The latest consequence of the credit crises and another example of securities fraud subsequent massive government bailouts are the preferred stock losses. In early September, the rating services began slashing the ratings on Fannie Mae and Freddie Mac preferred shares, creating borrowing problems for the issuers and eventually leading to the massive government bailout.
The major brokerage firms such as Merrill Lynch, Citigroup/Smith Barney, Wachovia/AG Edwards, Morgan Stanley, Edward Jones, JP Morgan and others have sold preferred stocks to their most conservative investors as ultra-safe investments. These firms’ representatives presented/misrepresented the shares as a conservative investment that would give investors, often retirees, the upside potential of a stock with the downside protection of a bond (with U.S. Government backing). While the backing part turned out to be correct, at least as to the bailout of the mortgage giants, the individual investors (and taxpayers) have once again been left holding the proverbial bag.
Estimates show over a million investors were sold Fannie Mae and/or Freddie Mac preferreds with the representation these investments were suitable for ultra-conservative investors looking for an income stream. In fact, many clients were persuaded to sell other more secure holdings to raise capital to invest in these inherently risky shares. Preferred have much the same risk characteristics of stocks, not bonds. In the event the issuer fails, as was the case with Freddie and Fannie, bond holders are first in line to get paid and our offered some protection of default. Not so with preferred holders.
If a broker represents preferred shares as ultra-safe investments suitable for conservative investors or fails to explain all the potential risks associated with the investment, the qualifies as a misrepresentation and/or omission which is actionable under most state securities laws. However, account holders with brokerage firms must sign a new account form before the firm will accept the account. Tne new account form serves a contract requiring the investors to take any claim for loss recovery to NASD/FINRA arbitration.
The stock market and broker fraud attorneys at Colling Gilbert Wright and Carter have extensive experience handling NASD/FINRA arbitration claims on behalf of individual investors. If you have lost money as a result of an investment in Fannie Mae or Freddie Mac preferred shares, please contact us for a free case evaluation.