Ridgewood Energy Update October 2016
Energy companies constitute approximately 5% of the S & P index, which gained 11% since 2014. Oil and gas stocks have lost, on average, 50%. These stocks are known to be cyclical, rising and falling with the cost of oil. That volatility has negatively affected investors with more than 10% of their investments in oil and gas stocks or bonds. Most brokerage firms recommend that an investor put no more than 10% of their portfolio in any one sector.
Ridgewood Energy is a “direct placement program.” This means that its units are directly sold by brokers to customers. The Ridgewood Energy Funds are complicated, the units do not trade, and most brokers do not read the actual offering materials. Ridgewood Energy Funds are sold by brokers who receive 8% commission. There are other large fees taken out of any investment. For example, Ridgewood Energy Fund S (one of the “alphabet soup” of Ridgewood Energy Funds) takes out 4.5% of the investment as an “investment fee to the Manager”, 8% in sales commissions, 1% in “Placement Agent Fees,” and an additional 3.5% in “Organizational distribution and other fees”. So, of every dollar invested in Ridgewood Energy Fund S, only 83% actually went into the drilling program.
In addition, Ridgewood Energy Funds pay enormous management fees to its affiliated companies. These were so large that the Ridgewood Energy S Fund kept 26% of the Fund’s revenue as a “management fee”. Ridgewood Energy Fund U has taken an astounding 57% of all revenues as a management fee. By comparison, Vanguard Energy Fund only has an expense ratio of approximately .3%.
What is particularly egregious are the losses retirees have had in Ridgewood Energy funds sold to them for retirement income. In 2015, most Ridgewood Funds stopped making distributions. This was a surprise to its investors, who had been told that the funds were safe, income-generating investments. Brokers compared their distributions to the low returns offered by banks, bonds and C.D.s. However, these comparisons are inherently misleading. Ridgewood Energy Fund distributions are, to some extent, a return of capital. In addition, Ridgewood Energy funds are not traded and cannot be sold. A savings account or C.D. can be liquidated. A stock, bond, or mutual fund can be sold. A retiree who was sold Ridgewood Energy is stuck. There are some small firms that will buy funds. If you have Ridgewood Energy and are needing help understanding your investment or trying to recover money, please contact me.
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United Development Funding IV – Ponzi Scheme
Last month, the FBI raided the offices of United Development Funding IV, a REIT, and Ponzi scheme that has been sold by brokers to unsuspecting investors.
A class action has been filed against the officers of the REIT for allowing funds from later investors to be used to bail out its earlier investors. However, class actions can take years, and may not result in meaningful recoveries.
Brokerage firms who recommend securities are required to conduct “due diligence” before recommending them. However, six brokerage firms have sold millions of dollars of UDF IV.
VSR Financial Services
Centaurus Financial Inc.
IMS Securities, Inc.
We are forming groups of investors in UDF IV for group arbitrations of their fraud claims. If you own UDF and were sold it by one of these brokerage firms, please contact us.
Energy Master Limited Partnerships and Their Collapse
Energy pipeline and refining companies have been sold to millions of American investors who wanted income. Many retired people were told by their brokers that these stocks would provide high income, have some tax benefits and would be safe investments. Unfortunately, they have fallen even more than the price of oil.
There has been a steep sell-off in energy master limited partnerships (“MLPs”). Not only have the price of these stocks plunged, but they have also cut their distributions. Kinder Morgan (KMI) has cut its dividend by 75%. Breitburn is now trading at $2 a share. Even pipeline companies and refineries are now facing the drop in volume as oil output has declined.
The NYSE Alerian MLP Index, which is an ETF following the energy sector, has lost over 25% in 2016, which is a larger drop than that of oil prices this year. Last year was much worse, as oil prices plummeted in 2015. Alerian tracks the energy MLP stocks, and they are in the tank.
Retired investors were sold Alerian, Breitburn, Linn Energy, Kinder Morgan, Plains All American and other MLPs under the premise that they would provide higher income than that available from treasures or bonds. Some brokers told retired investors that these energy MLPS were as safe as bonds, but would provide more income.
That is not true, as investors have learned this last year. In addition, they are often presented with a Hobson’s choice: if they hold energy MLPs, they risk bankruptcy or restructuring and tax liability, but if they sell them, they also have to pay taxes on “income” that was, in fact, a distribution to them of principal.
If you have been sold energy MLPs and energy stocks for their income, and have lost money, please contact us. We can help you if these investments were too risky for you or if their risks were not fully described to you. If you had a large portion of your savings in energy stocks, mutual funds and energy MLPs, at your financial advisor’s suggestion, FINRA rules provide for compensation.