Direct Participation Programs
Whenever you turn over money to your broker for investment, you are placing an incredible amount of trust in that person, tasking him or her with making decisions for your financial future. Unfortunately, there are many brokers who abuse the fiduciary relationship they have with clients and take advantage of their position to engage in fraud and misrepresentation. For many investors, knowing when your broker has engaged in this wrongful conduct can be difficult because the investment system is so complex. Often, the harm has already happened by the time investors realize that they have been burned by a broker. Knowledgeable securities law attorney Steve A. Buchwalter has helped investors in Los Angeles and elsewhere in Southern California bring fraud claims against their brokers to seek the compensation that they deserve.Understanding the Risks of Direct Participation Programs
There are numerous options that may be available to investors, ranging from stocks to mutual funds to Real Estate Investment Trusts. A Direct Participation Program (DPP), otherwise known as a limited partnership, is one of these tools. In general, DPPs provide an alternative investment route that allows investors to participate in a business venture’s cash flow or tax advantages.They may presentbenefits like the chance to own a piece of a business through a percentage interest, share of assets, or other unit. Limited partnerships are often offered in real estate (through such products as non-traded REITS, Tenants In Common partnerships etc.), heavy equipment sales, and petroleum exploration companies. A DPP investor can deduct expenses related to the business, share in tax benefits provided to the company, and receive revenues from the business directly. Many sources have compared DPP investors to limited partners or silent partners in a business venture.
With these advantages, however, come many of the same burdens and risks that come with owning a business. Investment through a DPP arrangement makes the investor a part owner of the business, bringing the same stresses and worries that business owners must deal with on a regular basis with the added detriment of having numerous partners who may not agree on anything. One of the biggest risks involved with DPP investments is not understanding enough about the business or the market in which the business operates, particularly in complex fields such as oil and gas drilling This type of investment also tends to be more illiquid than other options. In many cases, brokers do a poor job of explaining this aspect to prospective DPP investors, who may have hopes of exiting from their investments within a certain period of time. Most DPPs will include provisions prohibiting an investor’s exit from the business unless certain terms or timelines are met.
Brokers generally recommend these investments because like variable annuities, the commission to the broker is usually higher than almost any other investment. In other words, it benefits the broker by giving him a higher commission for selling the product than the broker would have received if he recommended a liquid investment, like a mutual fund.
Like variable annuities, the reason the commission is so high is because of the negatives the broker needs to overcome to recommend the investment. These include the fact that the investor usually cannot get out of the investment for many years. The investment is opaque because the investor rarely knows or understands what he is buying. Further, DPP investments frequently have returns that are lower than liquid investments.
Because of the above, a DPP investment is usually not in the client’s best interest and if the client knew all of the negatives, he would usually not invest. Hence, the commissions on these investments (usually exceeding 7 to 10 percent) need to compensate the broker for making what is usually a bad investment recommendation.
If your broker fails to advise you about the downsides and risks of investing in a DPP, you may be entitled to compensation. According to securities law, a broker has a fiduciary relationship with his or her clients, due to the lack of sophistication that most investors have when it comes to understanding the complex financial world. Brokers must meeta highstandard of care when advising their clients. They must provide them with advice that puts the client’s interests ahead of the broker’s interests without fail. When a broker recommends an inferior investment due to the commissions he would make, that is a breach of the broker’s fiduciary duty. If a broker breaches this duty, the investor may be entitled to receive damages based on the difference between what the investor’s portfolio would have been worth without the breach and the actual value of the portfolio with the breach.Contact an Experienced Broker Fraud Attorney in Los Angeles
If you have been burned by your broker in an incident of fraud or misrepresentation, Los Angeles lawyer Steve A. Buchwalter may be able to advise you. Our team has substantial experience in securities law, with Mr. Buchwalter having gained experience as a stockbroker before starting his practice. We understand how stressful this time can be, and we can fight for your right to compensation for a broker’s negligent or fraudulent conduct at every step of the way. We also serveinvestorsin Beverly Hills and Pasadena as well as in Santa Barbara, Ventura, and Orange Counties. Call us at (818)-501-8987 or contact us online to set up a free consultation.