Are “liquidated corporate units” a scam?

Liquidated corporate units scam

A reader asks: I have been approached by a broker concerning what they call “Liquidated corporate units.” These are corporate bonds yielding 13.625% per annum. This seems too good to be true.  What are “liquidated corporate units” and how can I check whether or not this is a scam?

Answer: In fact after your further investigations, it turns out that you had indeed been contacted by scammers who had created a clone of an EEA wealth management firm, in this case, Montgrand Wealth Management, see this linkFortunately, you were able to confirm that this was indeed a scam using the FCA website and register and did not lose any money.

The UK regulator has dedicated resources for consumers, to help them avoid falling victim to financial scammers and criminals. If you suspect an investment is a scam you should report it to the FCA here: https://www.fca.org.uk/consumers/report-scam-us.  There is also a useful guide and tools such as this warning list.

Unfortunately, this kind of clone scam is becoming more prevalent and sophisticated, so please do take all necessary precautions before you part with any money or confidential details. We covered another similar scam last week when Aberdeen Standard Investments was cloned.

I have to say though that I don’t know what “Liquidated corporate units.” are. 

However, I have come across situations in the past where brokers and their clients were buying the junk bonds of companies that had gone into chapter 11 bankruptcy, in the USA, for cents on the dollar. 

Under Chapter 11 business are shielded from creditors in order for the company to be able to reorganise and restructure its finances and debts. 

Traders would buy the junk bonds in the hopes that the issuing company would emerge from chapter 11 and be able to honour its obligations in part or full. And I suspect that this is something along those lines. 

But that kind of trade requires deep pockets and specialist knowledge, as you will need to kiss a lot of frogs before you find your prince, and need to know a great deal about the companies capital structure and the rankings of the outstanding debts of the business etc, and of course, in turn, to be able to interpret that as regards a restructuring. 

These trades are popular with specialist hedge funds and other institutions but not are normally associated with retail clients or private investors. 

In general, terms if the yield on either a fixed income security or an equity looks way too high in relation to its peers, there’s usually a reason for that, and most of the time it’s because it’s not sustainable.

None of the above of course is to say that there isn’t a place for high yielding debt within a portfolio. Particularly in the era of low and even negative interest rates, but perhaps it would more sensible to approach the space through the use of specialist diversified funds. 

The ETF database lists 69 ETFs that track the high yielding bond sector, some of which have done very well indeed in recent years. For example, the VanEck Vectors Fallen Angel High Yield Bond ETF (Ticker FALN) has a five-year return of +53.43%. 

Of course, previous performance is no guarantee of future gains and you should seek appropriate advice before making any investment decisions, but I think that serves to show that these days it’s possible to participate in even the most obscure parts of the market in relative safety, without the need for what sounds like a get rich quick scheme.

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