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Published on: February 27, 2018

LJM Preservation and Growth Fund Plummets In Value During VIX Spike

Wastebasket Filled with Crumpled Dollar Bills Investors in the LJM Preservation and Growth Fund suffered substantial losses in early February, 2018 as volatility in broad stock market indices spiked. LJM Preservation and Growth Fund (“LJM P&G Fund” or the “Fund”) (LJMAX, LJMCX, LJMIX) is a mutual fund advised by LJM Funds Management, Ltd., (“LJM”). LJM is headquartered in Chicago, IL, and was founded in 2012, as an affiliate of LJM Partners, an investment management firm that has been managing alternative investment strategies since 1998.

Since its inception in 2013, the LJM P&G Fund has employed an investment strategy that “seeks capital appreciation and capital preservation with low correlation to the broader U.S. equity market. The Fund attempts to profit, primarily, from the volatility premium – the spread between implied volatility (investors’ forecast of market volatility reflected in options pricing) and realized (actual) volatility. The Fund aims to capture this premium by writing (selling) call and put options on S&P 500 Index futures.”

A put option is a contract that allows the purchaser of the underlying contract to sell a security at a specified price (the strike price). This allows the purchaser to hedge a position or a portfolio, by essentially creating a price floor, where a drop in a security price below a certain level will nevertheless deliver a profit on the option contract. Conversely — when an investor, or institutional fund manager, sells a put option — the seller is betting that the price will stay higher than the option price. And in instances when the seller of the option contract does not own the underlying security, then the seller is engaged in naked option writing. This is an inherently risky strategy fraught with risk; in fact, some market pundits have referred to selling naked puts as “picking up nickels in front of a steamroller.”

Published on: February 26, 2018

ARC NYC REIT Increases its Defensive Tender Offer – Investors May Have Arbitration Claims

by InvestorLawyers

Building Demolished Investors in American Realty Capital New York City REIT (“ARC NYC REIT”), may have arbitration claims to be pursued before the Financial Industry Regulatory Authority (“FINRA”), if their ARC NYC REIT investment was recommended by a financial advisor who lacked a reasonable basis for the recommendation, or if the nature of the investment was misrepresented by the broker or financial advisor. According to its website, ARC NYC REIT is structured to provide its investors with a combination of current income and capital appreciation through strategic investments in high-quality commercial real estate located throughout the five boroughs of New York City.

A publicly registered non-traded real estate investment trust (“REIT”), ARC NYC REIT was incorporated in December 2013 as a Maryland REIT and is registered with the SEC. Accordingly, ARC NYC 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.

In early 2018 — a Tel Aviv, Israel based private real estate investment fund, Comrit Investments 1 LP (“Comrit”) — launched an unsolicited tender offer to purchase up to 1.6 million shares of ARC NYC REIT for $14.68 per share. In response, ARC NYC REIT’s Board countered with a defensive tender offer, to purchase up to 1.9 million shares at a price of $15.50 per share. Both of these tender offers were set to expire on March 6, 2018.

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 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: January 23, 2018

Woodbridge Bankruptcy Update: Chief Restructuring Officer Resigns Amid Concerns Related to Need for Independent Trustee Oversight

by InvestorLawyers

woodbridge mortgage funds As highlighted in our most recent 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 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. Through its Motion to Direct the Appointment of a Chapter 11 Trustee, the SEC alleged that cause existed for the appointment of an independent trustee to help manage the bankruptcy process and protect the interests of numerous Woodbridge investors: “[i]nstead of allowing a District Court to appoint an independent fiduciary, Robert Shapiro decided that he would select the victims’ fiduciaries when he started hiring the team of managers and professionals who are representing the Debtors’ estates today.”

On January 19, 2018, turnaround specialist Mr. Lawrence Perkins of SierraConstellation Partners LLC, resigned as Chief Restructuring Officer of Woodbridge. As recently reported, Mr. Perkins’ resignation will be effective once a replacement is hired, according to attorney Sam Beach of Young, Conaway, Stargatt & Taylor, counsel for Woodbridge. Further, the Bankruptcy Court scheduled closing arguments related to the request for an independent trustee for Tuesday, January 23, 2018.

Published on: January 18, 2018

FINRA Issues 2018 Regulatory Guidance on Securities Backed Lines of Credit

by InvestorLawyers

financial charts and stockbroker On January 8, 2018, the Financial Industry Regulatory Authority (“FINRA”) published its Annual Regulatory and Examination Priorities Letter (“2018 Letter”). The purpose of this letter is to highlight certain issues of importance to FINRA in the upcoming year, and serves as a useful guidepost for industry professionals and investors, alike. Included among the areas of concern addressed in the 2018 Letter is the increased prevalence of so-called securities backed lines of credit, or SBLOCs.

Given the current bull market that is currently approaching nine (9) years in age, it should come as no surprise that many brokerage firms and their registered representatives have heavily marketed SBLOCs to their clientele. The sales pitch in a rising market such as this is relatively simple: you may tap into the value of your investment portfolio in order to readily access cash in the form of an SBLOC, without the need to sell out of any investment holdings, thereby ensuring continued upside appreciation in the value of your investment portfolio. Such a marketing pitch, while logical, often downplays the risks associated with a SBLOC and its use of leverage against collateral that can rapidly deteriorate in value.

Put simply, SBLOCs are non-purpose in nature, meaning that such loans are not used to purchase more securities, and are thus distinguishable from traditional margin loans. Despite the fact that SBLOCs are non-purpose — and may be utilized for any number of ends, including for example creating liquidity for the purchase of a home, paying tuition, or financing the purchase of a car — FINRA has recently expressed concern over the risks associated with SBLOCs.

Published on: January 16, 2018

Investors in Life Settlements Absolute Return I, LLC May Have Arbitration Claims

by InvestorLawyers

Money Maze On December 29, 2017, Life Settlements Absolute Return I, LLC (“LSAR”) – a special purpose vehicle investing in life insurance policies – filed for Chapter 11 bankruptcy relief in the Bankruptcy Court for the District of Delaware (Lead Case No. 17-13030). The Debtors, LSAR I and its wholly owned subsidiary, estimate their assets to be worth between $10,000,001 and $50 million, and their liabilities to be between $100,000,001 and $500 million. According to the Debtors’ First Day Declaration, the Chapter 11 proceeding was necessitated because “[t]he Insureds have outlived their actuarial life expectancy, thereby prolonging LSAR’s receipt of cash from the death benefits of the Policies…” LSAR is wholly-owned by Attilanus, a Delaware limited partnership formed on January 29, 2004.

The primary risk associated with investing in life settlements (or viaticals) concerns the possibility that the insured (who has sold his or her life insurance policy to the investment sponsor) will outlive the money set aside by the sponsor to pay for continued life insurance premiums. In such a scenario, the investors in the life settlements may then be called upon to pay future premiums in order to ensure that the policy remains in force until maturity. When some investors refuse to pay, the remaining investors are left to cover higher premium payments, or else allow the policy to lapse.

Further, as appears to be the case with LSAR, when the sponsor can no longer afford to service the debt on its own credit facilities, then the sponsor may well be forced to seek bankruptcy protection. As outlined in LSAR’s Chapter 11 First Day Declaration, “Beginning in July 2009, in order to fund premium payments on the Policies… LSAR (as the borrower) and the Employees’ Retirement System of the Government of the Virgin Islands (“GERS”) and Attilanus (as lenders) extended a credit facility to LSAR, whereby Attilanus made an initial loan to LSAR in the principal amount of $500,000 and GERS made a loan to LSAR in the principal amount of $1,160,263.”

Published on: January 15, 2018

KBS REIT II Investors May Have Arbitration Claims

by InvestorLawyers

Money in Wastebasket Investors in KBS Real Estate Investment Trust II, Inc. (“KBS II” or the “Company”) may be able to recover losses on their investment through initiating an arbitration proceeding with FINRA Dispute Resolution, if the recommendation to purchase KBS II was unsuitable, or if the broker or financial advisor who recommended the investment made a misleading sales presentation. KBS II was formed as a Maryland REIT on July 12, 2007. The Company is based in Newport Beach, CA, and in line with its business model, is “[i]nvested in a diverse portfolio of real estate and real estate-related investments. As of September 30, 2017, the Company owned ten real estate properties (consisting of nine office properties and an office campus consisting of eight office buildings).”

Because KBS II is registered with the SEC, the non-traded REIT was permitted to sell securities to the investing public at large, including numerous unsophisticated investors who purchased shares through the initial public offering (“IPO”) upon the recommendation of a broker or financial advisor. Pursuant to the Company’s offering, 182,681,633 shares of KBS II common stock were sold through its primary offering, for gross proceeds of $1.8 billion. Further, the Company sold 30,903,504 shares of common stock under its dividend reinvestment plan, for gross proceeds of $298.2 million. According to publicly available information through filings with the SEC, as of September 30, 2017, the Company had redeemed 25,723,025 shares sold under the offering for $244.6 million.

Non-traded REITs, such as KBS II, are complex and risky investment vehicles that do not trade on a national securities exchange. Unfortunately, retail investors are often uninformed by their broker or money manager of the illiquid nature of non-traded REITs, meaning that investors who wish to sell their shares can only do so through a direct redemption with the issuer or through a fragmented and illiquid secondary market.