Investments can take shape in many different ways; while many people refer to the securities trading via the stock market, stocks are not the only option to consider when entering into trading opportunities. Typically, bonds are presented as safe trading alternatives to stocks, but bond fraud is a real risk to investors who rely on stockbrokers for insights and opportunities. While bonds and fixed-income investments can be the cornerstones of well-diversified portfolios, some investors use them as opportunities to exploit you for financial gain.

What are bonds?



Bonds are debts which governments and corporations sell to investors in order to raise their bottom-line capital. Bonds are most frequently broken down into four categories:

• Corporate bonds: Bonds issued by a company in order to generate funds

• Federal bonds: Bonds sold by a federal government, such as U.S. Treasury bills and U.S. savings bonds

• Municipal bonds: Bonds issued by states, cities or other government entities to fund civic projects

• Agency bonds: Bonds issued by government agencies or government-sponsored enterprises 

Agency bonds include mortgage-backed securities like those offered by the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Government National Mortgage Association (Ginnie Mae).

Despite the general umbrellas that can describe bonds, each of these categories can be further broken down into more specific descriptions. Similarly, on the fringe of what may be considered viable securities options, are junk bonds. These bonds are incredibly high-risk, but may also offer high rewards in some circumstances. Junk bonds move rapidly with stocks and offer minimal downside protection in the face of market losses. Unless you are in a position to hedge your bets on such a risk, an advisor should not suggest these bonds.

What is bond fraud?

Despite their relative security, bonds are like stocks in that they are subject to risks. While most investors are privy to potential risks of investments, they sometimes do not know of the specific risks associated with specific investment opportunities; it is a broker’s responsibility to provide investors with knowledge of those risks. 

One major risk opportunity for brokers to commit fraud via bonds is the opportunity for the broker to not provide adequate information about specific risks associated with potential bond trades. Junk bonds are often misrepresented as “high-yield bonds” or other vague terms which help brokers avoid divulging the true breadth of the risk associated with the bond.

Another fraudulent practice which brokers perform involves concealing charges related to the bond of the fund against which the bond is leveraged. Most bonds do not have market prices which are accessible by investors, making it simple for fraudulent brokers to mark-up or mark-down their cost-per-transaction involving a bond, increasing their profits relative to the trades which the investor approves.

As with all securities trading situations, every potential bond trade comes with inherent risks. As with all securities transactions, it is your broker’s responsibility to provide you with full information about those risks. For example, even in situations where the bond itself looks like a stable investment, the entity offering the bond for trade may be a financial flightrisk. If a business is likely to go under or otherwise plummet in their financial security, your bond may not be issued back to you at a meaningful value. It is the obligation of that broker to be aware of these risks and to fully divulge those risks to you before asking you to approve of the transaction.

It is unfortunate that brokers do not always act within their obligations to you. While they are supposed to be your reliable agent who helps assure your financial security, sometimes you need a team behind you to make it right when you have been wronged by a broker or brokerage. The legal experts at Riera Law will be that team. With decades of experience in securities litigation behind you, Riera Law is focused on getting you the reparations you deserve after being defrauded by an investment adviser. To begin your path to regaining what you’ve lost, contact us today.