Articles Posted in High Yield Investments

my name is.jpgOn January 9, 2012, Highland Funds will officially transfer management of their fund portfolios to a new entity called Pyxsis Capital. If history is any guide, Highland Floating Rate Fund investors should not expect a boost in performance following the name change. According to a 2005 study by Michael Cooper with the Krannert Graduate School of Management at Purdue University, funds that changed their names actually performed worse after the name change.

Highland’s change of identity is understandable, particularly in light of the legal backlash faced by brokers and advisors who sold the Highland Floating Rate Fund to unwary investors. See our August 2011 blog posting in the California Securities Fraud Lawyer Blog: Highland Floating Rate Funds’ Poor Performance Leads to Investor Lawsuits.

Despite the name change, the Pyxsis Floating Rate Fund’s management and investment strategy will continue to remain primarily focused in high-yield “junk bonds.” High-yield bonds are characterized by high returns as a reward for the risk inherent in investing in below investment grade securities (rated below BBB by credit reporting agencies). The family of Pyxis floating rate funds plan to invest 75% of the fund’s assets in bonds of which more than 80% are below investment grade.

Our securities law firm is currently pursuing a securities arbitration case on behalf of California investors who suffered losses in the Highland Floating Rate Advantage Fund [Symbols: XSFRX (Class A); XLACX (Class C); XLAZX (Class Z).] These funds are also referred to as “leveraged” loans because the borrowers typically have a significant level of debt relative to equity. The Highland Floating Rate Advantage Fund’s share price declined 8% in 2007 and more than 50% in 2008.

Unlike their peers, the Highland Floating Rate funds have continued to disappoint investors. Compared to the performance of other loan participation funds, the Highland Floating Rate Funds are in a class by themselves due to their five-year history of negative returns. In June 2011, the Highland Floating Rate Advantage Fund and the Highland Floating Rate Fund [Symbol: XLFAX] were merged into the Highland Floating Rate Opportunities Fund. Below are the 5-year return results for the Highland Floating Rate Opportunities Funds:

Highland Floating Rate Opportunities Fund 5 Year Return*

Thumbnail image for Thumbnail image for sec crest.bin.jpgToday, the Securities and Exchange Commission (SEC) announced the filing of a civil securities fraud lawsuit against Southern California wealth advisory firm MAM Wealth Management, LLC (MAM), MAMW Real Estate General Partner, LLC (MAMW), Alex Martinez and Ralph Sanchez. The action alleges securities fraud in connection with client investments of $10.3 million in a risky real estate investment. According to the complaint, from 2007 through 2009, Martinez and Sanchez advised 50 of their clients to invest in MAM Wealth Management Real Estate Fund, LLC (MAM Fund) and misrepresented that the MAM Fund was a safe and liquid investment with 9% annual earnings. Martinez and Sanchez are alleged to have used their discretionary authority over their clients’ accounts to invest in the MAM Fund despite its unsuitability for their conservative investment goals. Many of these client accounts were retirement accounts and the MAM fund was unsuitable for clients who were unable to accept the risk of losing their entire investment. According to the SEC, the defendants caused the MAM Fund to use client funds to make risky mortgage loans. In its action, the SEC seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and monetary penalties.

Today, the Securities and Exchange Commission (SEC) filed a securities fraud lawsuit against Barbara Alexander, a syndicated radio talk show host based in Monterey, California, who hosted a show for entrepreneurs called MoneyDots. According to the SEC’s complaint filed in San Jose federal district court, Alexander and two other executives at APS Funding misappropriated $2.5 million dollars from investors who thought they were investing in short-term loans secured by real estate offering an annual yield of 12 percent. The SEC alleges that the High Yield Investment Program (HYIP) was nothing more than a Ponzi scheme where fictitious returns reported to investors really came from new investors rather than actual income earned. This year, the SEC, FBI and U.S. Attorney’s office have stepped up their efforts to punish those who commit securities fraud. As reported in a recent blog posting, the FBI has reported a 105% increase in high yield investment fraud investigations

See related Monterey Herald news article: “MoneyDots” Talk Show Host Freed

The U.S. Attorney’s office has charged a San Francisco man with securities fraud for perpetrating a Ponzi scheme that allegedly collected more than $25 million from 80 investors. Maher Talal Muhawieh was charged with obtaining loans from victims which he claimed would be used to renovate residential properties that would later be sold at a profit. Muhawieh told victims that the loans paid a high rate of return, had limited risk and were secured by deeds of trust. According to the indictment, Muhawieh operated a Ponzi scheme in which he misappropriated funds for his own personal and used borrowed funds to reimburse earlier investors.

In testimony before the U.S. Senate last week, an FBI official reported that securities fraud involving high yield investment products was on the rise. According to the FBI, this year 291 new high yield investment fraud cases have already been opened. See related blog posting: FBI Reports 105% Increase in High Yield Investment Fraud Investigations

Thumbnail image for FBI Seal.pngAccording to an FBI report on Securities Fraud before the Senate Judiciary Committee, there was a 105% increase in High Yield Investment Program investigations by the Bureau in 2009. My California securities law firm has also experienced a similar surge in investor complaints involving high-yield investments like Medical Capital Notes, which were sold through a network of brokerage firms such as Securities America, a firm that is now the subject of numerous securities fraud lawsuits and class action lawsuits.

High Yield Investment Programs (“HYIP”) may seem like the ideal investment for retirees seeking greater income. However, for most investors, the acronym HYIP really stands for “Hazardous to Your Investment Portfolio.” Promising large returns with seemingly no risk, these high yielding investments have raised millions of dollars from unsuspecting investors. In reality, many of these to-good-to-be-true investments turned out to be nothing more than Ponzi Schemes that needed to bring in new investor money in order to continue paying existing investors. During the recent financial crisis, many of these Ponzi schemes ultimately fell apart when the pool of available investors evaporated.

High yield investments are often sold through private placements that can only be purchased by “accredited investors.” Because private placements are typically high risk investments with limited liquidity, they are only suitable for wealthy and sophisticated investors who can bear the risk of loss.

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