Alternative investments are drawing scrutiny

Mary Beck invested in part ownership of a fleet of luxury cars but the venture went bankrupt in 2012.
Michal Czerwonka/New York Times
Mary Beck invested in part ownership of a fleet of luxury cars but the venture went bankrupt in 2012.

NEW YORK — Regulators across the country are confronting a wave of investor fraud that is saddling retirement savers with steep losses on complex products that until a few years ago were pitched only to the most sophisticated investors.

The victims are among the millions of Americans whose mutual funds and stock portfolios plummeted following the financial crisis, and who started searching for ways to make better returns than the minuscule interest rates being offered by bank deposits and government bonds.

Tens of thousands of them put money into speculative bets promoted by financial advisers, including private loans to young companies like television production firms and shares in bundles of commercial real estate properties.


Those alternative investments have now had time to go sour in big numbers, state and federal securities regulators say, and are making up a majority of complaints and prosecutions.

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“Since the crisis, we’ve seen more and more people reaching out into different types of exotic investments that are a big concern to us,’’ said William F. Galvin, Massachusetts’ secretary of state.

On Wednesday, Galvin’s office ordered one of the nation’s largest brokerage firms, LPL Financial, to pay $2.5 million for improperly selling the real estate bundles, known as nontraded REITs, or real estate investment trusts, to hundreds of people from 2006 to 2009, and in some cases overloading clients’ accounts with REITs.

LPL said it agreed, as part of the settlement, to alter its process for selling alternative investments.

J. Bradley Bennett, executive vice president of enforcement at the Financial Industry Regulatory Authority, or ­FINRA, Wall Street’s self-regulatory group, said that for the last two years 10 staff members have been dedicated to looking at the ‘‘proliferation of these products, to understand how they are being sold.’’


The phenomenon of investors actively moving money in pursuit of higher interest rates, known as chasing yield, is reverberating through many sections of the economy.

Mary Beck, a furniture business consultant in Pasadena, Calif., said that in 2008, as the stock investments in her husband’s IRA began to fall quickly, the couple moved $470,000 to a new product recommended by their broker.

While the offering was unfamiliar — part ownership in a fleet of luxury cars — Beck bought the pitch because her broker had been around for years, and the product was offering what seemed to be a modest annual interest rate of 7 percent.

Soon after they stopped receiving interest payments, the Becks lost their money when the venture went bankrupt in 2012. Beck and her husband are planning to work longer.

Her lawyer, Andrew Stoltmann, is representing 10 of the broker’s customers, who have filed claims with FINRA.


There is no agreed-upon list of the financial products that have caused problems for yield-chasing investors, but regulators say certain ones come up particularly often. Private placements, investments in largely unproven private companies, have been on the list of top enforcement concerns published by the national organization of state securities regulators every year since 2007.