Suitability

Published on: February 27, 2018

FINRA Warned of Risks of VIX-Linked Exchange Traded Products

stock market chart A recent spike in stock market volatility has brought into focus the enormous risks associated with certain exchange-traded-products (ETPs) linked to the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). However, these products have previously been the subject of several warnings by the Financial Industry Regulatory Authority (FINRA).

Created in 1993, the VIX attempts to track broadly measured volatility in the market. VIX is an index, not a security, but certain ETPs have attempted to allow investors to track the performance of the VIX index. One such ETP is Credit Suisse’s VelocityShares Daily Inverse VIX Short-Term ETN (ticker symbol XIV), which the issuer shuttered earlier this month after investors experienced unexpectedly large losses during a spike in the VIX. Other ETP products that may pose similar risks include Proshares SVXY, VelocityShares ZIV, iPATH XXV, and REX VolMaxx VMIN.

ETPs have previously come under scrutiny by FINRA. In October of 2017, FINRA ordered Wells Fargo to pay $3.4 million in restitution to investors relating to unsuitable recommendations of volatility-linked ETPs. FINRA also has published Regulatory Notice 17-32, regarding sales practice obligations, which cautions brokerage firms that many volatility-linked ETPs are highly likely to lose value over time and may be unsuitable to retail investors, particularly those who plan to use them as traditional buy-and-hold investments. Previously, in 2012, FINRA called for heightened supervision by brokerage firms regarding complex investment products in Regulatory Notice 12-03, specifically warning of the risks posed by investment products tied to the VIX.

Published on: February 23, 2018

Inverse ETF Investors Lose Millions As VIX Index Skyrockets

by InvestorLawyers

Investors who bought into inverse volatility-linked exchange traded funds (ETFs) on the recommendation of their broker or financial advisor may be able to recover their losses in FINRA arbitration. Inverse volatility-linked investments are designed to return a profit when the market experiences periods of calmness, or low volatility. However, unlike more traditional investments and strategies such as a buy-and-hold stock portfolio, investing in volatility-linked products is extremely complex and risky, and therefore, not likely a suitable strategy for the average, retail investor.

Certain inverse ETFs are structured to provide investors with returns that are positive when the CBOE Volatility Index (the “VIX”) falls, and negative when the VIX rises, and investors in these products essentially are taking the view that the market will remain relatively steady. However, earlier this month stock market volatility and the VIX rose rapidly as the stock market whipsawed erratically.

ETFs that lost value during this market turmoil include the following:

Published on: February 22, 2018

American Finance Trust Shares Subject of Competing Tender Offers

by InvestorLawyers

Apartment Building Investors in American Finance Trust (“AFIN”), formerly known as American Realty Capital Trust V, Inc., may have arbitration claims to be pursued before the Financial Industry Regulatory Authority (“FINRA”), if their AFIN position was recommended by an investment advisor who lacked a reasonable basis for the recommendation, or if the nature of the investment was misrepresented by the stockbroker or financial advisor. According to its website, AFIN is structured to protect shareholder capital and produce stable cash distributions through the acquisition and management of a diversified portfolio of commercial properties leased to investment grade tenants.

AFIN is a publicly registered non-traded real estate investment trust (“REIT”) that is based in New York, NY. Incorporated in early 2013 as a Maryland REIT, AFIN is registered with the SEC, and therefore, the non-traded REIT was permitted to sell securities to the investing public at large, including numerous unsophisticated retail investors who bought shares through the initial public offering (“IPO”) upon the recommendation of a broker or money manager.

According to publicly available information through the SEC, MacKenzie Capital Management LP (“Mackenzie”) recently made an unsolicited tender offer to purchase up to 1 million shares of AFIN common stock at $13.66 per share. This tender offer is set to expire on March 22, 2018, unless extended.

Published on: February 22, 2018

Woodbridge Bankruptcy Update: Judge Approves Settlement Agreement Calling For Board of Managers

by InvestorLawyers

House in Hands As highlighted in our previous blog posts concerning the Woodbridge Group of Companies (“Woodbridge”) of Sherman Oaks, CA, Woodbridge filed for Chapter 11 bankruptcy on December 4, 2017, in Delaware Bankruptcy Court (Case No. 17-12560-KJC). Thereafter, on December 21^st, the Securities and Exchange Commission (“SEC”) formally filed charges against Woodbridge and its owner and former CEO, Robert Shapiro, alleging that “[D]efendant… used his web of more than 275 Limited Liability Companies to conduct a massive Ponzi scheme raising more than $1.22 billion from over 8,400 unsuspecting investors nationwide through fraudulent unregistered securities offerings.”

By January 2, 2018, the SEC further alleged, among other things, that the timing of the Chapter 11 proceeding called into question whether Mr. Shapiro had preemptively sought bankruptcy protection, in the first instance, in order to shield himself from impending charges of misconduct, and sought appointment of an independent trustee.

On January 23, the SEC announced a resolution under which the Bankruptcy Court for the District of Delaware approved a settlement Term Sheet, calling for the appointment of a new Board of Managers consisting of representatives recommended by the parties which will take necessary actions for managing Woodbridge, with the first course of action to be selecting a CEO or Chief Restructuring Officer for the Debtors. The Term Sheet also calls for the formation and appointment of Unitholders and Noteholders committees to represent the interests of investors who purchased Woodbridge notes and unit investments.

Published on: February 21, 2018

Investors in Credit Suisse’s VelocityShares Daily Inverse VIX Short Term ETN May Have Arbitration Claims

by InvestorLawyers

financial charts and stockbroker Investors who bought into Credit Suisse’s Velocity Shares Daily Inverse VIX Short Term Exchange-Traded Note (“XIV”) on the recommendation of their broker or financial advisor may be able to recover their losses in FINRA arbitration. As we discussed in several recent blog posts, inverse volatility-linked investments are designed to return a profit when the market experiences periods of calmness, or low volatility. However, unlike more traditional investments and strategies such as a buy-and-hold stock portfolio, investing in volatility-linked products is extremely complex and risky, and therefore, not likely a suitable strategy for the average, retail investor.

By design, Credit Suisse’s XIV was structured to provide investors with the opposite return of the CBOE Volatility Index (the “VIX”), or the so-called ‘fear-index’, and was thus essentially a bet that the market would remain calm. Earlier this month — as the market’s prior 12-month rally gave way to a sharp rise in volatility and an approximate 8% loss in the S&P 500 index, this inverse or short volatility trade proved to be an absolute train wreck.

As stocks returned all the year’s gains in trading on Monday, February 5, the VIX skyrocketed to 37 by close of trading, an increase of 95%. Unsurprisingly, many inverse volatility-linked investment vehicles sustained massive losses. Among the hardest hit ETNs was Credit Suisse’s XIV, which plunged approximately 90% in value. In light of XIV’s losses, Credit Suisse recently announced that the last day of trading for VelocityShares Daily Inverse VIX Short-Term Exchange-Traded Note will be Tuesday, February 20, 2018. Credit Suisse has elected to trigger an accelerated liquidation of XIV because the product could no longer perform as it was designed.

Published on: February 20, 2018

Investors in Certain Volatility Linked Financial Products May Have Arbitration Claims

by InvestorLawyers

money whirlpool 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.”

Put simply, investing in a volatility-linked product is a very risky enterprise that is likely only suitable for professional investors seeking to trade on a short-term basis (e.g., several hours or day trading). Further, because the VIX or so-called ‘fear index’ is not actually tradeable, investors who wish to invest in the VIX must trade derivatives instead (including volatility-linked ETFs and ETNs). And when it comes to investing in derivatives, such as future contracts and options on futures, the majority of retail investors do not fully understand the extreme volatility and risk associated with these complex investment products.

Earlier this month, equity indices declined sharply following a steady rally in the prior 12 months that saw the benchmark S&P 500 stock index gain nearly 20%. It was during this year-long market rally that many retail investors were lured into investing in inverse volatility-linked products, essentially seeking to capture even bigger gains, provided that there was no price correction. However, the idea of shorting volatility, or betting on calm stock market conditions, is a strategy best suited for sophisticated, institutional investors.

Published on: February 14, 2018

Investors May Have Arbitration Claims Against Former Newbridge Securities Broker Austin Dutton

by InvestorLawyers

broker misappropriating client money A number of investors have recently filed arbitration claims with the Financial Industry Regulatory Authority (“FINRA”) against broker Austin Richard Dutton, Jr. (CRD# 2739167). Publicly available information indicates that Mr. Dutton was previously affiliated with Newbridge Securities Corporation (“Newbridge”) (CRD# 104065) from 2007-2017. Currently, Mr. Dutton is affiliated with Sandlapper Securities, LLC (“Sandlapper”) (CRD# 137906), and conducts his financial advisory business through his own independent firm, Bridge Valley Financial Services, LLC. Upon information and belief, Mr. Dutton marketed certain risky non-traded investment products to a client base which includes Philadelphia law enforcement and firefighters.

According to publicly available information, Mr. Dutton appears to have recommended and sold certain complex and risky non-conventional investments (“NCIs”) including direct participation programs (“DPPs”) and non-traded financial products, including non-traded REITs. In particular, it appears that Mr. Dutton recommended and sold numerous non-traded REITs previously packaged and marketed by Nicholas Schorsch’s firm, American Realty Capital (ARC), now known as AR Global.

FINRA disclosures concerning Mr. Dutton include, but are not limited to, four pending customer complaints and a July 2017 regulatory enforcement proceeding by state securities regulators. Of the pending complaints, three pending customer disputes were filed in December 2017 and all center on allegations of unsuitability, misrepresentations, and omissions of material facts concerning the risks and features of certain securities.

Published on: February 13, 2018

Investors in AEI Accredited Investor Fund V May Have Arbitration Claims

by InvestorLawyers

Investors in AEI Accredited Investor Fund V, L.P. (“AEI V” or the “Limited Partnership) may be able to recover losses on their investment through initiating an arbitration proceeding with FINRA Dispute Resolution, if the recommendation to invest in FSEP was unsuitable, or if the broker or financial advisor who recommended the investment made a misleading sales presentation. AEI V is structured as a Minnesota limited partnership and is based in St. Paul, MN. The Limited Partnership was formed as a capital investment entity for the purpose of investing in a portfolio of income producing commercial real estate.

Money Maze On May 29, 2013, AEI V first offered securities through its private placement pursuant to Regulation D (“Reg D”) of the federal securities laws. The total initial offering amount was $1,915,573, and investors who participated in the offering were required to invest a minimum of $5,000.

In general, limited partnerships — particularly non-traded limited partnerships, such as AEI V — are very complex and risky investments. For this reason, investing in a limited partnership through a private placement is typically only available to accredited investors (to be accredited an investor must have an annual income of $200,000 or joint annual income of $300,000, for the last two years, or alternatively, have a net worth in excess of $1 million).

Published on: February 12, 2018

FS Energy and Power Fund Update

by InvestorLawyers

As we highlighted in a previous blog post, investors in FS Energy and Power Fund (“FSEP” or the “Fund”) may be able to recover losses on their investment in arbitration through arbitration before the Financial Industry Regulatory Authority (“FINRA”), if the recommendation to invest in FSEP was unsuitable, or if the broker or financial advisor who recommended the investment made a misleading sales presentation. Headquartered in Philadelphia, PA, the Fund is structured as a non-traded business development company (“BDC”) that invests primarily in the debt of a portfolio of private U.S. energy and power companies.

stock market chart
BDCs first emerged in the early 1980’s when the U.S. Congress enacted legislation that amended the federal securities laws. These legislative changes allowed BDCs — which are a type of closed-end fund — to make investments in developing companies and firms. BDCs are in the business of providing various debt and mezzanine financing solutions for small and medium-sized businesses that otherwise could not access credit in the same way as more established companies.

By providing credit solutions to less established companies, BDCs frequently collect much higher than average interest income and seek to pass along such income to investors in the form of dividends. While an investment in a BDC may seem like an attractive option for an investor seeking enhanced income, our office has frequently encountered situations in which financial advisors recommended unsuitable nonconventional investment products to their clients, including non-traded BDCs, such as FSEP.

Published on: December 18, 2017

Summit Healthcare REIT Shares May Be Worth Less Than $2 A Share

by InvestorLawyers

Money Bags Investors with losses in Summit Healthcare REIT (“Summit”), a non-traded real estate investment trust (Non-Traded REIT), may have arbitration claims if a broker or advisor made a recommendation to purchase the shares without a reasonable basis or misled the customer as to the nature of the investment. Summit, headquartered in Lake Forest, California, invests in a diversified, income-producing portfolio of assets in the healthcare sector, focusing its investments on operators of senior housing facilities in the United States. Summit acquires, leases, and manages healthcare real estate and invests in the healthcare sector and diversifies by property type, location, and tenant. Publicly-available information suggests that shares of Summit have significantly decreased in value and are now worth less than $2 a share.

MacKenzie Realty Capital has reportedly offered to purchase up to 330,000 shares of Summit for only $1.34 per share in a tender offer – which would leave investors who sold facing a significant loss on the original purchase price. Secondary market providers that allow investors to bid and sell illiquid products such as Non-Traded REITs value Summit shares at between $1.50 and $1.56, and the sponsor estimates their value at $2.53 a share.

Unfortunately for many investors in Summit, it would appear that any attempt to exit their illiquid investment will incur a substantial loss. Aside from their illiquid nature, non-traded REITs also present significant additional risks. One of these risks has to do with their high cost. In most instances, non-traded REITs are sold through a network of independent broker-dealers and associated financial advisors, who earn steep commissions (ranging up to 10%) on sales of non-traded REITs to investors. In addition to the sales commission charged, non-traded REITs typically charge other expenses, including certain due diligence and administrative fees (that can range anywhere from 1-3%).