Exchange-Traded Notes

Wells Fargo Brokerage Firms Ordered to Pay $3.4M Over Unsuitable Exchange-Traded Product Recommendations

Published on: October 16, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority said that Wells Fargo Advisors Financial Network and Wells Fargo Clearing Services LLC must pay over $3.4M in restitution to customers who were impacted by unsuitable recommendations involving exchange-traded products and the supervisory failures involved. By settling, Wells Fargo (WFC) is not denying or admitting to the regulator’s charges.

According to FINRA, between 7/1/200 and 5/1/2012, there were registered representatives at Wells Fargo (WFC) who recommended these volatility-linked ETPs without fully comprehending the investments’ features and risks. The self-regulatory organization also found that the broker-dealer did not put into place a supervisory system that was reasonable enough to properly supervise the ETP sales during the period at issue.

The regulator said that the brokers did not have reasonable grounds for recommending these ETPs to customers whose risk profiles and investment goals were considered moderate or conservative. The representatives are accused of making inappropriate recommendations about when to leave these positions in a “timely manner.”

Ex-Broker Ordered to Pay $550K For Bilking Modest Income Investors in ETN/ETF Fraud Had Previous Unsuitable Investment Claims Against Him

Published on: October 5, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has secured a final judgment by default in its broker fraud case against Demitrios Hallas. The former broker was charged by the regulator in April for allegedly trading unsuitable investment products in five customers’ accounts. The customers were unsophisticated investors with not much, if any, experience in investing. Their net worth and income levels were modest enough that risky investments were not a good fit for their portfolios.

According to the regulator’s complaint, in a period of a little over a year, Hallas traded 179 daily leveraged exchange traded funds and exchange traded notes in these accounts. (Both ETFs and ETNs products are considered high-risk, volatile, and only suitable for sophisticated investors.)

The SEC said that Hallas had no reasonable grounds for recommending these investments to customers. Meantime, the latter were charged fees and commissions of about $128K. The net loss sustained over all the positions was about $170K.

North Carolina Retiree Couple Files FINRA Arbitration Case Against Morgan Stanley Over Energy Investment

Published on: March 8, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Two North Carolina investors have filed an arbitration claim with FINRA against Morgan Stanley (MS) over unsuitable investments involving the financial firm’s Cushing MLP High Income Exchange Traded Note. The married couple, who are retirees in their sixties, are accusing the brokerage firm of:

· Common law fraud

· Negligence

· Breach of fiduciary duty

· Negligent supervision

· Failure to adequately disclose the risks

In a phone interview with InvestmentNews, the claimants said that they have lost over $100K. According to the couple, a Morgan Stanley broker invested about $150,000 of their money in the Morgan Stanley Cushing MLP High Income ETN, which is an exchange traded note connected to master limited partnerships with shipping and energy assets. Their legal team said that the couple did not understand the extent of the risks involved in that they could potentially lose their principal. This was a loss they could not afford. Instead, the claimants were purportedly told that their investment would make them money.

The Cushing MLP High Income Exchange Traded Note seeks to give investors cash upon maturity or early repurchase, as well as variable coupon payments every quarter (depending on how the underlying index, performs). The claimants’ broker fraud lawyers believe that Morgan Stanley recommended the exchange traded note to investors who were seeking to make money but may not have understood or been fully apprised of all the risks.

SEC to Investigate Seesawing Credit Suisse TVIX Note

Published on: March 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission is reviewing the VelocityShares 2x Daily VIX Short Term Exchange Traded Note (TVIX) that collapsed last week, right after it climbing nearly 90% beyond its asset value. The drop came not long after Credit Suisse stopped issuing shares last month. Now, the Switzerland-based investment bank says it will start creating more shares.

Also known as TVIX, the VelocityShares 2x Daily VIX Short Term Exchange Traded Note is an exchanged-traded note that seeks to provide two times the daily return of the VIX volatility index. With the note’s value hitting nearly $700 million up from where it was at approximately $163 million in 2011 and now crashing down, The TVIX has taken investors for quite the ride.

Investor advocates are saying that more should be done to protect retail investors. There is growing concern that with the rising popularity of ETNs, investors and financial advisers are getting into these products without fully understanding them or the risks involved. Financial Industry Regulatory Authority has said that it too will look into the “events and trading activity” that led to the collapse of the TVIX note.