Negligence based unsuitable investment recommendations in oil, gas, and energy related companies make up a majority of the cases we’ve handled for investors. These can be overconcentration cases, meaning your advisor recommended you invest too much of your money in the energy sector. We analyze the energy sector concentration of your portfolio by first comparing it to the S&P 500, which at any given time about 11% of the index is comprised of energy companies. If you have more than that in your portfolio, there needs to be some justification for that. We have represented clients with anywhere from 50% to near 100% concentrations in oil and gas related investments. That sort of overconcentration should trigger compliance review automatically.
Brokers at full service brokerage firms recommended oil and gas stocks, master limited partnerships, and other related investments heavily to investors between 2012 and 2015. When oil prices collapsed in 2014 into 2015 due to oversupply, it resulted in devastating investment losses for many investors. The price shock moved fast and wiped out some pretty substantial companies like Breitburn Energy, Energy XXI, and Magnum Hunter amongst others. Unfortunately, many smaller oil and gas producers lost a majority of their value in 2014 and 2015, including many private issuers like the Coachman/Bakken Drilling Funds. Advisors sold the sizzle of “fracking” and the “energy renaissance” to justify their recommendations into these companies, many of which were highly leveraged and speculative.
Dozens of master limited partnerships declined in value substantially in 2014 and 2015. The $500 billion master-limited-partnership sector is the sausage maker of the oil/gas investment world. Brokers sell these investments as part of the income component of an investor’s portfolio, but never explain that with those high yields, come high risks. The bullish pitch by brokers in favor of the investments centered on the high-yielding way to participate in the booming U.S. energy infrastructure build-out. Unfortunately, the investments, while providing generous yields, masked the substantial high risks of these investments.
Many of these investments were pitched to elderly and conservative investors because of the relatively high dividends and yields that the investments paid out. These losses are potentially recoverable through either FINRA arbitration claims against the brokerage firms whose brokers recommended the investments or lawsuits against the promoters of the investments.