Beware of Boiler-Room Style Calls

By Kristen Barros

With decades worth of Securities and Exchange Commission (“SEC”) and Financial Industry Regulatory Authority (“FINRA”) warnings, boiler room-style scams have nonetheless been a successful tactic used by many scamming brokers. These calls consist of a surprise phone call by a broker with a high-pressure sales pitch urging customers to invest in different products such as penny stocks and other high-risk investments. Techniques are used to rip off consumers and investors, particularly seniors. According to FINRA, an elderly couple was persuaded into purchasing “nearly $900,000 worth of virtually worthless microcap stocks.” FINRA also uncovered another scammed senior investor who “purchased more than $500,000 of a microcap stock while on the phone with the caller.” These scams are costing investors serious amounts of money and it is important to know when you, as an investor, are being victimized. Here are some common characteristics of boiler room scams:

  • Big promises: The caller is promising high returns on investments you simply “can’t miss out on.”
  • Repeat calls: The caller may be calling you repeatedly, each time getting more aggressive and convincing.
  • Penny stocks or microcap stocks: These are just some of the most common boiler room scam sales offered along with some other high-risk investments.
  • “Stock Recommendation” Organization: Most of these scams are from organizations that are not even registered with FINRA. They use fake names and other false information to appear to be a reputable firm. It is important to use FINRA’s BrokerCheck to verify every caller.
  • Pumping-and-dumping: This is when victims are pressured into purchasing stocks to pump up the stock’s value.
  • Supposed Account Executives: The caller may claim to be an account executive who really got your information from a website you may have visited previously.

These are just some ways to figure out if you are being boiler room scammed but it is most important to know what to do when you are actually being scammed. First off, never say yes. Even if what the caller claims seems appealing or plausible, always say no. These callers know what they are doing and have been trained to give the most believable sales pitches, negating any sense of possible doubt. Second, do not give these callers a second chance. It is always easier to just hang up after you have established the first call was a scam.  After the first call, you will most likely get called again to follow up. Third, never give your credit card information out to any caller. The callers mission is to obtain all your card information or set up a wire transfer to complete the investment. Don’t fall into their trap (even if they ask for checks). A legitimate brokerage firm will have specific policies in place to complete transactions and rarely ever request immediate fund transfers. Lastly, and probably most importantly, use FINRA’s BrokerCheck to check investment advisors and brokers. This is an easy way to be sure about who is contacting you and whether they are legitimate.

These risks are real and senior citizens are continuously being targets. If you or anyone you know has sent money over the phone, recently, you must act quickly to rectify any possible damage done. Many credit card companies or financial institutions are willing to help you stop payment. For more tips on boiler room-style scams, visit the FINRA website at

Think Twice if Your Broker Suggests an MLP

By Jon Sallah

In the current low-yield environment, investors and advisors have been seeking alternative investments that offer better returns than those that are currently available through banks or corporations. In recent years, investors and brokers began purchasing partnership units in Master Limited Partnerships (“MLPs”) because they offer higher than average yields in the form of distributions. MLPs appeared to be a high-yielding bond substitute with tax advantages, which seem to be perfect for retail investors seeking income. However, there are many risks associated with these investments.

MLPs were created in the 1980’s to incentivize investment in domestic energy infrastructure. For a business to qualify as a MLP, at least 90% of its revenue must come from the natural resources industry or real estate. MLPs combine the tax benefits of a limited partnership with the liquidity of a publicly traded security. Investors purchase partnership units of the MLP and receive distributions. These distributions are specified in the MLP’s partnership agreement and require the partnership to pay out most of their current income to investors. The distributions provide an incentive to investors because they are considered as a “return of capital” and the income is not taxed until the investor receives back their principal investment. A distinguishing characteristic of MLPs is that they carry on an active business so the prior quarter’s performance can have an effect on distributions.

In order for MLPs to prosper, two conditions must be met. First, capital markets must be accessible. Since MLPs pay out the majority of their cash flow to investors, they may be dependent on borrowing or selling additional units to grow. As a result, investors face the risk of dilution of their units and possibly subordinating their right to payment to secured creditors. This is an unforeseen risk as many investors would not anticipate their units being diluted as a result of limited access to the capital market.

Second, energy prices have to be stable. The performance of MLPs is almost entirely linked to the performance of energy prices and the risks associated with those sectors. For example, when the price of oil or gas falls (or production declines), MLPs are frequently sold off and their value may decrease significantly. Investors may still receive distributions, but the value of their units are likely to decrease. An investor who does not fully understand the sector they are investing in may face unwanted surprises.

The risks discussed above shed light on the unsuitability of MLPs for unsophisticated investors. However, the spotlight on MLPs in securities law did not arise until a few years ago. Advisors and brokers began purchasing units of MLPs to replace low-yield bonds and REITS with a high-yield alternative. Years of stable energy prices led many advisors and brokers to advise the purchase of additional MLP units, resulting in over-concentrated portfolios. When energy prices plummeted, these over-concentrated portfolios experienced significant losses, and actions were brought against many brokers/advisors.

In sum, investing in MLPs should be limited to sophisticated investors who have a high-risk tolerance. Investors who seek to generate income may be advised of the associated risks; but, knowledge of the energy sector, capital markets, and the various risks facing active businesses is crucial before purchasing such a high-risk investment.


Clinic Students Submit Comment Letter on Proposed FINRA Rule Change

On September 8, 2016, the Investor Rights Clinic (“IRC”) submitted a comment letter to the Securities and Exchange Commission (“SEC”) to share its opinion regarding a proposed change to FINRA Rule 2232. The proposed rule change would require broker-dealers to disclose mark-up and/or mark-down pricing information on retail customer confirmations for certain fixed-income securities when that broker-dealer executes the customer’s order using its proprietary account and then executes an offsetting sale or purchase in the same trading day.

When customers buy or sell certain fixed-income securities, such as bonds, brokerage firms sometimes buy or sell the security from their own proprietary account and charge the customer a mark-up or a mark-down.  A mark-up occurs when a broker-dealer sells a customer a fixed-income security at a price above the prevailing market price. A mark-down occurs when a broker-dealer buys a fixed-income security from a customer below the prevailing market price. Broker-dealers can then either purchase additional securities to cover what it has sold out of its proprietary account or sell the securities it bought from customers out of its proprietary account and pocket the mark-up or mark-down difference from the prevailing market price.

The IRC supports the proposed rule change because the new disclosure requirements would help many of the IRC’s clients who are retired or near retirement age and look to fixed-income securities to meet their investment goals and objectives.  Many investors are unaware that the actual market price of the security may be different than the amount they pay or receive. This lack of information has led to some customers paying more for trades in fixed-income securities than other similar customer trades.  The proposed rule change would protect the interests of those who need that protection the most – the less sophisticated investors who invest in fixed-income securities but may not have the level of trading expertise required to investigate undisclosed mark-up or mark-down pricing schemes.  Theoretically, investors could use a sophisticated trade statistics database such as the Trade Reporting and Compliance Engine (“TRACE”). However, this platform requires a level of trading knowledge far beyond that of the average retail investor.  The IRC believes average retail investors should not be at a disadvantage solely because they cannot utilize a complex online database such as TRACE.

Requiring firms to disclose the true cost of fixed-income securities transactions will further the objectives of the SEC because this rule change would protect the average retail investor from being adversely affected in these types of trades. Furthermore, consumers would be armed with the knowledge needed to select broker-dealers whose services will not impose undue costs on investors.






Keep These Red Flags In Mind and Prevent Yourself From Falling Victim To an Annuity Scam

By Jessica Nowak

For as long as investing has been around, people have been scammed into spending large amounts of their assets on products that are not suitable for their lifestyles. More specifically, charming brokers tend to convince elderly individuals to invest in annuities that end up being more costly than they are beneficial. Occasionally, annuities can be great investments, but they are not meant for everyone. When selling annuities, some brokers have their own best interests in mind, not yours. Brokers generally receive enormous commissions from the purchase of these products and leave out important facts in their description of the annuity, like the severe penalties for cashing out early. Most annuities that people get tricked into are long-term fixed rate or variable annuities, where the investor is required to hold onto the product for at least 10-15 years before the consequences for cashing out subside.

In order to save you from the headache that comes with being conned into an unsuitable investment, here are a few red flags to look out for:

  • Large fees for breaking the annuity earlier than 7 or 8 years from the date of signature.
  • “Today only” deals or the push for you to sign on the spot.
  • Annuities that last more than 7 years, especially if you are age 65 or older.
  • Large commission percentage for the broker.
  • High surrender fees.
  • Little to no interest earnings combined with severe cash out penalties.
  • The agent or broker requests that the check to be made out to his name, not the company’s name.
  • When the verbal terms don’t match the on paper terms of the contract.
  • Large yearly maintenance fees.

As you near retirement, you want to make sure that you invest in products that are suitable for your lifestyle, age, and future goals. Long-term annuities with large hidden fees and little growth are usually not the way to go for those who have retired. Make sure that you have a trusted friend, family member, or financial advisor review the contract before signing it. Brokers may set up shop in your local bank, grocery store, or even community center. Just because you trust the owners of the establishment does not mean you should trust the individual broker. Be aware that you are talking to someone who may not have your best interests in mind. For more tips on how to stay well informed on these types of scams, visit the FINRA website at