commingled with the firm’s proprietary trading accounts and MF Global layed of more than 1000 workers worldwide. This story is strikingly similar to what many firms endured during the last credit crisis. While there are certainly more firms that will follow MF Global down this path, investors and brokers were given an important reminder regarding diversification.

The old addage about not putting all your eggs in one basket applies to MF Global. Investors and brokers that diversify investment portfolios in various stocks and sectors spread out risks of volatility and above average losses. Nonetheless, horror stories from investors and brokers that concentrated their investments in MF Global stock and or bonds are widespread. MF Global employees received stock from the company and continued purchasing additional shares in a concentrated fashion.

Employees believing in their employer and wanting to share in its success is very American. Employees have been engaging in this practice for generations, and when the company succeeds employees can and have built tremendous wealth from these practices. However, certain MF Global employees not only lost their retirement savings in the decline of MF Global stock, but also have lost their livelihoods with the same company. This “all in” approach has devastated many.

Because employees rely upon a company’s viability in terms of continued employment, concentrating your investments in the same company is not a good idea. Perhaps taking a 10% or less stake in your employer’s stock or bonds makes sense. You can take advantage of the company’s success without taking on unnecessary risk of losing a significant portion of your savings in the event the company fails. Investing more than 10% of your savings in your company is pure speculation.

Gilman Law LLP is a leading securities law firm and is here to help you recover for losses sustained due to broker misconduct. For a free evaluation of your case, please fill out our online form, or if you need to speak with an attorney right away CALL TOLL FREE (1-888-252-0048).

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Why Would You Buy A Principal Protected Note?

Principal Protected Notes (PPN’s) have grown in popularity over the last decade. Firms all over Wall Street are consistently selling new issue PPN’s to retail investors. PPN’s come in all shapes in sizes, with investors participating in the so-called upside of baskets of stocks, currencies, commodities, bonds, or stock indices. Investment professionals sell these PPN’s as investments with no downside risk with the potential for gains on the upside.

Asking an investment professional to explain how the potential upside is determined may be easier said than done. PPN performance calculations are extremely complicated and as a result, investment professionals often focus on the lack of downside risk as a key selling point. Representations such as you “can’t lose”, “no brainer” or it is a “win, win” are often cited by disappointed investors.

The risks of a PPN are more severe than the “no brainer” label that these types of investments often receive. PPN’s are subject to the credit risk of the issuer. If the issuer goes under, you may lose the entire investment. PPN’s are also extremely illiquid. In the event you need to sell the investment prior to maturity, there will likely be a very limited number of investors bidding. Furthermore, the bid spread will be fairly wide. In addition, you may not earn any return, which will leave you struggling to keep up with inflation. And if the market accelerates significantly, your return is limited.

PPN’s were concocted by Wall Street to play on investors’ fear during times of uncertain markets. Upside potential with no downside is an easy for sell for the most novice investment professionals. This type of “protection” appeals to many types of investors. However, even when the markets are up, PPN returns are largely underwhelming. The brokers get a nice 3% commission up front and then try and sell you another PPN again when this PPN matures in 2 to 5 years.

It is hard to understand why anyone would buy a PPN. At least if you buy a short-term investment grade bond or CD you will get something in return for tying your money up for a period of years. Unfortunately a PPN’s limited return in good times just isn’t worth it in the event that the issuer goes bankrupt or if you need to sell prior to maturity. Not surprising, the only one getting a guaranteed return is your investment professional. 

 

 

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Buying Value Stocks Still Carries Substantial Risk

The definition of what a value stock varies among Morningstar, Lipper, the Investment Dictionary, Wikipedia, and other financial resources. However, generally speaking, a stock is considered a value stock if it is currently trading below its perceived price level. There are many mutual funds, money managers, and investment professionals that hold themselves out as value stock specialists. These individuals want investors or investment professionals to trust them to purchase stocks, which they perceive to be undervalued.

While value investing is widely followed investment discipline, when it comes to certain stocks, determining what the value should be can be risky. There are plenty of success stories out there where investment professionals buy stocks that get oversold on breaking news and eventually recover to profitability. In the last stock market sell off, many of these opportunities arose.

This is an art that professional money managers have been working to perfect for some time. Where retail investors get into trouble is when a retail stockbroker calls them up wanting to do the same thing. For every success story out there, there are just as many failures. At what point does a so-called value stock become a bankrupt company?

Stocks such as Enron, Lehman Brothers, Bear Sterns, Washington Mutual at one point in time were all purchased by retail brokers because they viewed these stocks as undervalued. Unfortunately, some times stocks are being sold for a reason. Institutional investors, banks, hedge funds and others were likely selling out their portfolios of these stocks while retail brokers were pushing them on to unsuspecting novices. Too often you will here statements in retail offices such as, “if I loved Bank of America at $14, why wouldn’t I love it at $7”. This mindset is the reason why retail investors are encouraged to double down on falling positions.

The only way to truly avoid buying a falling knife rather a diamond in the rough is to have a diversified portfolio with proper allocations to stocks and bonds depending on your investment time horizon, risk tolerance, and needs for the investments. Allowing a professional money manager to purchase small amounts of quality undervalued stocks for you, or purchasing a value mutual fund with a manager with a successful track record is significantly different than a retail broker encouraging you to double down. Investors should be wary of any retail broker recommending these types of strategies. 

 

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Beware of Investment Professionals Recommending That You Chase The Latest Market Trends

Investors should be wary of an investment professional that recommends that an investor jump into the latest trends. It is always amazing to hear what trends investment professionals recommend to investors. Unless you are a professional trader, chasing trends such as rising commodities prices, trading stocks, or concentrating your portfolio in dividend paying stocks, these ideas are usually the wrong approach. The key to successful long-term investing is diversification. While there may be short-term potential in the hottest trends these ideas also carry significant risk.

Over the last couple of years commodity prices have risen dramatically. Back in 2008 the price of oil rose above $150 a barrel. Many retail investors got burned by jumping into energy futures or exchange traded funds at or near the top of the market. Gold is now the commodities market leader. Money is flowing into gold futures and exchange traded funds. Gold may continue higher as investors seek a safe haven for their investments. However, concentrating your savings in gold now would be a mistake. Gold is trading around $1900. That doesn’t mean it cannot fall significantly. If your investment professional recommended a small allocation to gold early on then you have benefited from this move, but now is not the time to jump in with both feet. Diversification is the key long-term. The risks right now are too great to justify potential returns.

Surprisingly, because interest rates are so low, many investment professionals are recommending that investors try and take advantage of the stock market’s volatility. Right now the volatility index is trading around 40, which means that over the next 12 months the market can move 40% in either direction. While that may provide opportunities for trading gains, it also means that investors can lose in either direction too. The market has seen wild 500 point swings in either direction in the same week. Investment professionals attempting to trade these moves got burned, while investors with diversified portfolios with appropriate allocations to investment grade fixed income were more insulated to short-term trading losses. While the market’s volatility remains at extremely high levels, the overall performance of the market this year is almost flat.

Investment professionals are also recommending that investors, particularly retirees, concentrate investments in dividend paying stocks. While yields may be attractive on certain stocks, these yields may not last forever. Investing in a company solely for its yield ignores the risk of the underlying stock. An example of this is Barnes and Noble. Investors seeking yield pushed the stock to $21 a share earlier this year because it offered a high dividend. Once Barnes and Noble cut its dividend investors that bought the stocks for its $2 a share dividend lost nearly $10 in the underlying stock. Another example is Ford. Years ago Ford was trading around $16 per share and was yielding nearly 7%. It was one of the highest yields on the street. Unfortunately, investors lost as much 50% on the stock when Ford slashed its dividend. Investment professionals should recommend quality stocks, which often pay a dividend. However, buying a stock solely because of the yield is not an investment strategy.

There are always new trends. These trends come and go. Taking a long-term approach is the only way to avoid losing money unnecessarily chasing a trend. If you have a short-term investment time horizon, it is even more important not to chase a trend, and seek safety for your savings.

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What Your Investment Professional’s Recommendations Mean For Them

It is important for investors to understand what your investment professional stands to gain for a particular recommendation or strategy. It is hard to imagine that an investor needs to be so vigilant, but considering how many different ways investment professionals take advantage of investors, investors need to understand the motivation for a particular recommendation.

The most obvious area for misconduct is when an investment professional recommends an active trading strategy where the investor relies upon the investment professional’s stock picks. Despite countless studies that demonstrate that passive investment styles such as indexing outperform active trading strategies, certain investment professionals still recommend active stock picking. Most reputable brokerage firms have compliance procedures in place to prevent your broker from churning your account, however, smaller broker dealers tend to have less supervisory safeguards. The most prudent step to take if an investment professional recommends an active trading, commission based strategy is to find a new investment professional. However, you can also ask that your account be converted to a fee-based account, otherwise known as a wrap account.

Wrap accounts have grown over the last decade because brokerage firms have been subjected to substantial arbitrations filed by investors who suffered significant losses due to excessive commissions. Investors in wrap accounts tend to pay a flat 1% fee for unlimited trades. If a broker that is recommending an active trading strategy is unwilling to execute the trades through a wrap account, then the motivation is certainly the commissions. Wrap fee misconduct, however, is usually the opposite of churning, where an investment professional does very little managing to justify the 1% fee. Retirees with large balances are the most susceptible to such misconduct. Retirees are much less likely to enter a significant amount of trades, so the 1% fee may actually be over charging them for what they receive. Having an in-depth understanding of what your investment professional will provide for the 1% fee each year is important. This lets the investment professional know that you are paying close attention to your savings.

Investors should also beware when an investment professional tells you there is no fee or commission associated with the transaction. This should be a huge red flag that the payout is built into the price. Private placements, structured products, REITs, reverse convertibles, IPO’s, new issue preferred stocks, variable annuities, and even bonds are likely to have a fee to the investment professional packaged with the deal. This doesn’t mean that you investment professional shouldn’t get paid for his advice, but it is important to understand the motivation behind the recommendation. The best investment for the client is very likely something with low fees or commissions added to or built into the price. Conversely, a REIT that pays your investment professional 5% of the investment is likely not what is best for you.

It is imperative for you to have an investment plan with your advisor with documented goals, periodic meetings to adjust according to any changes in your life, or the markets, and a full understanding of what you will be paying as far as fees and commissions.

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FINRA Cracks Down On Private Placement Misconduct

In most instances, investment professionals solicit private placement purchases from investors that usually know little to nothing about the proposed investment or issuer. Although banks and brokerage firms are aware of their obligations under NASD Notice to Members 03-71, to conduct extensive due diligence, perform reasonable basis and customer specific suitability analysis, provide balanced disclosures, maintain supervisory provisions for selling private placements, and adequately train its investment professionals to sell private placements within industry rules. At a minimum, FINRA expects members to discuss the following with potential private placement investors: liquidity concerns, credit risk of the issuer, presence of collateral backing the deal, forecasts for the return of principal investments and payment of timely interest/dividends, tax consequences, and the costs and fees associated with the investment. In many of FINRA’s fines and suspensions below, FINRA emphasized that a member’s due diligence requirement must go well beyond reviewing the private placement memorandum (PPM). In the past few months, FINRA issued the following enforcement rulings: 

FINRA fined and censured Brookstone Securities and Principal David William Locy $25,000 for failing to conduct adequate due diligence prior to approving 3rd party private placements to be sold to Brookstone clients. Brookstone also failed to have written supervisory procedures in place for 3rd party private placement sales.

FINRA suspended Leroy Henry Paris II, former Meadowbrook Securities, Jackson, MS principal from acting as a principal for 6 months. Mr. Parris was responsible for conducting the firm’s due diligence on private placement prior to allowing its financial advisor’s to sell these risky investments. FINRA charged Paris with failing to conduct due diligence on a third party private placement “beyond reviewing the private placement memorandum” (AWC 2009019070102)

FINRA made findings that Timothy Camarillo failed to conduct adequate due diligence on a private placement sold to investors. FINRA found that Camarillo did not sufficiently understand the product’s risk, which was sold to investors seeking capital preservation. Camarillo was suspended for 4 months, fined $10,000, and ordered to pay restitution to clients.

FINRA fined Garden State Securities and Kevin DeRosa, principal (AWC 2009018819201) for failing to ensure that it established written supervisory procedures designed to comply with industry rules and standards regarding private placement sales. Due diligence would have found that misrepresentations were made in the PPM.

FINRA fined National Securities Corporation and Matthew G. Portes for failing to conduct due diligence prior to selling private placements, and for failing to supervise the sale of private placements. (AWC 200901968201).

FINRA fined Brewer Financial Services, and barred Adam Gary Erickson Principal, and Steven John Brewer for failing to conduct due diligence on private placement sales to clients (AWC 201002325701).

FINRA fined Newbridge Securities $25,000 for failing to conduct adequate due diligence prior to selling private placements and for failing to have adequate supervisory system in place regarding private placements (AWC 200901659401)

FINRA fined and suspended Penena Karpel McRoberts (AWC 2009017606101) for failing to conduct due diligence and for having no reasonable basis that these private placements were suitable for clients. 

FINRA fined and suspended Robin Fran Bush (AWC 2009016159402) for failing to conduct adequate due diligence beyond PPM and for failing to visit the site of the issuer.

FINRA barred Alvin Waino Gebhart and suspended Donna Traina Gebhart for failing to perform due diligence and making misrepresentations regarding private placements. (C0220020057)

FINRA fined Workman Securities (AWC 2009018818401) $700,000 for failing to conduct due diligence and for having no supervisory system in place to sell private placements to clients. 

FINRA fined Puritan Securities (AWC 2008012927503) for failing to have a supervisory system in place for selling private placements to firm clients.

FINRA fined Vincent Michael Bruno (AWC2009018771701) for failing to supervise private placement sales.

FINRA fined and suspended Bobb Arthur Meckenstock for failing to conduct adequate due diligence and supervision of a private placement.

For many of the underlying private placement sales that led to FINRA’s fines and suspensions, investment professionals also recommended that investors hold the risky investments, despite patent indications that these investments would never recover.  An investor’s reliance upon the investment professional’s expertise regarding a recommendation to hold a declining private placement that was recommended to them is certainly reasonable. Many investors are now contacting attorneys to assist them in recovering losses for fraudulent private placement investments.

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Preferred Stocks Get No Preferential Treatment In Down Markets

Preferred stocks are routinely sold to retirees to provide income in retirement. Most preferred stocks are issued at $25 per share, and normally trade on an exchange. As a result, an investment professional can build a preferred stock position for an investor with relative ease. New issues of preferred stocks routinely come to the market, so investment professionals can sell shares to investors at $25 per share, which usually includes a built in .50 per share commission for the investment professional, or 2% of the offering price. These transactions are processed off the exchange. Most preferred stock pay a quarterly dividend and have an interest rate greater than bonds. Preferred stocks almost sound too good to be true. Unfortunately, that is how many investment professionals sell preferred stocks to their clients.

Those investors whose investment professionals recommended preferred stocks as a safe income producing investment prior to or during the 2008-2009 market crash are all too familiar with how volatile preferred stocks can be. In 2008 and 2009, the volatility of preferred stocks mirrored that of stocks rather than the volatility of investment grade fixed income. Because their investment professional never explained the down side of investing in preferred stocks, most investors had no idea that preferred stocks could decline like stocks

Many preferred stocks are issued with no maturity date (perpetual debt) or maturities as long as 40 to 50 years. Many retirees will not live to see these investments reach maturity. Such long-term maturities subject the investor to the credit risk of the issuer for substantial time periods. Investors that owned preferred stock in Lehman Brothers, Bear Sterns, Fannie Mae, Freddie Mac,Wachovia,WashingtonMutual, and AIG learned this lesson the hard way.

Although preferred stocks trade on an exchange, preferred stocks generally trade in very low volume with large price spreads between the bid and asking prices. Accordingly, in a declining market, investors have difficulty selling their preferred stock shares. This is a significant problem for retirees that need to sell their preferred stocks. This important factor is rarely discussed when investment professionals are unloading their firm’s allotment of new issue preferred on unsuspecting clients.  

Interest rates are currently at historic lows, however, that means that rates can only go in one direction, higher. As many retirees remember, in inflationary environments, interest rates move significantly higher. While a 7% rate on a preferred stock with no maturity may seem like a great return now, if the inflationary trend continues, interest rates should move significantly higher. Not only will the preferred stocks with a 7% rate decline, but alternative investment options will likely have higher coupon rates with shorter maturity time frames, making it near impossible for the 7% holder to sell their shares without a significant loss.

Preferred stocks may seem like a solid investment when rates are low and the stock market is advancing, however, the Federal Reserve will not keep rates this low if the market rallies. The Fed is much more likely to keep rates low when markets decline. While this may limit interest rate risk short-term, the preferred stocks will be subject to significant market decline. Considering the limited circumstances where preferred stocks might make sense, the “preferred” label is misleading.

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Gilman and Pastor, LLP Announces a Securities Fraud Class Action Lawsuit Has Been Filed Against WebMD Health Corp. on Behalf of Stock Owners/Investors and Urges Investors to Inquire as to the Class Action Lawsuit Prior to the October 3, 2011 Lead Plaintiff Deadline

Press Release

August 25, 2011

BOSTON, MA – Gilman and Pastor, LLP announces that a lawsuit seeking class action status has been filed in the United States District Court for the Southern District of New York on behalf of the purchasers of WebMD Health Corp. (“WebMD” or the “Company”) (NASDAQ: WBMD) who purchased shares between February 23, 2011 and July 15, 2011, inclusive (the “Class Period”).

The Complaint alleges that during the Class Period, defendants issued materially false and misleading statements regarding the Company’s business and prospects. Specifically, defendants misrepresented and/or failed to disclose the following adverse facts: (i) that WebMD was experiencing sponsorship cancellations due to extended legal and regulatory reviews; (ii) that WebMD’s customers, including several consumer product companies, were delaying advertising on the Company’s website as a result of smaller advertising budgets; and (iii) as a result of the foregoing, defendants lacked a reasonable basis for their positive statements about the Company and its prospects.

As a result of Defendants’ misleading statements, shares of WBMD traded at artificially high price levels.  On July 18, 2011, WebMD announced its preliminary second quarter financial results and lowered its financial guidance for 2011. Consequently, the price of WebMD stock fell $14.01 per share, or 30%, to close at $32.48 per share, on extremely heavy trading volume.

If you purchased or otherwise acquired WBMD shares during the Class Period, between February 23, 2011 and July 15, 2011, and either lost money on the transaction or still hold the shares, you may contact Gilman and Pastor by no later than October 3, 2011 to discuss your rights, including as to the recovery of your losses, or to obtain additional information, at www.investment-losses.com, by email at kgilman@gilmanpastor.com or by calling toll-free (888)252-0048.

 

 

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Gilman and Pastor, LLP Announces a Securities Fraud Class Action Lawsuit Has Been Filed Against Juniper Networks, Inc. on Behalf of Stock Owners/Investors and Urges Investors to Inquire as to the Class Action Lawsuit Prior to the October 15, 2011 Lead Plaintiff Deadline

Press Release

Source:  Gilman and Pastor, LLP

August 25, 2011

BOSTON, MA – Gilman and Pastor, LLP announces that a lawsuit seeking class action status has been filed in the United States District Court for the Northern District of California on behalf of the purchasers of Juniper Networks, Inc. (“Juniper” or the “Company”) (NYSE: JNPR) who purchased shares between July 20, 2010 and July 26, 2011, inclusive (the “Class Period”).

If you purchased or otherwise acquired JNPR shares during the Class Period and either lost money on the transaction or still hold the shares, you may contact Gilman and Pastor by no later than October 15, 2011 to discuss your rights, including as to the recovery of your losses, or to obtain additional information, at www.investment-losses.com, by email at kgilman@gilmanpastor.com or by calling toll-free (888)252-0048.

The Complaint alleges that during the Class Period, Juniper issued materially false and misleading information concerning the Company’s business practices and financial results.  Juniper repeatedly assured investors that Juniper was well positioned to deliver against its long-term model of 20% or higher revenue growth and 25% or higher operating margin. Nonetheless, Juniper failed to disclose negative trends in Juniper’s business.  As a result of the Company’s misleading statements, Juniper’s stocks traded at artificially high prices during the Class Period. 

Then on July 26, 2011, Juniper issued a press release reporting disappointing financial results which were far below previous guidance, the JNPR stock dropped drastically by 21% to close at $24.66 per share.   

 

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Gilman and Pastor, LLP Announces a Securities Fraud Class Action Lawsuit Has Been Filed Against Dendreon Corporation on Behalf of Stock Owners/Investors and Urges Investors to Inquire as to the Class Action Lawsuit Prior to the October 3, 2011 Lead Plaintiff Deadline

Gilman and Pastor, LLP Announces a Securities Fraud Class Action Lawsuit Has Been Filed Against Dendreon Corporation on Behalf of Stock Owners/Investors and Urges Investors to Inquire as to the Class Action Lawsuit Prior to the October 3, 2011 Lead Plaintiff Deadline

Press Release

August 25, 2011

BOSTON, MA – Gilman and Pastor, LLP announces that a lawsuit seeking class action status has been filed in the United States District Court for the Western District of Washington at Seattle on behalf of the purchasers of Dendreon Corporation (“Dendreon” or the “Company”) (NASDAQ: DNDN) who purchased shares between January 7, 2011 and August 3, 2011, inclusive (the “Class Period”).

The Complaint alleges that Dendreon violated federal securities laws by failing to disclose the following facts: (i) Dendreon knew or deliberately disregarded the fact that financial forecasts regarding the immediate adoption of the Company’s cancer drug Provenge were dramatically inflated, particularly in light of the fact that the Company had not provided physicians with financing options; (ii) Dendreon lacked adequate systems of internal operational or financial controls; and (iii) Dendreon executives repeatedly issued false and misleading statements to the investment community regarding Provenge, leading investors to believe that the medical community would quickly adopt the drug to treat prostate cancer.

As a result of Defendants’ misleading statements, shares of DNDN traded at artificially high price levels.  On August 3, 2011, Dendreon issued a press release announcing financial and operational results well below analyst expectations, and significantly lowered guidance for 2011. Consequently, shares of DNDN dropped more than 60%. 

If you purchased or otherwise acquired DNDN shares during the Class Period, between January 7, 2011 and August 3, 2011, and either lost money on the transaction or still hold the shares, you may contact Gilman and Pastor by no later than October 3, 2011 to discuss your rights, including as to the recovery of your losses, or to obtain additional information, at www.investment-losses.com, by email at kgilman@gilmanpastor.com or by calling toll-free (888)252-0048.

 

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Awards & Recognition

The Securities and Investment Fraud Attorneys at Gilman Law LLP have been recognized by numerous leading legal publications:

National Securities Investment Fraud Law Firm