Quagmire Investing: The Risks of Seeking Instant Wealth
Your spouse just came home from the club. The ostensible mission was golf and perhaps another round or two at the proverbial 19th hole. But, tonight there’s not just the travails of the par 3s on the back nine holes or whether this years’ Beaujolais is worth a damn. There was discussion about an investment “opportunity” where “we” could get in on the ground floor and make a killing on (a) a new variation on Ozempic (b) a fund that employs algorithms to move money in and out of various cryptocurrencies (c) a resort and casino being built in some unknown Caribbean Island or (d) you contrive the investment.
This is not common stock in a publicly traded/SEC regulated market. No, this would be a limited liability entity based in the Isle of Wight or Gibraltar or some other place you can’t find on a map. If you can get in on the ground floor and there is an approval by the FDA or the CFTC or some other acronym based regulatory agency, the return will be 10x the investment. All that is needed is some paperwork to sign and a check for $80,000. An opportunity of a lifetime all because your spouse overheard about this thing in the locker room.
It does happen. We have represented people where the $80,000 turned into $1.4 million because they were at the right place at the right time. And these stories are all over the media and the internet. People who bought Mastercard stock at $5.00 a share in 2006 don’t get invited on “Shark Tank” to discuss its current $436 price. We love the idea of getting rich by finding and making investments in things that are obscure and edgy. A synonym for those two words is “risky.”
If you have a portfolio where you can readily watch $80,000 in investment capital wash out to sea, you can play at the adult table of investors. These are people who find excitement in Blackjack at $1,000 a hand or in betting against the American mortgage market as Steve Mnuchin did in 2006. But most of us can’t really afford an $80,000 dent in our investment portfolio while driving in search of big money. So, Lesson 1. Can you afford to lose it all?
Lesson 2 is the divorce lawyer’s nightmare. The marriage wasn’t going well. Sometimes, this plays out in seeking happiness through a bigger house, a faster car or a $50,000 trip to climb Mt. Everest. In the first two of those indulgences, we can undo the transaction by selling the house or the car. But when you or your spouse signs up for a 0.00045% share of Ozempic 2.0 or PotOGold Crypto LLP, you typically become a limited partner or stakeholder in a largely unregulated private entity based in a place you never heard of. In a divorce, if you have been paying attention, you might walk into your lawyer’s office with a bank statement showing $80,000 wired to Bermuda, a hundred-page private investment agreement and maybe a Form K-1 showing a $9,000 loss in Year 1 of the investment. Your lawyer sifts through the pile and asks “What is it?” And you tell the secondhand tale of your spouse at the club and how this new drug lets you drop 10 pounds a week without wrinkling and how clinical trials conducted in Madagascar produced no deaths in 2022.
As a lawyer who has sat on the unknowing side the table here is what we face. Our initial reaction is that you should tender any rights to this marital asset and get hard cash for it. This is especially true if you don’t have an income that supports losing all should the investment go under. If your spouse makes $200,000 and you make $40,000 you really can’t afford to lose 50-60% of this uncertain investment. Meanwhile, you sit there and rightly say: “If I accept $50,000 to forego any rights to Ozempic 2.0 or PotOGold and I one day see my spouse at the jeweler buying a $70,000 Rolex because the investment hit, I will never forgive myself and I will never forgive the divorce lawyer who told me to take the cash.”
The answer lawyers have to give isn’t always a satisfying one. I offer that if you take the $50,000 you get in exchange for a portion of the investment and wisely pick the right numbers on your next 25,000 Powerball tickets, you may be able to tell the same jeweler to send a car over with a handful of Rolex Daytonas for your purchase. Clients respond: “That’s gambling.” To which the sage lawyer replies: “So is Ozempic 2.0 unless you can read and analyze the clinical trial results from Madagascar and assess how the FDA will respond to that study.”
Late in 2008 we learned that investment wizard Bernard Madoff was not what we thought he was. He persuaded some pretty smart people that he was a genius. He did it right here in the good old U.S.A. where there are both federal and state regulators who are supposed to catch fraudulent transactions. Your investment in Ozempic 2.0 or PotOGold could be the next Mastercard or Tesla. But, the latter two are publicly traded investments. Call your broker and you are back to cash in a day or so. When you sign up for 0.00045% of a privately held business unless you are truly on the inside or you can evaluate clinical trials from Madagascar, you might as well be “Groundhog Gus” scratching off the Powerball numbers. The only real difference is that Gus does his scratching on a regular schedule, so you know if you won or lost. Most private equity investments are 1,001 nights of “Maybe, yes, maybe not.” Early in my career I watched a divorce client’s net worth drop by half overnight because the FDA said “No” to a Phase II drug approval.
Typically, most investments of the kind described here are not in joint names. If they aren’t you will need to spend a fair amount of money with your attorney describing how and what you own should the day come when the ship comes in and the big payoff is distributed. Realize that if you are not the registered owner of the interest, all the tax and other notices go only to the registered owner. It would be nice to make the interest joint in title, but don’t expect the business you now own part of to spend lots of their time nailing down your entitlements. Those folks are in the “Shark Tank” looking for the big payday and they really don’t care about your portion of the 0.00045%.
Perhaps, someday, this Country Club investment will pay off big. But, in the meantime, you want to make certain that while you fight over this investment “whale” the Rolex Daytona ends up on your arm and not your attorney’s.
