Alternative Investments Can Be Traps for the Unwary

Some of the typical risks and problems associated with alternative investments are risk of loss of principal, excessive fees, lack of transparency, illiquidity, and high correlation with asset classes (like stocks) that they purportedly hedge.

The panic of 2008, continued stock market volatility and the problem of how to reduce debt and close deficits have flattened investor confidence in the stock market, and, consequently, traditional asset allocation models.  What was traditionally viewed as a balanced portfolio – 60% stocks and 40% bonds – is now viewed by some as high risk. (more…)

 

They Die Hard

When they walk out of prison, they crank right back up and keep going full throttle until another prosecutor/judge pairing insists on another time out.

Today, I’ve got two pieces of bad news and two pieces of good news. Let’s get the bad news out of the way first. Bad news point #1: Investment fraud is rampant. It’s at epidemic proportions already and will get worse over the next decade as baby boomers continue to retire. Bad news point #2: Investment fraudsters never quit, unless they go to prison. From failed investment to failed investment they just keep going until a prosecutor and judge tell them they can’t for awhile. When they walk out of prison, they crank right back up and keep going full throttle until another prosecutor/judge pairing insists on another time out. A recent case from the SEC illustrates the bad news. According to the SEC’s press release:

On May 10, 2012, the Securities and Exchange Commission charged a California-based real estate company and its owners with defrauding potential investors by boasting a false company track record to tout their purported real estate expertise while concealing the bankruptcy of their previous company.

The SEC alleges that Michael J. Stewart, John J. Packard, and Randall A. Smith created Apartments America, LLC to pool investor proceeds from an unregistered offering of securities and invest primarily in apartment buildings in Southern California and Arizona. They solicited potential investors through a website, Internet advertisements and postings, cold calls, solicitation letters, and advertising in a national newspaper. They boasted a track record of producing more than a 60 percent annual return on investment and creating more than $100 million in net equity.

According to the SEC’s complaint filed in federal court in Orange County, California, what potential investors did not know is that Apartments America was a new company with no assets and no track record. Stewart, Packard, and Smith were merely using the same investment strategy and selective statistics from their prior bankrupt company that had defaulted on $91.6 million in promissory notes held by 647 investors.

According to the SEC’s complaint, Stewart lives in San Clemente, California, and Packard and Smith each live in Long Beach, California. Together they formed Apartments America in September 2009, just three months after Pacific Property Assets (PPA) filed for bankruptcy. Stewart and Packard owned PPA and Smith worked for them. In the months prior to defaulting on its promissory notes, PPA was actively soliciting investor funds and promising an annual interest rate of 24 to 30 percent.

The SEC alleges that under Apartments America, whose securities have never been registered with the SEC, Stewart, Packard, and Smith similarly solicited investor funds with the same plan to purchase apartment buildings. But they engaged in a concerted scheme to distance themselves from PPA and its bankruptcy. In communications to potential investors, they selectively and misleadingly used some of PPA’s historic investments and touted them as Apartments America data. For instance, they arrived at their fabricated statistic of a 60 percent annual return on investment by cherry-picking PPA’s successful property investments while omitting the losses incurred on more than 50 properties in PPA’s portfolio at the time of its bankruptcy. Stewart, Packard, and Smith also misrepresented that they had created more than $100 million in net equity by calculating some of PPA’s property investments while omitting information about its bankruptcy and the losses on its bankrupt properties. They also falsely represented to potential investors that they were managing a property portfolio valued at more than $200 million when that in fact referred to PPA’s bankrupt property portfolio, which was actually being managed by the bankruptcy trustee.

Now the good news. Good news point #1: If you know where to look, you can turn bad news point #2 to your advantage. You can find earlier failed investments and thereby avoid the one that the well-disguised fraudster is asking you to buy now. Good news point #2: You can be the hero who saves hundreds of people. It only takes one vigilant investor willing to alert regulators to an ongoing scam to close the thing down. Once closed, it cannot destroy the retirements of the hundreds of other investors who would have fallen victim to it had the vigilant investor not taken action. How many times in your life do you get the chance to do something heroic? Here’s your chance. Everything you need to know is in The Vigilant Investor. You’ll see things you never would have noticed before. You’ll recognize scams that you never would have recognized before. You’ll be a hero to people you’ll never meet, but who will owe you a debt of gratitude.

If you’ve been a hero through things you learned in The Vigilant Investor, we want to give you credit here. Please share your story with us by emailing pat@investorswatchdog.com.

Problems with Non-Traded REITS

Recommendations of alternative investments can provide a litmus test for whether your broker or adviser is worth keeping

Last week, Page Perry LLC wrote a blog post entitled Nontraded Behringer Harvard Opportunity REIT I Implodes. We have not yet filmed a segment of Investor’s Watchdog University addressing that type of product. But you need to know about the dangers even before we get around to shooting that video. According to the Page Perry post: (more…)

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