Ponzi schemes and investment scams are on the rise. According to a securities fraud attorney, low-interest rates have caused investors to seek out riskier investments. “Retirees that need income can’t get by with 1% on a bank account – they end up in riskier products that pay more income, but are suspectable to fraud,” explained Marc Fitapelli. Fitapelli is an investment fraud attorney based in New York City. He believes that low-interest rates combined with fears over inflation are pushing retail investors into ever more exotic products, causing a spike in securities fraud filings.
Investors Flee the Stock Market for Risky Alternatives
You can’t discuss anything these days without mentioning COVID-19. The pandemic has impacted many aspects of our lives, including our finances. In the days following the initial news of the pandemic, global stock markets crashed only to quickly soar to record highs a year later. These volatile moves scare even the most seasoned investors.
Most investors learn to deal with these fluctuations, but there is a small subset of investors that shun the stock market in favor of complex non-traded securities. These investments can range from private LLCs, business development companies, private equity companies, non-traded REITs (Real Estate Investment Trusts), and even cryptocurrencies.
Investments that are not traded on the stock market are not illegal to sell. The securities are usually sold under exemptions that the Securities and Exchange Commission offer to accredited investors. These exemptions allow companies to sell securities without having to go through the disclosures and other requirements of an IPO.
While the process is simpler for the companies selling the securities, that simplicity comes at a big cost to investors. “On balance, less disclosure will result in more fraud,” opined attorney Marc Fitapelli. Attorney Fitapelli has observed a noticeable spike in cases associated with non-traded investments and attributes it to sustained record low-interest rates. Interest rates on conventionally “safe investments” are at record lows, causing investors to seek out higher yields through non-traded REITs, BDCs, and promissory notes, the attorney explained.
GPB Capital Ponzi Scheme Exposes Flaw in Broker-Dealer Due Diligence
A recent, nearly $2 billion Ponzi scheme exposes the flaws in the system. In February 2021, the Justice Department announced the arrests of the owners and principals of GPB Capital. “By paying investors from an undisclosed and improper source such as investor capital, the defendants repeatedly misled investors about the health and performance of their investments,” stated Acting United States Attorney DuCharme when the indictments associated with GPB capital were announced. Litigation surrounded GPB may continue for years to come.
Instead of waiting for the government’s cases to conclude, Fitapelli’s law firm, MDF Law, is pursuing arbitration cases against the financial advisors who sold GPB funds to investors. These funds were called Armada Waste and GPB Auto. When salespeople sell non-conventional products they have a legal obligation to conduct “reasonable” due diligence, explained Marc Fitapelli. “It was difficult to miss the red flags associated with GPB,” Fitapelli argues.
FINRA, SEC and State Regulators Take Action
In recent years, FINRA and the Securities and Exchange Commission have taken steps to safeguard investors from risky non-conventional investment products. Individual state securities regulators have also taken notice. Even with these protections in place, wise investors should always approach new investments with healthy skepticism. You are your own best defense against fraud.