Private, Gated and Complex Investment Losses

You invested your money. Now you cannot get it back.

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You may have been told that the investment was stable, secure or designed to provide steady income.

Now withdrawals have been stopped, distributions have fallen, the value is unclear or your money is locked up.

Led by Harold Geller and Matthew W. Taylor, the Sotos Investor Protection Group helps investors assess losses involving private credit, private equity, exempt-market products, gated funds and other complex investments.

A private or complex investment is not automatically improper. These investments pay higher compensation and are rarely suitable for low-medium risk investors, near retirement investors and retired investors, or short to medium term investors.

The important questions are:

Was the investment right for you?
Were the risks clearly explained?
Did you understand when and how you could withdraw?
Did your advisor understand the product?
Was too much of your money invested in it?
Were the fees, conflicts and restrictions explained?

What Does It Mean When an Investment Is Gated?

A gate restricts an investor’s ability to withdraw or redeem money from a fund.

The fund may:

delay withdrawals;
allow only part of a withdrawal;
process redemptions over time;
suspend withdrawals entirely; or
require investors to wait while assets are sold.

A gate may be permitted under the investment’s documents.

That does not automatically mean the original recommendation was unsuitable.

A concern may arise if:

you needed access to the money;
the restriction was not clearly explained;
the possibility of a gate was minimized;
you were told the investment was liquid;
you were told it was similar to cash, a GIC or a bond;
too much of your savings was placed into the investment; or
the advisor did not understand the redemption terms.

What Is an Illiquid Investment?

An illiquid investment is difficult to sell or convert into cash quickly.

Private investments may not have a public market or a ready buyer.

This can mean:

you cannot sell when you want;
the reported value may be difficult to verify;
withdrawals may be delayed;
you may have to accept a lower price;
the investment may take years to mature; or
money needed for retirement or emergencies may become inaccessible.

Liquidity can be just as important as return.

Private Credit

Private credit funds make loans outside the traditional banking system.

Potential risks can include:

borrower defaults;
difficult valuations;
limited disclosure;
high fees;
concentration;
leverage; and
restrictions on withdrawals.

Private credit may be appropriate for some investors.

The issue is whether the risks were properly understood and whether the investment fit the investor’s circumstances.

Private Placements and Exempt-Market Investments

Some securities can be sold without a prospectus under an exemption.

These may include private companies, funds and other investments that are not publicly traded.

Potential concerns can include:

limited information;
untethered high return representations
difficulty selling;
uncertain valuations;
concentration;
long holding periods; and
complex eligibility requirements.

Does Being an Accredited Investor Mean the Investment Was Suitable?

No. These are two distinct concepts.

Accredited-investor status may determine whether someone is legally eligible to purchase certain investments.

It does not necessarily mean that the investment was right for that person.

An accredited investor may still:

need access to money;
rely on retirement income;
have limited experience with complex investments;
be unable to withstand a significant loss; or
require a conservative strategy.

Structured Notes and Other Complex Products

Structured products can contain features that are difficult to understand.

Potential issues may involve:

conditional returns;
limits on gains;
market barriers;
principal-loss risk;
early redemption;
issuer credit risk;
fees; and
complicated payout formulas.

A product that appears to provide income or protection may behave very differently under changing market conditions.

Mortgage and Alternative Investments

Private mortgage investments and alternative funds may involve:

real-estate lending;
construction projects;
mortgage pools;
private borrowers;
alternative credit;
derivatives;
leverage; or
other less-liquid assets.

Risks can arise from:

inadequate disclosure;
borrower default;
falling property values;
project delays;
valuation uncertainty;
concentration; and
limited liquidity.

Warning Signs That the Advice May Need Review

A private or complex investment may deserve a closer look if:

it was described as safe or low risk;
you were promised predictable returns;
you did not understand that withdrawals could be restricted;
the investment now has no clear value;
distributions stopped unexpectedly;
a large percentage of your portfolio was placed into the product;
fees or commissions were not explained;
you were asked to sign documents you did not understand;
the product did not match your need for income or liquidity; or
your advisor cannot clearly explain what happened.

Did Your Advisor Understand the Product?

A financial professional recommending a complex investment should understand:

what the investment owns;
how returns are generated;
what can cause a loss;
how the investment is valued;
how and when investors can withdraw;
what fees are charged;
whether leverage is involved;
whether conflicts exist; and
why the product is appropriate for the client.

Often advisors recommend products which they claim to know and understand, but do not. The advisor may be relying on sales materials instead of conducting independent due diligence. They all seem to claim they know the product, but when challenged, often only know the possible upsides, not the risks. It’s knowledge of the risks that is key to competent due diligence.

Read more about Unsuitable Investment Advice.

Who May Be Responsible?

Depending on the circumstances, a claim may involve:

the financial advisor;
an investment dealer;
an exempt-market dealer;
a portfolio manager;
a bank or wealth-management firm;
a product issuer;
a promoter; or
another party involved in recommending, managing or supervising the investment.

What Should You Do If Your Money Is Frozen?

Collect what you have, including:

account statements;
subscription agreements;
offering memoranda;
fund reports;
redemption requests;
gating notices;
advisor emails;
presentations;
fee information;
risk-profile documents; and
communications explaining the delay.

Write down what you remember about:

access to the money;
risk;
liquidity;
how much of your portfolio was invested;
when you tried to withdraw; and
what explanation you received.

Do not assume that you must wait until the investment becomes worthless before asking for advice. Delay can be fatal to your right to seek compensation.

Read more about Gated investment funds: what to do.

Read more about investment-loss recovery options.

Investor Protection Experience, Backed by Litigation Strength

Harold Geller brings more than 30 years of investor-protection, financial-services and complex-product experience.

Matthew W. Taylor brings complex investment, securities and class action litigation experience, particularly where losses affect many investors or involve several potential defendants.

Frequently Asked Questions

Is a gated fund the same as a failed fund?

No.

A gate restricts access to money. The fund may still own assets and may eventually process withdrawals.

Can I make a claim before the investment becomes worthless?

Possibly.

A concern may exist when access is restricted, the value is unclear or the investment no longer meets your needs.

What if the offering documents mentioned the risk?

Written disclosure can be relevant, but it may not answer whether the risk was clearly explained or whether the investment was suitable.

Can my advisor be responsible if the fund caused the loss?

Possibly.

The advice and the performance of the product are separate issues. A review may consider why the product was recommended and whether it fit your circumstances.

What if many investors have the same problem?

A coordinated group claim or class action may be considered where investors share similar losses and legal issues.