For investors who have suffered stock market losses after purchasing alternative investments recommended by their stockbroker, the path to financial recovery can feel shrouded in fog. You placed your trust in a professional, only to see your hard-earned money disappear into complex, opaque products you may not have fully understood. This is a story we at Bakhtiari & Harrison know all too well. Many of our clients come to us feeling confused, betrayed, and unsure of where to turn. They knew something was wrong, but they couldn’t quite put their finger on it. What they didn’t know is that they may have been victims of a deceptive practice we call “NAV Squeezing.”
This blog post will pull back the curtain on this insidious practice. We will explain what NAV squeezing is, how it works, and why it’s a significant danger to unsuspecting investors. We’ll also illuminate the path forward, explaining how you can seek justice and recover your losses through a process known as FINRA arbitration.
The Problem: The Allure of Alternative Investments and the Shadow of NAV Squeezing
In recent years, you may have heard your stockbroker touting “alternative investments” as a way to diversify your portfolio and achieve higher returns. These are investments that fall outside of the traditional categories of stocks, bonds, and cash. They can include non-traded Real Estate Investment Trusts (REITs), Business Development Companies (BDCs), private placements, and various types of funds that hold illiquid assets.
The promise of these investments is tantalizing: access to exclusive opportunities and returns that aren’t correlated with the whims of the stock market. However, the reality is often far more perilous, especially for individual investors who may not have the resources to conduct the same level of due diligence as large institutions.
One of the most significant and least understood risks associated with certain alternative investments is the potential for NAV squeezing.
What is NAV Squeezing?
“NAV squeezing” is a term we use to describe the artificial manipulation of a fund’s Net Asset Value (NAV). The NAV is, in simple terms, the per-share market value of a fund’s assets minus its liabilities. For publicly traded mutual funds, the NAV is calculated daily based on the closing prices of the underlying securities, providing a transparent and accurate valuation.
However, with many alternative investments, particularly those that are non-traded or hold illiquid assets, the NAV is not determined by the open market. Instead, it is calculated periodically (often quarterly or even annually) by the fund manager or a related party. This lack of a transparent, market-based valuation process creates a dangerous opportunity for manipulation.
NAV squeezing occurs when a fund manager inflates the stated NAV of the fund to create the illusion of strong performance. This can be done through a variety of methods, from using aggressive or unrealistic valuation models to improperly accounting for liabilities.
How NAV Squeezing Works: A Look Under the Hood
Imagine a non-traded REIT that owns a portfolio of commercial real estate properties. The value of these properties can fluctuate based on market conditions, occupancy rates, and a host of other factors. A responsible fund manager would use conservative and independent appraisals to determine the fair market value of the properties and, in turn, the NAV of the REIT.
However, a manager engaging in NAV squeezing might:
- Use outdated or overly optimistic appraisals: They might cherry-pick favorable appraisals or delay obtaining new ones when they know the property values have declined.
- Misrepresent the value of illiquid assets: For funds that hold private company stock or other hard-to-value assets, the manager has significant discretion in assigning a value. This discretion can be abused to inflate the NAV.
- Improperly account for liabilities: The fund might have significant debts or other liabilities that are not fully or accurately reflected in the NAV calculation, making the fund appear healthier than it is.
- Engage in “NAV lending” to mask problems: Some funds may take out loans against their assets (a practice known as NAV lending) to generate cash for distributions to investors. While not inherently fraudulent, this can be used to create the illusion of income and a stable NAV, even when the underlying assets are underperforming. The fund is essentially borrowing money to pay investors, a house of cards that can quickly collapse.
Why is NAV Squeezing Done? The Motivations Behind the Deception
The motivations for NAV squeezing are straightforward and, unfortunately, all too common:
- To attract new investors: A consistently rising NAV is a powerful marketing tool. It creates the impression of a successful and well-managed fund, luring in new investors and their capital.
- To generate higher fees: Many fund managers are compensated based on the value of the assets under management. By artificially inflating the NAV, they can increase their own fees.
- To retain existing investors: A declining NAV would likely lead to a wave of redemption requests from current investors. By propping up the NAV, managers can delay the inevitable and continue to collect fees.
- To create a false sense of security: A stable or rising NAV can lull investors into a false sense of security, preventing them from asking tough questions or seeking to liquidate their investment.
The Devastating Impact on Customers: Misleading Returns and Hidden Risks
The consequences of NAV squeezing for investors can be catastrophic. Here’s how it directly impacts your financial well-being:
- You are paying for phantom performance: The returns you see on your account statements may be entirely illusory. You believe your investment is growing, but the reality is that the underlying assets are stagnant or declining in value.
- You are overpaying for the investment: When you purchase shares in a fund with an inflated NAV, you are paying more than the investment is actually worth.
- You are trapped in an illiquid investment: Many alternative investments have long lock-up periods and limited redemption options. By the time the true value of the assets is revealed, it may be too late to get your money out.
- You are exposed to undisclosed leverage: The use of NAV lending to prop up a fund can significantly increase its risk profile. You may be unknowingly invested in a highly leveraged product that is vulnerable to a sudden collapse.
The dangers and risks to customers investing in these products are manifold and extend beyond just the potential for financial loss. The emotional toll of discovering that your trust has been betrayed and your financial security jeopardized can be immense.
The Path to Justice: Your Legal Recourse Through FINRA Arbitration
If you believe you have been the victim of NAV squeezing or other forms of stockbroker negligence, you may feel powerless against a large brokerage firm. However, there is a well-established process for resolving these disputes: FINRA arbitration.
When you opened your brokerage account, you almost certainly signed an agreement that included an arbitration clause. This clause stipulates that any disputes you have with your broker or their firm must be resolved through arbitration administered by the Financial Industry Regulatory Authority (FINRA), rather than through the court system.
Understanding the FINRA Arbitration Process
FINRA arbitration is a legally binding process that is generally faster and less expensive than traditional litigation. Here’s a simplified overview of the steps involved:
- Filing a Statement of Claim: The process begins when you, the claimant, file a Statement of Claim with FINRA. This document details the facts of your case, the nature of the misconduct (such as stockbroker negligence in recommending an unsuitable investment susceptible to NAV squeezing), and the damages you are seeking to recover.
- The Respondent’s Answer: The brokerage firm, the respondent, is then required to file an answer to your Statement of Claim, admitting or denying the allegations.
- Arbitrator Selection: A panel of one or three neutral arbitrators is selected to hear the case. These arbitrators are typically experienced in the securities industry.
- Discovery: Both sides engage in a process of discovery, exchanging documents and information relevant to the case. This is a critical phase where a seasoned securities lawyer can uncover evidence of wrongdoing.
- The Hearing: A hearing is held where both sides present their cases, call witnesses, and cross-examine opposing witnesses.
- The Award: After the hearing, the arbitrators will issue a written award, which is the final and binding decision in the case.
While the process is designed to be more streamlined than a court trial, it is still a complex legal proceeding. The brokerage firms will be represented by experienced defense attorneys, and attempting to navigate the process on your own can be a significant disadvantage. This is where the guidance of a seasoned securities lawyer becomes invaluable.
Why You Need an Experienced Securities Attorney on Your Side
When you are facing a large and well-funded opponent, you need a guide who knows the terrain and has a proven track record of success. At Bakhtiari & Harrison, we are that guide.
We are a team of dedicated and experienced securities attorneys who have dedicated our careers to fighting for the rights of investors. We understand the complexities of the securities industry and the nuances of FINRA arbitration. We know how to identify and prove stockbroker negligence, and we have a deep understanding of the deceptive practices, like NAV squeezing, that can harm investors.
The Bakhtiari & Harrison Difference: A Client-Centered Approach
What sets Bakhtiari & Harrison apart is our unwavering commitment to our clients. We understand that behind every case is a person or a family who has suffered a significant financial loss. We take the time to listen to your story, understand your goals, and develop a legal strategy that is tailored to your specific needs.
We are not a high-volume “settlement mill.” We are trial lawyers who are always prepared to take a case to a final hearing to achieve the best possible outcome for our clients. Our reputation for thorough preparation and aggressive advocacy often leads to favorable settlements, but we will never hesitate to fight for you in the arbitration hearing if that is what it takes to secure the justice you deserve.
The importance of having seasoned attorneys representing you in a FINRA arbitration cannot be overstated. An experienced securities lawyer will:
- Thoroughly investigate your case: We will dig deep to uncover the evidence of wrongdoing, including the manipulation of NAVs and the unsuitability of the investment.
- Navigate the complex procedural rules of FINRA arbitration: We will ensure that all deadlines are met and that your case is presented in the most effective manner possible.
- Level the playing field: We will go toe-to-toe with the brokerage firm’s high-powered legal team, ensuring that your rights are protected every step of the way.
- Maximize your chances of a successful recovery: Our goal is to recover the full extent of your losses, including your initial investment, lost opportunity costs, and, in some cases, punitive damages.
Take the First Step Towards Financial Recovery
If you have lost money in the stock market after purchasing an alternative investment recommended by your stockbroker, and you suspect that you may have been a victim of NAV squeezing or other forms of misconduct, do not wait to seek help. The time to act is now.
Contact Bakhtiari & Harrison today for a free and confidential consultation. We will review your case, answer your questions, and provide you with a clear and honest assessment of your legal options.
You don’t have to face this alone. Let our experience be your guide. Let our strength be your shield. Let us help you fight for the justice and the financial recovery you deserve.