“Excessive Compensation Often Leads to Misconduct”
As one colleague recently pointed out, as a general matter, the investment products that are most prone to fraud, are the same investment products that offer the highest compensation.
Variable annuities may offer compensation in excess of 6-7% of a customer’s initial investment. Non-traded Real Estate Investment Trusts offer may compensation in excess of 12% of a customer’s initial investment. Municipal bonds and corporate debt securities can be sold as principal, and notwithstanding a spread between the bid and what a seller is paid, and the offer, what a buyer is charged, current rules allow for the undisclosed mark-up of these transactions.
The same is true of Unit Investment Trusts, which may be inventoried and sold as principal, once again with undisclosed mark-ups of as much as 5%. Moreover, these same securities can be bought and sold with astounding frequency.
Similarly, structured products, including exchange linked notes, reverse convertible notes, and bond funds are frequently the investment products most associated with misconduct, because once again, in addition to the relatively larger commissions associated with the sale of these products by the broker, the brokerage firm generally earns significant compensation, and even significant on-going compensation in connection with the underwriting and affiliated management of these investments.
A list of the securities or investment products we see most often include:
Complex Derivative Products
Equity Linked Notes
High Yield Bond Funds
Inverse Leveraged ETF Funds
Municipal Bond Funds
Mutual Fund Fraud
Real Estate Investment Trusts (REITs)
Retail Bank Customer Referrals
Reverse Convertible Securities
Penny Stocks – Low Priced Securities
Ultra-Short Bond Funds