CAN I RECOVER MY ARAVALI FUND (MUNICIPAL ARBITRAGE) FUND LOSSES?

The Aravali Fund was a so-called municipal arbitrage bond fund created by Aravali Partners, LLC and sold by Alex Brown Deutsche Bank to investors nationwide. It was called an "arbitrage" fund and many investors were misled into believing that it was relatively risk free, a safe or conservative investment fund. But it was nothing of the sort. It was a highly leveraged and speculative structured credit product that many believe to have been misrepresented and mismanaged.

The so-called municipal bond "arbitrage" strategy was a very complex investment strategy involving multiple investments in the tax exempt and taxable fixed income markets. The fund managers invested in long tax exempt municipal bonds and, in effect, shorted the equivalent of taxable corporate bonds utilizing libor swap contracts and swaptions. The key to the success of the strategy was "market timing" and the "continued correlation" of the tax exempt municipal bond yields and the libor swap contract yields. It was originally used by many banks as a short term trading strategy. But many firms like Aravali Partners converted it to a flawed long term buy and hold strategy to maximize their own sales commissions and management fees.

In August 2007, the handwriting was on the wall for the "muni-arbitrage" funds. It was time to sell not buy. It was not the time to launch new funds or increase the leverage of the funds. The "continued correlation" of the tax-exempt and taxable fixed income market yields had collapsed. The lack of correlation and the high leverage was a recipe for disaster. Nevertheless the "muni-arbitrage" fund managers proceeded with the investment strategy full steam in derogation of their fiduciary duties to investors.

Alex Brown Deutsche Bank blamed the unforeseen and unprecedented market conditions as the reason for the collapse of the so-called "muni-arbitrage" funds in 2008. Nothing could be further from the truth, the funds were rocked in August 2007 and fund managers were put on clear notice of the dangerous market conditions and risk of loss. The real cause of the collapse was the fund managers' reckless disregard of the key factors of the strategy, "correlation" and "market timing," in relation to market conditions. As a result, many investors have commenced arbitration proceedings and recovered their losses due to misrepresentations and mismanagement of the so-called muni-arbitrage funds.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

WATCH OUT FLORIDA INVESTORS--TOO MANY FINANCIAL ADVISERS THROUGHOUT THE UNITED STATES FAIL TO ACT PROFESSIONALLY!

Investors sometimes hire a financial adviser to manage their money professionally if for no other reason than to escape their own irrationality. Many investors know that, in investing, their emotions can be their worst enemy - leading them to buy high and sell low. They think that a financial adviser, detached from their emotions, will behave more rationally and act in their best interest. Unfortunately, a recent undercover academic study concluded that many financial advisers are too detached from their clients and too attached to their own financial interests to provide professional financial guidance. ("Financial Advisers Flunk Undercover Sting," Ryan Sager, SmartMoney.com).

Economists from Harvard, MIT Sloan School of Management and the University of Hamburg hired and trained a group of actors and turned them loose to make 300 visits to Boston-area financial advisers, posing as clients and presenting various portfolios for review and analysis by the financial advisers. This occurred over a five-month period in 2008.

For some reason, the economists expected that the advisers would exhibit "catering behavior" - complimenting their new clients on their portfolios to build rapport and advising them to stay the course. What they found was very different.

"[T]hey largely found that the advisers were willing to recommend big changes fairly quickly." "Most strikingly, the advisers nudged people in low-cost index funds toward high-fee actively managed funds -- blatantly making their clients worse off. Presented with the index-fund portfolio, the advisers recommended a change in strategy more than 85% of the time. Meanwhile, advisers largely encouraged returns-chasers to keep chasing returns."

The economists concluded that the lesson to be learned from all of this is that it is very important for investors to understand how their financial adviser is getting paid. If they are making money from commissions and fees from selling products, they are incentivized to push those products whether they are appropriate for their client or not, a clear conflict of interest. Financial advisers may overcome this incentive and recommend, say, an index fund that pays them next to nothing, but 85 percent of them in the study did not act in their clients' best interest.

Unfortunately, the authors observed, most of us are no better at picking advisers than we are at managing our money.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

CITIGROUP GLOBAL MARKETS FINED OVER FAILURE TO DISCLOSE CONFLICTS OF INTEREST

The Financial Industry Regulatory Authority (FINRA) recently announced that it has fined Citigroup Global Markets, Inc. $725,000 for failing to disclose certain conflicts of interest in its research reports and research analysts' public appearances.

Citigroup failed to disclose potential conflicts of interest inherent in their business relationships in certain research reports it published from January 2007 through March 2010. Citigroup and/or its affiliates managed or co-managed public securities offerings, received investment banking or other revenue from, made a market in the securities of and/or had a 1 percent or greater beneficial ownership in covered companies, and did not make these required disclosures in certain research reports. In addition, Citigroup research analysts failed to disclose these same potential conflicts of interest in connection with public appearances in which covered companies were mentioned.

FINRA found that Citigroup failed to disclose the required information because the database it used to identify and create the disclosures was inaccurate and/or incomplete due primarily to technical deficiencies. In addition, Citigroup failed to have reasonable supervisory procedures in place to ensure that the firm was populating its research reports with required disclosures.

In concluding this settlement, the firm neither admitted nor denied the charges, but consented to the entry of FINRAs findings.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.