Articles Tagged with junk bonds

Stoltmann Law Offices, a Chicago-based investor rights law firm, represents investors across the country in suits against brokerage firms, investment advisors, investment banks, and insurance companies. Typically, we offer our services on a contingency-fee basis which means we do not get paid until you do.  We understand most of our prospective clients come to us having already been financially burned and rarely have the wherewithal to pay out of pocket for legal services.

Our attorneys are currently investigating claims by investors against Morgan Stanley involving fired Morgan Stanley broker Robert David, Jr., of Farmington Hills, Michigan. According to a regulatory filing, Robert David Jr. played fast and loose with client information on Morgan Stanley documents used by compliance to approve investments by clients in high risk junk bonds.  The information David manufactured included client net-worth, liquid net-worth, and changing the risk tolerance on client documents. Morgan Stanley has limitations in place for soliciting investments in high risk junk bonds to protect against over-concentration risk. David altered these documents to avoid these compliance protocols and restrictions. It was also alleged by FINRA that David made 538 unauthorized trades in eight client accounts.

Investing in junk-bonds can be a high risk investment plan. These sorts of corporate bonds offer considerably higher coupon payments, usually 7% per year or higher, but carry with them a substantially higher risk of default. If a company goes out of business, runs into cash shortfalls, and then seeks some sort of restructuring, like through a Chapter 11 Bankruptcy filing, the bond holders can be wiped out completely. Most public companies that issue bonds to investors publicly are rated by the three primary ratings agencies – Standard & Poor’s, Moody’s, and Fitch.  Although each is slightly unique, generally, all three rate bonds using a AAA to D structure. AAA is reserved for the absolute highest credit reliability, like that of United Kingdom. According to published reports, only two United States companies have earned a AAA rating, Microsoft and Johnson & Johnson. In order for a bond to be rated junk, its ratings typically need to fall below BBB- on the Standard and Poor’s scale, and are considered to be “high risk” by definition. Investing in junk bonds may be suitable for investors seeking high income so long as they are comfortable with the high risk inherent in such a strategy. In a rising interest rate environment, this strategy could spell doom for investors.

Chicago-based Stoltmann Law Offices is representing investors who were solicited by their financial advisors to invest in junk-bonds offered by now bankrupt Hornbeck Offshore. The bonds sold to our clients were rated D by Standard and Poor’s at the time of the solicitation, which is as low as bond ratings go.  This was not even speculation, it was financial homicide. The financial advisor at issue in our clients’ cases, Thomas M. Bonik was registered with NTB Financial Corporation (f/k/a Neidiger, Tucker, Bruner), which is headquartered in Colorado and has offices all over the country.  Mr. Bonik’s office was primarily in St. Augustine, Florida.

Hornbeck Offshore had been struggling financially for years.  The company is primarily engaged in offshore oil drilling and transportation. The persistently low prices for oil and gas for the past few years resulted in Hornbeck struggling financially due to a heavy debt load. Part of that debt was in the form of bonds purchased by investors.  Covid was the last straw for this struggling company and in June it filed a pre-packaged Chapter 11 plan in the Bankruptcy Court for the Southern District of Texas.  These pre-packaged plans are negotiated in advance with the “Secured” creditors, and typically burn bond holders like our clients. No surprise, our clients have lost every dime they invested in these Hornbeck bonds.

Financial advisors recommend clients invest in corporate or municipal bonds that are technically “junk” rated because these bonds have much higher yields than higher rated bonds. In the persistent low-rate environment in the US and to some degree the worldwide economy has been in since after the financial crisis, investors and advisors alike reach for higher yields, often investing in esoteric alternatives to grab that extra yield.  In this instance, the recommendation was to invest in corporate bonds that were rated “D” by S&P, which defines this rating as:

AdobeStock_112181284-1-300x200Are you a Wisconsin resident and were you sold U.S. Virgin Islands bonds by your Wells Fargo broker? If so, those losses you sustained with Wells Fargo may be recoverable through the Financial Industry Regulatory Authority (FINRA) arbitration process. We are securities attorneys based in Chicago and sue firms like Wells Fargo on a contingency fee basis because the firm may be liable for investment losses. If your Wells Fargo broker sold you these bonds, please call 312-332-4200 today to speak to an attorney for a no-cost, no-obligation consultation to find out how you can bring a claim against the firm.

Brokers have an ironclad obligation to only recommend and sell bonds that are suitable for investors, and the U.S. Virgin Islands bonds were high-risk and illiquid investments, which are not suitable for many investors. According to a recent Wall Street Journal article, the mutual fund with the highest percentage of Virgin Islands debt is made up largely of Wisconsin investors, because Wells Fargo Asset Management, which oversees the Wells Fargo Wisconsin Tax Free C Fund, is protecting itself from the situation by holding that that is insured or coming due within the next 18 months. More than 8% of its holdings is Virgin Islands debt. The bonds were recently downgraded further to junk bond status.

Much like Puerto Rico, the Virgin Islands are struggling with a declining population, declining tourism, high levels of debt and pension obligations. These debt problems were exacerbated after the 2008 market crash. And in 2012, the Hovensa oil refinery on St. Croix shut down. This was one of the territory’s biggest employers, employing over 2,000 people. Because of the drop in revenue, this caused the territory to increasingly rely on bond proceeds to pay operating costs, while contributing less to pension plans. Currently, there is $2.2 billion in debt obligations.

David Michael Miller, a former broker with Huntington Investment Company, was ordered to pay back $800,000 in restitution for making unsuitable investment recommendations. Those recommendations cost investors $1 million. Miller was fined by the Financial Industry Regulatory Authority (FINRA) $15,161 which represents the commissions he earned from selling the products. He was also banned by FINRA from working with any company affiliated with the organization. Miller was accused of not doing adequate research on recommendations of 140 purchases of an investment called unit investment trusts (UITs) that totaled more than $5.3 million for 129 accounts, according to an order from the organization. These recommendations were made between August 2012 and May 2013. Some of the UITs were below-investment-grade securities and speculative junk bonds, which made them more risky.

A broker has a duty to only recommend those investments that are suitable. The broker must take into account the customer’s age, net worth, investment objectives and sophistication, and, if he does not, his brokerage firm may be liable for investment losses. On two separate occasions, Miller assured customers that their investment was safe and that if the customer held it for the life of the investment, he would received his premium of $150,000 back along with five percent interest. He also told eight customers that their investments would not lose money. Those customers lost a combined amount of $171,464.

According to his online FINRA BrokerCheck report, David Michael Miller was registered with New England Securities in Columbus, Ohio from February 2008 until July 2008 and The Huntington Investment Company in Columbus from July 2008 until August 2013. He has 10 customer disputes against him. He is not licensed within the industry and FINRA has permanently barred him from acting as a broker or otherwise associating with firms that sell securities to the public.

The Associated Press wrote an article today entitled “New Way to Bet on Oil Wipes out Billions in Investor Savings” in which a Stoltmann Law Offices customer, Karen Robinson, was featured. Robinson invested in oil, shale and energy investments at the urging of her broker, Tom Parks of Ameriprise Financial Services in Stephenville, Texas. Two years later, Robinson’s oil partnerships have plummeted in value and she has lost more than half of the $202,000 she invested.

In the past year alone, investors have lost $20 billion in publicly traded drilling partnerships (or $8 out of every $10 invested, according to a report prepared for the The Associated Press.) $37 billion in bond losses sold by the partnerships has also occurred since 2010. This comes after the plunge in the price of oil, coupled with the partnerships borrowing heavily and running big risks, even when the price of oil was higher one year ago. Oil and gas products have always been high-risk investments and are not for those investors who wanted to preserve capital. Many of these partnerships are classified as “junk” bonds, high-yield, high-risk securities, typically issued by a company seeking to raise capital quickly, because they are from volatile emerging markets or highly indebted U.S. companies. Subsequently, because of the high volatility, investors are pulling out of junk funds and emerging market bond funds, quickly, to the tune of $4 billion each.

Master limited partnerships, such as the energy partnerships, are types of limited partnerships that are publicly traded, with two types of partners. The limited partner is the person or group that provides the capital to the partnership and receives periodic income distributions from its cash flow, and the general partner receives compensation that is linked to the performance of the venture. They also avoid corporate taxes by passing off much of what they earn straight to their investors. But many energy stocks, BreitBurn included, tumbled by 85%, and cut payments to investors in half. As quoted by Andrew Stoltmann in the article: “It’s a little like a death spiral. When the bad news inevitably hits, they don’t have a cash cushion.”

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