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What Is a Defective Investment Product?

January 14, 2022 Blog

Making informed investment decisions requires a clear understanding of the specific asset, or product, in which you want to invest. Many investment products are extraordinarily complex, and understanding how they work can be challenging even for experienced brokers and investors. For inexperienced investors who rely on their brokers for advice, this presents the risk of unknowingly buying into defective investment products.

Compounding this risk is the fact that many brokers either (i) don’t know that they lack the necessary knowledge for making sound investment recommendations, or (ii) don’t care about making sound recommendations because all they want to do is make sales and generate commissions. As a result, many investors who rely on their brokers’ advice end up buying defective investment products—and in many cases, they end up facing substantial investment losses.

Did You Suffer Losses Due to a Defective Investment Product?

All types of investment products can present unexpected risks for unwary investors. At Zamansky LLC, we handle investment fraud claims against brokers involving investment products including (but not limited to):

Commodity Futures

Investing in commodity futures essentially involves betting on the price of a particular product at some particular point in the future. While some skilled futures investors are able to reap sizable profits, investing in commodity futures is highly speculative, and it can quickly lead to substantial investment losses.

As a result, investing in commodity futures is a high-risk strategy that is best left to knowledgeable high-net-worth investors who can weather significant swings in the value of their portfolios. For the average investor, commodity futures are too risky to consider.

Collateralized Debt Obligations

Collateralized debt obligations were responsible for the 2008 Great Recession. While brokers sold (and continue to sell) these as low-risk investments—particularly in the case of mortgage-backed securities—the truth is that they can leave investors with substantial losses when debtors default on their loans.

Similar to commodity futures, while investing in collateralized debt obligations might seem like a good idea, the risk is too great for most individual investors. Unfortunately, this does not stop many brokers from continuing to sell these investment products to their clients.

Leveraged Exchange-Traded Funds (ETFs)

Leveraged exchange-traded funds (ETFs) sound good in theory: They allow investors to diversify by buying into a broad range of stocks, and they typically offer the opportunity to earn either double or triple the returns of a targeted index. But, when an investment product sounds too good to be true, there is usually another side to the story.

While brokers often pitch the benefits of investing in leveraged ETFs to their clients, what they don’t often disclose is that the leveraged nature of these products also enhances investors’ potential losses. Similarly, many brokers do not adequately explain that leveraged ETFs are designed to be short-term investments—meaning that they require active trading and management in order for investors to have any chance of pocketing returns.

Private Placements

A private placement is an investment in a company that does not offer its shares on a public market such as the NASDAQ or NYSE. While there are rules and regulations that govern private placements, the requirements for offering shares privately are nowhere near as comprehensive as those for publicly-traded securities. Additionally, many companies that offer private placements do not follow the law (often because they are offering investment “opportunities” without engaging legal counsel), and they often provide incentives to brokers who promote their stock.

Given these issues (among others), investing in private placements is also a high-risk proposition for individual investors. However, this does not stop brokers from promoting them as the next “can’t miss” opportunity.

Other Complex and High-Risk Investment Products

Fraudulent disclosures and other issues can lead to investor losses with various other types of investment products as well. Some additional examples of complex and high-risk investment products that can be dangerous for individual investors include:

  • Closed-End Funds
  • Convertible Notes and Reverse Convertible Notes
  • Delaware Statutory Trust (DST) Investment products
  • Equity-Indexed Annuities
  • Equity-Linked Notes (ELNs)
  • Like-Kind Exchanges (LKEs or “1031 Exchanges”)
  • Microcap Stocks (or “Penny Stocks”)
  • Municipal Bond Funds
  • Real Estate Investment Trusts (REITs)
  • Tenant-In-Common (TIC) Investment Products
  • Variable Annuities

Speak with a Lawyer about Filing a Defective Investment Product Claim

If you have questions about recovering investment losses related to a defective investment product, we encourage you to contact us for more information. Depending on why you suffered your losses, you may be eligible to pursue a claim against your broker in FINRA arbitration. To schedule a free and confidential consultation at Zamansky LLC, call 212-742-1414 or request an appointment online today.