Investor Lawyers Blog
Investors in speculative microcap and nanocap securities may have arbitration claims to be pursued before FINRA, in the event that the recommendation to invest lacked a reasonable basis, or if the nature of the investment, including its risk components, was misrepresented to the investor. Both FINRA and the SEC have issued ample guidance with regard to the numerous risks associated with investing in speculative microcap (or “penny”) stocks, including the potential for fraudulent schemes and market manipulation due to the lack of public information concerning the companies’ underlying business and management, as well as verifiable financials.
In certain instances, broker-dealers who transact business in the penny stock arena may expose themselves to regulatory scrutiny and related liability. For example, Aegis Capital Corp. (“Aegis”) (CRD# 15007) has come under considerable regulatory scrutiny by both the SEC and FINRA with respect to its activities concerning low-priced securities transactions. Formed in 1984 and headquartered in New York, New York, Aegis is a mid-sized, full service retail and institutional broker-dealer. As of March 2017, Aegis employed approximately 415 brokers in its sixteen branches, with the bulk of its workforce centered in New York City and Melville, NY.
According to FINRA BrokerCheck, Aegis’ regulatory history includes a total of thirty (30) disclosure events, a number of which involve penny stocks. For instance, in August 2015, Aegis entered into a settlement with FINRA, pursuant to which the broker-dealer agreed to pay $950,000 in sanctions over allegations of improper sales of unregistered shares of penny stocks, as well as certain AML violations. In connection with that regulatory event, two of Aegis’ compliance officers were suspended for 30 and 60 days, and ordered to pay fines of $5,000 and $10,000, respectively. On March 28, 2018, the SEC imposed a cease-and-desist order (“Order”) against Aegis for its alleged supervisory failures concerning penny stocks. Further, the SEC penalized Aegis $750,000 after the brokerage firm admitted that it failed to file required suspicious activity reports (“SAR’s”) on numerous penny stock transactions from “at least late 2012 through early 2014.”
Based upon recent secondary market pricing, investors in certain publicly registered, non-traded business development companies (“BDCs”), may have suffered losses on their illiquid investments. In the wake of the 2008 financial crisis, many retail investors have been steered into so-called non-conventional investments (“NCIs”), including non-traded REITs and BDCs, often premised upon a sales pitch or marketing presentation from a financial advisor touting the investment’s lack of correlation to stock market volatility and enhanced income via hefty distributions. Unfortunately, in some instances, investors were solicited to invest in such NCIs without first being fully informed of the risk components embedded in these products.
Hard Rock Exploration, Inc. (“Hard Rock”) of Charleston, West Virginia and certain of its affiliate entities, including Blue Jacket Gathering LLC, Blue Jacket Partnership, Caraline Energy Company, and Brothers Realty, LLC (“Hard Rock Affiliates”), are independent oil and gas development companies.
Investors who have lost money on the recommendation of their broker or financial advisor to invest in volatility related financial products may be able to recover their losses in FINRA arbitration. As we discussed in a recent blog post, inverse volatility-linked investments are designed to return a profit when the market experiences periods of low volatility. Unlike more traditional investments and corresponding strategies such as a buy-and-hold stock portfolio, investing in volatility-linked products is likely not a suitable strategy for the average, retail investor. In fact, when volatility-linked ETFs first began rolling out in early 2011, Michael L. Sapir, Chairman and CEO of ProShare Capital Management, stated that “The intended audience for these ETFs are sophisticated investors.”
Bank of America Merrill Lynch’s (“Merrill Lynch”) brokerage unit offered Strategic Return Notes (“SRNs”) to customers, resulting in losses of as much as 95% of the principal invested. First issued in November 2010 and maturing November 27, 2015, the SRNs were designed to be linked to Merrill Lynch’s own proprietary volatility index (the “VOL”) which was designed to calculate the volatility of the S&P 500 Index. The SRNs, which were issued at $10 per share, ultimately matured at just $0.50 per share. Thus, investors in Merrill Lynch’s proprietary SRN’s were subjected to an enormous 95% loss on their principal investment.