As contingency fee lawyers, we evaluate a steady stream of potential securities fraud cases. We meet with investors of all ages and backgrounds who have been cheated, defrauded and tricked into making bogus investments. We evaluate far more cases than we agree to take.
One of the most difficult types of cases that we evaluate is the so-called alternative investment case. Alternative investments are not traditional stocks or bonds purchased through a normal brokerage firm. Instead, these investments are offered directly by a promoter of some business scheme, perhaps an oil well, a gold mine, a real estate development, or some brand new technology. The promoter offers the chance to get in on the “ground floor” and make enormous profit.
The alternative investment can take the form of a limited partnership interest, an LLC interest, or some other portion of a small, non-publicly traded business entity. The investor does not get normal account statements, like a regular brokerage firm. Instead, the investor gets a K-1 at the end of the year for tax purposes and perhaps a regular newsletter on how the gold mine, oil well (or whatever) is doing. It’s almost always doing great!
Typically, the promoter of one of these alternative investments approaches investors believed to be wealthy and sophisticated, even though they are not. The investor must sign a phone book- sized disclosure statement that reveals pages and pages of warnings as well as financial information that most people simply cannot understand. The promoter usually appears to be a wealthy person who has had many successes in the past. This is the chance to get in on the next big thing.
Years later, the investor realizes he or she has been duped. The information contained within the original disclosure statement was inaccurate or fraudulent, and the promoter has simply stolen the money.
What remedy does the investor have? Far too often, the answer is not much. The money is gone, and there’s nobody left to sue. The business venture itself is probably kaput with no money or assets left. Moreover, the investor probably has no real remedy against the (supposedly rich) promoter who tricked them into investing in the first place. Rich people are usually asset protected. This means they have shielded their assets in a way to make them judgment proof in the event of a lawsuit. Contingency fee lawyers will rarely waste their time and resources going after sophisticated, asset-protected individuals.
In cases like this, we must often tell victims that we can do nothing for them. Their only remedy is to report the activity to the criminal authorities and hope that law enforcement and prosecutors will build a criminal case against the fraudster. While seeing the fraudster go to jail can be satisfying, most victims rather have their money back.
Our advice: If you are offered an alternative investment opportunity that looks too good to be true, it probably isn’t true. Stay away!