Complex investments imperil ordinary savers

New York TimesFebruary 16, 2013 

Regulators across the country are confronting a wave of investor fraud that is saddling retirement savers with steep losses on complex products that until a few years ago were pitched only to the most sophisticated investors.

The victims are among the millions of Americans whose mutual funds and stock portfolios plummeted in the wake of the financial crisis, and who started searching for ways to make better returns than those being offered by bank deposits and government bonds with minuscule interest rates.

Tens of thousands of them put their money into speculative bets promoted by aggressive financial advisers. The investments include private loans to young companies like television production firms and shares in bundles of commercial real estate properties.

Those alternative investments have now had time to go sour in big numbers, state and federal securities regulators say, and are making up a majority of complaints and prosecutions.

“Since the crisis, we’ve seen more and more people reaching out into different types of exotic investments that are a big concern to us,” said William F. Galvin, the Massachusetts secretary of the commonwealth.

There are few good statistics on the extent of the problem nationally. But cases are mounting in the offices of regulators like A. Heath Abshure, the securities commissioner in Arkansas, where a majority of the 66 open securities cases involve complex investments sold to less sophisticated investors looking for a steady return.

J. Bradley Bennett, chief of enforcement at the Financial Industry Regulatory Authority, Wall Street’s self-regulatory group, said that for the last two years, 10 staff members have looked at the “proliferation of these products to understand how they are being sold.”

There is no agreed-upon list of the financial products that have caused problems for yield-chasing investors, but regulators say certain ones come up particularly often. Private placements, investments in largely unproven private companies, have been on the list of top enforcement concerns published by the national organization of state securities regulators every year since 2007.

Private placements are supposed to be available only to wealthy, sophisticated investors, but several loopholes, including relaxed procedures for verifying wealth, have allowed them to end up in the portfolios of less sophisticated retirement savers.

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