Investor Lawyers Blog
Investors in funds formerly managed by defunct Chicago options trading firm LJM Partners, including the LJM Preservation & Growth Fund, may have litigation or arbitration claims against stockbrokers or investment advisers who sold them or placed their funds in the LJM funds.
The Financial Industry Regulatory Authority (FINRA) recently took regulatory action against brokerage firm Triad Advisors LLC in connection with sales of the LJM Preservation & Growth Fund. According to the Letter of Acceptance Waiver and Consent (AWC) Triad AWC, in December 2021 FINRA censured and fined Triad Advisors LLC $195,000 regarding the brokerage firm’s failure to supervise their brokers’ recommendations of LJM Preservation & Growth Fund. Triad Advisors LLC also agreed to pay $510,256.57 in restitution. Triad representatives sold $2,267,000 in LJM Preservation & Growth Fund to 58 customers.
According to the FINRA allegations, between September 12, 2016 to February 1, 2018, Triad failed to reasonably supervise representatives’ recommendations of the LJM Preservation & Growth Fund. FINRA also found that Triad Advisors LLC allowed the sale of LJM Preservation & Growth Fund without conducting reasonable due diligence and without a sufficient understanding of its risks and features.
FINRA also found that between March 2014 and January 2019, Triad Advisors LLC failed to obtain the required account information for customers who purchased LJM Preservation & Growth Fund and LJM Partners, Ltd. offerings. Triad Advisors LLC also allegedly failed to enforce written supervisory procedures (WSPs) to ensure that information was obtained by the firm.
In early February 2018, the LJM Preservation & Growth Fund dropped more than 80% over the course of just two days during a spike in the volatility index (VIX), losing more than $600 million for investors. Other LJM private funds also experienced substantial losses during this time frame as a result of utilizing the same general trading strategy.
The LJM Preservation & Growth Fund sought to generate returns by engaging in uncovered short volatility trading, which it described as follows:
The Fund seeks to achieve its investment objectives by capturing gains on options sold on S&P futures contracts that can be purchased (“closed”) at a later date for a lower price than the price realized when originally sold…. In the aggregate, the Fund is typically “net short” in the portfolio of contracts that it holds, which means that the Fund holds more uncovered option contracts than covered.
In lay terms, the fund’s “short volatility” investment strategy used to generate returns for investors was the equivalent of picking up nickels and dimes in front of a steamroller. This analogy is appropriate because, in order to execute on its “short volatility” investment strategy, the Fund implemented an options trading scheme called a “short strangle” – which is an options trading strategy widely known to have an unlimited downside (meaning no preservation) and limited upside (meaning no real growth).
Any licensed investment advisor or stockbroker selling a fund (or placing customer funds) in a high-risk investment that employs a complex options strategy like this is duty-bound to understand how the strategy works. Investors may have claims against advisors or firms whose recommendations to purchase LJM investments led to losses.
The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience representing investors in disputes concerning investment adviser and stockbroker misconduct, including cases involving complex options trading strategies. Investors may contact us via the contact form on this website, by telephone at (866) 966-9598, or by e-mail at newcases@investorlawyers.net for a no-cost, confidential consultation. Attorneys at the firm are admitted in New York, Wisconsin and various federal courts around the country, and handle cases nationwide (in cooperation with attorneys located in those states if required by applicable rules).
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