For many investors, the mutual fund is a mainstay of their investment portfolios, whether it be in...
Navigating the Mutual Fund Maze, Part 1: What Is a Mutual Fund?
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Investment Fraud
Investors Have Rights to Recover Attorney’s Fees In California
Legendary investor Warren Buffet once said, “Only when the tide goes out do you discover who’s been swimming naked.” What Buffet is talking about are the investments in your portfolio. The tide going out is a metaphor for a bear market, and swimming naked refers to poor investments, which often find their way into one’s portfolio because of imprudent investment advice, conflicted advice, or just plain investment fraud. Now that we seem to have entered bear market territory, it is time to see if your financial adviser has you swimming naked. And what you can do about it. What the Changes Mean for Investors California has amended its securities laws to give California investors a new and significant weapon in the fight against promoters and brokers who either lie or conceal material facts. The legislation, which went into effect in 2022, now requires courts to award attorneys’ fees to investors who prevail in certain securities-related claims. California imposes certain fiduciary duties on persons who furnish investment advice. Persons covered would include: Stock promoters Stockbrokers Investment advisers California law requires these persons to put the investors’ interests ahead of all else and be truthful in all dealings with the investing public. […]
FINRA Arbitration Suffers Reputational Setback in Suit That Highlights Unfair Expungement System
Lawyers who represent victims of investment fraud frequently criticize the FINRA arbitration process as being tilted in favor of stockbrokers. Biased arbitrators, cherry-picked by the industry and beholden to their interests, is a common complaint. A recent filing by the Alabama Securities Commission against a FINRA arbitrator for numerous violations has added credence to the claims of unfairness. According to Financial Advisor, the Alabama Securities Commission has filed papers to vacate a FINRA arbitration ruling, accusing FINRA arbitrator Harvey Linder of “fraud, corruption and undue means” after he expunged five customer complaints from the record of a Merrill Lynch broker. Customer complaints form part of a stockbroker’s disciplinary record and serve as a valuable public resource for investors who want to research a potential broker. Knowing this, stockbrokers will go to great lengths to have all traces of securities fraud erased from their public record, which includes cherry-picking arbitrators who are predisposed to grant expungement. Arbitrators are selected pursuant to an established process in which FINRA sends a list of arbitrators, both public and industry, to the investor and the stockbroker to rank or strike. FINRA then averages the rankings and selects the arbitrator(s) with the highest average. Unlike the […]
Third-Party Enforcement of Cryptocurrency Markets
Shortly after viewers watched the Netflix series Squid Game, where contestants participated in a deadly, rigged contest for millions of dollars, real-life investors lost millions by investing in a fraudulent crypto token of the same name—SQUID. Anonymous creators promised to create a crypto “play-to-earn” platform whereby people could virtually participate in the squid games. However, instead of building the game, the anonymous creators allowed the SQUID token’s value to soar and then cashed out with approximately $3.4 million. The investors were left with nothing. Do Whistleblower Laws Apply to Cryptocurrencies? Much like the game show in the television series, this scam could have been avoided had a whistleblower come forward. There were numerous red flags that a third-party whistleblower may have been able to recognize: The creators of the token were anonymous; the website allowed you to purchase the SQUID token but not sell it; its social media websites did not allow people to comment; and the website (since taken down, but archived versions are here and here) had a large number of grammatical mistakes. There are doubtlessly many other cryptocurrency scams whereby a third party must come forward to protect innocent investors. Fortunately, whistleblowers can be rewarded for doing […]
The Various Places Where Excessive Fees May Be Hidden in Your 401(k) Plan
So-called defined contribution plans—such as 401(k) plans—have become “the primary private savings vehicle for most Americans’ retirement.”[1] The assets held by 401(k) plans have more than doubled over the past decade, and as of 2019, these plans held a whopping $6.4 trillion in retirement savings.[2] With trillions at issue and the retirement security of millions of American workers at stake, it is crucial that these assets are managed responsibly. However, while some plans are in good hands, many suffer from what has been dubbed the “pervasive problem of excessive fees”[3]—that is, participants in 401(k) plans often pay more in fees than they should, and more than they would if their plan was managed and administered more prudently. Excessive fees undermine workers’ ability to save effectively for their retirement and line the pockets of plan administrators, recordkeepers, and investment managers. Differences in fees that may appear small when considered in isolation can add up to enormous differences over time. Given that workers typically spend decades saving up for their retirement, excessive fees in the context of a 401(k) plan have an outsize impact—for example, a difference in fees of less than one-half of a percent can cost employees tens of thousands of dollars […]
Should Your 401(k) Plan Invest in Private Equity?
The U.S. Department of Labor (“DOL”) recently issued a guidance document explaining that 401(k) plans are permitted to invest in private equity funds, albeit only indirectly.[1] The DOL touts its new guidance as a policy that “level[s] the playing field for ordinary investors” and helps “ensure that ordinary people investing for retirement have the opportunities they need for a secure retirement.”[2] However, allowing 401(k) plans to invest in risky, high-fee investment vehicles such as private equity funds may very well invite imprudent decision-making by the people entrusted to ensure that workers’ retirement savings are invested wisely. Your Employer’s Fiduciary Duties Regarding Your 401(k) Plan A 401(k) is an employer-sponsored defined contribution retirement plan that enables workers to make tax-deferred contributions from their salaries to the plan. As sponsors of 401(k) plans, employers—as well as the people employers retain to provide recordkeeping and investment management and advisory services to the plan—have fiduciary obligations to participating employees. Employers’ fiduciary obligations to plan participants have been codified in the Employee Retirement Income Security Act of 1974 (“ERISA”).[3] Specifically, under ERISA, employers and other plan fiduciaries are subject to the twin duties of loyalty (requiring fiduciaries to act for the “exclusive purpose of providing benefits to participants”) and prudence (requiring fiduciaries […]
401(k) Participants Can Be Prime Targets of Cross-Selling Efforts
Participants in their company’s 401(k) plan have come to expect that their employer will protect their personal information from disclosure outside the plan. However, plan participants of Shell Oil’s 401(k) have filed a case in federal court in Galveston, Texas – Harmon v. Shell Oil Company – alleging Shell took no action to stop the plan’s recordkeeper, Fidelity, from using participants’ personal information to cross-sell nonplan financial products and services to them. Plan recordkeepers are those invisible, behind the scene operators that a 401(k) plan hires to keep track of the plan’s financial records as well as the participants’ personal information such as contributions, withdrawals, account balances and changes to an account. Recordkeepers also keep track of your social security number and other sensitive information personal to you, such as home and cellular phone numbers, work and personal email addresses, investment history, age, income, marital status, call center notes, and when you are nearing retirement. The lawsuit exposes a little-known practice outside the retirement plan industry – plan recordkeepers using confidential plan participant information to proactively solicit those same participants to buy retail financial products and services outside the Plan for nonplan purposes. It is a practice that has endured despite long-standing […]
Understanding 401(K) Documents: The Annual Fee Disclosure
401(k) documents are notoriously mystifying—and notoriously ignored. “I must say,” admitted Justice Ruth Bader Ginsburg at recent oral argument of the United States Supreme Court, “I don’t read all the mailings that I get about my investments.” For about 72 million American workers, 401(k)s are “nest eggs.” Employees expect their 401(k) investments, along with social security, to provide them with a steady income during their retirements. To help protect this expectation, the Employee Retirement Income Security Act (ERISA), imposes strict obligations on employers (and their appointees) who manage and administer 401(k) plans. These 401(k) plan “fiduciaries” make crucial decisions about 401(k) plans, like what investments options are available on the plan; what companies provide services (like recordkeeping) for the plan; and how much the plan (and participants) pay for various services. Under ERISA, 401(k) fiduciaries must make these decisions loyally and prudently: they must prioritize the interests of the 401(k) plan participants (ERISA’s duty of loyalty) and must make decisions with “care, skill, prudence, and diligence” (ERISA’s duty of prudence). But these decisions are often made behind the closed doors of committee meetings. And, for the average employee, it can be difficult to discern whether their employers are living up to their fiduciary duties. This […]
Now is a Good Time to Judge Your Company’s Management of Its 401(k) Plan
No doubt you have seen the news recently about the stock market gyrations caused by the uncertainties arising from Covid-19. Because many Americans’ retirement savings are invested directly and indirectly in the stock market, now may be the time to evaluate how your 401(k) is holding up through this market volatility. Foremost, a fund that has lost value in this down market does not make it a bad investment any more than a fund that made money in a upmarket is a good investment. When evaluating performance, how the fund performed compared to the overall market it invests in, also known as a benchmark, is one of the most important facts to consider. As a participant in a 401(k) it is a good idea to know which benchmark your employer has selected for the funds you own. Because there are thousands of funds that invest across a broad spectrum of companies, there is no single, one-size-fits-all benchmark. To the general public, the Dow Jones Industrial Average is the most commonly recognized benchmark, although it is seldom used anymore by professional investors. For funds that invest in large companies, the Dow Jones Index has been replaced by more representative benchmarks, such […]
S.E.C. Regulates Initial Coin Offerings
“Crypto crime”—that is, a crime involving cryptocurrencies and other digital assets, including...