Hedge Fund Fraud
Hedge funds are types of investment partnerships that are ‘minimally regulated’ by the government, FINRA, and other watchdog groups. Due to the less-regulated nature of these funds, hedge-fund managers have a wide array of investment options, from investing in startups and executing hostile takeovers to investing in futures, derivatives, and commodities. This massive array of options allows some hedge funds to rake in extraordinary returns; but it also means that many of these funds are extraordinarily risky as well.
While not all hedge funds are risky, many are – and a recent increase in popularity is leading many investors to invest, and lose money, in hedge funds. It’s one thing for a well-educated, savvy investor to put part of his or her portfolio in a hedge fund, but many individuals, especially senior investors, don’t quite understand what they’re investing in, or the hedge fund is completely unsuitable for their financial situation and investment goals.
Part of the problem is that many senior investors invest for income; they rely on their investment returns (and often the principal as well) to pay for their basic needs. Many elderly investors may not understand that most hedge funds are illiquid, meaning that it can be difficult or impossible to cash out any part of their investment until a pre-arranged date, often five to ten years after the initial purchase of the investment. This illiquidity can be a major issue for seniors, who may be forced to pay a large fee to cash out part of their investment early, or may not be able to do it at all – and it’s even worse when senior investors are initially misled about the fund’s liquidity and withdrawal policies.
However, with fraud rampant in the hedge-fund industry, illiquidity is only one of many potential issues for seniors who invest in hedge funds. Most Americans have heard of Bernie Madoff, the New York City-based fund manager who stole an estimated $65 billion from his clients, but his story is far from the only notable case of hedge fund fraud in recent years. Scott Rothstein, a Fort Lauderdale-based lawyer and hedge fund manager, stole an estimated $1.2 billion from a group of investors that included the noted New York-based hedge funds Platinum and Centurion.
While the most destructive kind of hedge fund fraud often occurs inside the management of a specific fund, individual brokers and financial advisors can be responsible for hedge-fund related fraud, too. Some brokers secretly receive kickbacks or commissions if they can convince their clients to invest in a certain fund, and will recommend that fund to their elderly clients, whether or not it’s suitable for their investment needs. In addition, the illiquid nature of hedge funds makes it easier for unscrupulous brokers or advisors to steal all or part of an elderly client’s investment; if a client can’t cash out for five years, a broker may feel that they can skim off the top without being noticed.
Overall, while hedge funds can offer high returns for experienced investors, investors who rely on a steady stream of income, or those who are not well-versed in the stock market would likely do well to stay away from these kinds of investments. No matter what kind of investments you buy, remember to do significant research before deciding to make a purchase. And consult an experienced securities arbitration and elder financial fraud attorney if you feel that you’ve been misled or defrauded by your broker or financial advisor.
The Silver Law Group can help you determine whether an investment loss is the result of a violation of securities industry rules and regulations. If so, you may be able recover their losses through a FINRA arbitration claim. To assess your individual situation and discover your options, contact us for a free consultation with an experienced elder financial fraud and securities arbitration attorney.