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October 26, 2014, 01:56:22 AM |
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When Bear Sterns underwrote the first of a series of junk bonds in 1977, no one thought much of it. After all, the risks commensurate with the yields. There were big, bold warnings on brochures and sales forms.
By the early eighties, junk bond sales accounted for more than a third of all money instrument sales in the U.S. Brokerages specializing in junk bonds sprouted like mushrooms. Small time traders, the public, were the target demographic of brokers. The brochures, prospectus and sales forms still had warning labels about the risks involved. But people continued to buy these bonds and continued to get burned. Many lost their entire live savings. Some ended up in the streets after failure to repay their home mortgages.
By mid-80s, the junk bond market grew to almost $200 billion, despite the fact that 9 out 10 investors lost money. The Junk Bond King, Michael Milken, made over $1 billion in commission and bonuses during the period.
No one thought they were doing anything wrong. They sold low grade bonds and told potential clients that these were risky investments. They weren't hiding anything.
Except they played on the dreams and hopes of naive fools, frequently sharing rags to richest stories that will seduce even the most cautious people. They also never mentioned how some of these bonds were issued for companies that are so broke, they couldn't even pay their employees salaries or office rentals. Some of the proceeds from these junk bonds were used by company CEOs to fund their lavish lifestyles. Babes and booze and blows were all paid by the life savings of some poor shmuck who clearly should've known better.
Alas, it all eventually came to a crashing end. Milken was fined $600 million and jailed 10 years. Many other brokers, brokerages and investment banks shared similar, if lesser penalties.
The moral of the story here is, snake oil salesmen comes in all shapes and sizes. And exchanges like Cryptsy and Bittrex will not be able to hide behind "we're just exchanges" lines. As crypto becomes more mainstream, the threat of legal sanctions against all of its major players will become more likely.
This suit will likely get thrown out, but more will follow. Silver Law Group is probably just hedging a position and creating brand awareness, in the hopes of attracting more clients.
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