It seems like every day there is a new “hot stock” being pushed by financial pundits and brokerage houses alike. Seadrill Limited (ticker symbol, SDRL) was once one of these hot stocks, but it has since fallen from grace, with wide reports that it will be declaring chapter 11 bankruptcy by early next week. SDRL’s stock was known for its generous quarterly dividend, and, to the detriment of retiree investment portfolios, benefited from excessive promotions it received from those within the brokerage and investment industry.
SDRL is an offshore deep-water drilling contractor in the oil and gas sector. It was founded in 2005 by John Fredriksen, a Norwegian-born billionaire, who was well-known for his triumphs in the oil and shipping industry during the 1980s. The company grew quickly by way of aggressive management and acquisitions, and its stock price in September of 2013 surged to its high of over $47 per share. However, SDRL has since spectacularly nosedived, falling by more than 99% in value to its current trading price of $0.23 per share.
As early as February 2012, Mad Money’s Jim Cramer was bullish on SDRL. But so were big name brokerage firms like Morgan Stanley, which issued a research report in November 2013 that confidently touted SDRL as an overweight value stock. In a subsequent research report from March 2014, Wells Fargo Securities named Seadrill’s subsidiary, Seadrill Partners, LLC (ticker symbol, SDLP), its “top Marine MLP Pick” and predicted “solid distribution growth” through 2015. Notably, SDLP’s investment performance took a similar trajectory to its parent SDRL, at one-point trading over $34 per share in August of 2014, but now sitting barely above $3 per share today.
Perhaps not shockingly, both Seadrill companies, each featured and promoted in Wells Fargo and Morgan Stanley research reports, are in fact investment bank clients of both firms. While these firms were touting SDRL and SDLP as safe and value investments, the truth is that they were always speculative oil and gas securities. The energy sector is widely considered to be one of the most volatile sectors for investments, and, as we speak, we are seeing just how susceptible the industry is to global weather events like superstorms Harvey and Irma. But Seadrill was even more susceptible to stock volatility because the SDRL parent company was anchored by enormous debt obligations.
Through Malecki Law’s own investigations, it has become further apparent that many retirees who were sold SDRL and SDLP never received any disclosures about Seadrill’s debt and investment risks. Brokerage firms would have known of these risks because SDRL itself issued many public warnings about its debt. As early as September 30, 2012, SDRL reported that it was at risk of default because it owed $10.8 billion in principal debt. As of November 30, 2012, SDRL also reported that it had an astounding revenue backlog of approximately $21.3 billion. Wells Fargo Securities’ own research report from January 2013 confirmed the same, stating that SDRL had “a total revenue backlog of $20B.”
It cannot be expected that the casual retiree will read these research reports each time a broker makes an investment recommendation. Most retirees are clueless when it comes to investing, and simply rely on their investment professionals to make suitable recommendations. As a result, many investors were never warned of Seadrill’s risks. In fact, many were sold on only the glossy benefits of the investment, such as its attractive quarterly dividends. Unbalanced investment recommendations, which disclose only the benefits and omit the risks, are a clear violation of federal securities law, per the Financial Industry Regulatory Authority’s (FINRA’s) Rule 2210(d)(1)(A), which states:
“All member communications must be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service. No member may omit any material fact or qualification if the omission, in light of the context of the material presented, would cause the communications to be misleading.”
FINRA has also reminded brokerage firms on their sales practice obligations, specifically relating to senior investors in Regulatory Notice 07-43:
“For many investors who are at or nearing retirement, there can be a temptation to reach for yield to maximize retirement income without the appreciation of the concomitant risk. Moreover, it can be difficult for some investors to fully appreciate the risks of certain products or strategies, particularly if they are concerned about running out of money. Yet, especially when investments involve retirement accounts or lump-sum pension plan payments, taking undue risks with funds needed to last a lifetime can be financially disastrous.”
At Malecki Law, we are seeing the sad aftermath of Seadrill’s demise in retiree portfolios, which in some cases, are only realizing investment losses now. When the price of crude oil took a downturn in late 2014, the share prices of SDRL and SDLP soon followed. Investors who held on, often at the recommendation of their brokers that the oil market would bounce back, are about to see the value of their investments dissipate further when SDRL declares bankruptcy next week. SDRL’s CEO, Mr. Fredriksen, recently told the Wall Street Journal that he was putting in long hours to keep Seadrill from collapsing and that he has “dealt with messier situations than Seadrill,” but that’s hardly consolation for ordinary retirees who suffered investment losses in Seadrill and were never informed of the risks.