Reading in the Wall Street Journal, yesterday, I came across an article that troubled me. The article discussed a recent speech given by David Blass, chief counsel of the division of trading and markets of the Securities and Exchange Commission, to a group of investment lawyers. Blass warned that many private funds (hedge funds, private equity portfolios etc.) might be breaking the law by not properly registering as broker-dealers if they solicit outside investors by selling interests in their funds. He continued that many private fund managers understand the rules and have structured their practices within the rules and regulations; but, there are many they have not.

Up to this point I was fine with the article, then Mr. Blass explained a provision in the law applicable when a fund does not properly register with the SEC and an investor loses his/her shirt. In this circumstance, many states uphold that an investor has the right to seek his/her money back plus interest if the person who solicited him/her was not properly registered and he/she has sustained a loss.

The article continued to explain how this phenomenon could occur. First, losses have to be large enough to justify a lawsuit, and the investor cannot sell his/her interest when a rescission case is pursued. Secondly, the statute of limitations has not yet expired and finally, the solicitor was not registered with the SEC to sell the investment.

That’s it. Lose a bunch of money, don’t sell the investment and prove that the solicitor was not properly registered and bam you get your money back, plus interest. While I agree that everyone should follow the rules, and those that do not follow the rules should be punished, I have a hard time with the rescission movement. If a fund did not do anything else wrong except sell when it should have bought and bought when it should have sold why should an investor be able to not only get his/her investment back but also a return on that investment. Just doesn’t seem right.

Not sure anyone else would agree; but, this is my blog and hence I get to voice my opinion.

Let me know your thoughts.

– Frank


Categories: Uncategorized

1 reply

  1. I agree. Don’t invest if you are not willing to assume the risk that comes with it.

    I have the same problem with “Ponzi schemes”. Yes. Many of those that allegedly ran Ponzi schemes are guilty But there are those that get caught up in the shuffle that I believe are actually innocent. Many of these people are in trouble because of disgruntled investors Investors that invested in a risky investment to begin with. Who should be responsible for that?

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