Investors who are comfortable with high risk may choose to purchase high-yield bonds, derisively called “junk bonds” by some, in pursuit of higher yields than those provided by safer investment bonds. While so-called junk bonds carry a higher risk of default or devaluation than other bonds, they are not inherently unsuitable investments. The problem comes when bond issuers, brokers or financial advisors steer investors into junk bonds without providing investors with a full disclosure of the risks or sell such bonds to investors with low risk thresholds who can’t afford to take the higher risk.
At Girard Bengali, APC, we represent investors in FINRA, AAA and JAMS arbitrations and in traditional litigation against advisors, brokerage firms and bond issuers who act unethically and unscrupulously in selling junk bonds. Many of our clients are people who lost millions of dollars in their retirement accounts due to junk bond losses, as well as investors who were seduced into purchasing junk bonds as part of other investment strategies, even though the investment was unsuitable. Our California-based firm handles these claims for clients throughout the U.S.
What Bonds Are Considered Junk Bonds?
All bonds offered for sale on any market are given a credit rating. Bonds can be issued by corporations and various government bodies. The rating agencies (Moody’s, Fitch, and Standard & Poor’s) rate the bonds based on the agency’s research into the financial “health” of the issuer. When an issuer possesses certain attributes, like stable blue-chip earnings, their bonds will be rated “investment grade,” meaning they are viewed as safer investments.
Some bonds, like U.S. Treasury’s, are considered extremely low risk because they are backed by the U.S. government, so they receive the highest possible rating. Bonds issued by established, successful corporations also usually receive high ratings. Such highly rated bonds offer safety, but a relatively small return.
Bonds that do not earn an investment grade rating are often called junk bonds or high-yield bonds. They are considered high risk investments, but they can be attractive to investors looking for higher returns. Companies issuing junk bonds often have underlying problems, such as liquidity issues, that increase the risk that they will default and leave investors with zero to show for their investment.
When Can an Advisor or Broker Be Held Liable for an Investor’s Junk Bond Losses?
Financial advisors can carelessly, or purposefully, mislead clients into investing in high-yield bonds, even though the high risk is clearly unsuitable for the investor. Arbitration or litigation over junk bond losses can stem from various acts or omissions on the part of brokers and advisors:
- Making unsuitable recommendations: FINRA rules require advisors to make recommendations that fit the investor’s age, goals, risk tolerance and various other criteria. Dishonest advisors or brokers who fail to do this may offer unsuitable investments, such as junk bonds, to a client who doesn’t understand what they’re getting into.
- Fraud and misrepresentation: Advisors sometimes steer clients into junk bonds for their own personal gain, leading to heavy losses on the part of the investor. Investors can seek redress for these losses by pursuing a claim with the help of a skilled lawyer.
- Omitting facts: Advisors must explain the risks associated with high-yield bonds. Glossing over the risks or not mentioning them at all can lead a client to invest in junk bonds without understanding the potential for loss.
- Breach of fiduciary duty: In some states, advisors must do more than ensure the suitability of an investment. The same is true for certain fee-based advisors. Such advisors must make investment recommendations based on the client’s best interests. Failing to do so is a breach of fiduciary duty, one of the greatest offenses in the advisory world.
Reach Out to Our California High-Yield Bond Fraud Attorneys
Girard Bengali, APC, is home to a dedicated team of lawyers and staff with decades of experience helping people who were misled into investing in high-yield junk bonds and sustained losses. Call 866-778-6821 or contact us online to arrange a free confidential meeting with our attorneys to discuss your specific situation and how we may be able to help.