Junk bonds are popular tools among scam artists and fraudulent investment advisors because they offer what every investor wants: the potential for significant returns. In addition, many investors tend to associate bonds with limited risk (which is an appropriate correlation for some types of bonds, but not others), making junk bond scams an easier sell as well.
However, the reality is that all investments carry risk, and junk bonds are among the higher-risk investments that are available to individual investors. Unfortunately, scam artists and fraudulent advisors promoting junk bonds typically either downplay or conceal these risks while falsely inflating these bonds’ upside potential.
Warning Signs of a Junk Bond Scam
While junk bonds can be legitimate investment opportunities for sophisticated investors under appropriate circumstances, for casual investors, any “opportunity” to invest in a junk bond should be viewed with skepticism. In particular, the following are all possible warning signs of a junk bond scam:
1. Non-Investment Grade Bond Rating
The first warning sign is that you are being offered an investment in a non-investment grade bond. A rating of B, Ba or lower from any of the three major rating companies indicates that a bond is “junk” and therefore a high-risk investment.
2. Lack of Information
If you cannot understand the investment opportunity, or if the person offering the investment becomes evasive when you press for more information, this is a common sign of a junk bond scam. A legitimate broker or investment advisor should be well-versed in any investments he or she is offering or recommending to clients.
3. Poor Company Performance
For corporate bonds, poor financial performance may indicate that the bond offering is part of a scam. If you are being asked to loan money to a company that has recently suffered substantial losses and that has a rating below investment grade, this will often be a sign of a scam (or at the very least an unsuitable investment).
4. Energy Sector Bonds
While oil and gas companies were once among the most stable blue chips on the market, that time has come and gone. Many companies that once offered investment-grade debt instruments have since been downgraded to junk bond status. As a result, any bond investment offerings in the energy sector must be carefully scrutinized for potential fraud.
5. Other Red Flags
Finally, junk bond scams often involve many of the hallmarks of other types of investment frauds as well. For example, some additional red flags for junk bond scams include:
- “Guaranteed” returns that beat the general market
- Unregistered brokers and advisors
- Use of boiler rooms to cold call potential investors
- High-pressure sales tactics
- Requests for payment by email or over the phone
Did You Lose Money in Junk Bonds? Contact Zamansky LLC Today
If you lost money in junk bonds, the attorneys at Zamansky LLC can provide you with a free case evaluation to determine whether you may be entitled to a financial recovery. To discuss your situation with one of our experienced attorneys in confidence, call us at (212) 742-1414 or request a consultation online today.