AFSCME 3357-HOF'S BLOG

The Problems with buying a "Brokered CD"


I've seen a lot of scams, but another attorney in my office has brought a new one to my attention: Brokered CDs. A brokered CD could be a legitimate investment. In simple terms, a broker buys a long-term, large denomination CD and sells interests in fractions of the CD to buyers. The pitch by the broker is that the buyer of the brokered interest does not need to pay an early withdrawal penalty. The catch is that the buyer must actually resell the fractional interest at market rate. If interest rates have gone up, the redemption price will fall (like any bond). In addition, you have to pay the marketing costs on a nonstandard, and more risky investment.

Rarely will a brokered CD make financial sense. Here's why: you are taking a low-risk, low yield investment, and interjecting a high risk and high cost intermediary (the broker). It will be rare that the total broker's fees will be less than the difference between short-term and long-term investment rates at top rate institutions.

Finally, there's the potential that you are dealing with a fraudulent operator. The underlying CD may not even exist. You may be buying into a Ponzi scheme. The CD may exist but be oversubscribed. The potential for problems is enormous.

I suspect that we will soon see tighter regulation of CD brokers. If you get a case involving a brokered CD, I suggest that you put immediate pressure on the broker and have the client file complaints with every regulatory body that you can think of. Cross your fingers and hope the money isn't in a secret account in the Cayman Islands somewhere.



What to Do If You Have a Problem With a Brokered CD