Much has been made in the recent months about supposed growth in the oil and gas markets, including speculation, such as the recent article on www.forbes.com that increasing demand will be preceded by increased investment in infrastructure that would bring the product to market.
Regardless of the potential growth as an investment, limited partnerships and business development corporations have historically been, and will likely continue to be, extremely risky investments that demand a careful suitability analysis and due diligence by financial professionals before they are recommended for public investors. In addition to the risks listed in the Forbes article, such as “acts of God and man” (environmental, terrorist, war, etc.), there are the risks that the investment never yields the promised gains, or that the investment itself is completely false, fictional and fraudulent.
Further, these investments also tend to be highly illiquid and require long holding periods. This fact alone can render an investment unsuitable for a particular investor, if they are at an age or place in their lives where access to cash is important, or if the investor actually told their financial professional that liquidity was important to them.
Oil and gas limited partnerships, like other alternative investments, also tend to be high-commission products, giving brokers an incentive to recommend and sell to unsuspecting investors without making the necessary suitability analysis required of them by FINRA Rules and applicable securities laws.
The North American Securities Administrators Association (NASAA) cites potential tax consequences and fraudulent sales techniques of investments in oil and gas as additional concerns for investors. For example, while cold-callers may claim that springtime weather will bring more motorists that will demand more oil, the increased use of oil and gas in good weather is a known fact and usually already built into the market price, so such claims can be half-truths with serious omissions. Sometimes, as NASAA points out, these investments are marketed in high-pressure sales calls from “boiler rooms” to market the investments. Investors should be extremely weary if they receive such unsolicited phone calls.
As reported by MarketWatch, while yields may look or sound promising, the fine print of the limited partnership investment structure may include substantial layers of fees and expenses that could “erode” returns to the investors. Further, MarketWatch noted that certain such investments may merely return principal back to the investor, rather than any actual income on the investment. Other “investments” that return principal are typically known as Ponzi schemes.
We at Malecki Law have unfortunately seen poor marketing and solicitation tactics involved when recommending alternative investments like oil and gas limited partnerships. It is also not uncommon for financial professionals to fail to disclose all of the attendant risks of these investments, including any lock-up periods, relative illiquidity of the investments generally, as well as tax drawbacks. Securities rules require that a broker fully advise the investor of all risks when recommending investments in oil and gas limited partnerships and other similar alternative investments. If you believe you were not properly informed of these risks, or feel you were subjected to high-pressure sales tactics that forced you into unsuitable investments, please contact the attorneys at Malecki Law to determine if you have a claim for damages.