Securities Lawyers Blog
The securities fraud attorneys of Gana Weinstein LLP are investigating potential recovery options for investors with broker Zachary Bader (Bader). Recently The Financial Industry Regulatory Authority (FINRA) brought an enforcement action (FINRA No. 20130363873) which resulted in a permanent bar form the securities industry. The complaint alleged that from February 2012 through July 2013, Bader engaged in excessive trading (churning) in three customer accounts with a reckless disregard for the interests of those customers. FINRA also alleged that from March 2012 through January 2013, Bader made unsuitable recommendations of a complex Exchange Traded Note (ETN), the iPath S&P 500 VIX Short Term Futures ETN (VXX) to 21 customers without a reasonable basis to believe that the ETN was suitable for at least some investors.
Bader entered the securities industry in 2011 with brokerage firm Brookstone Securities, Inc. From February 2012 until August 2013, Bader was associated with Craig Scott Capital, LLC. Thereafter, from August 2013 until August 2013, Bader was associated with National Securities Corporation out of the firm’s Melville, New York office location.
As a background, when brokers engage in churning the broker will typical trade in and out of securities, sometimes even the same stock, many times over a short period of time. Often times the account will completely “turnover” every month with different securities. This type of investment trading activity in the client’s account serves no reasonable purpose for the investor and is engaged in only to profit the broker through the generation of commissions created by the trades. Churning is considered a species of securities fraud. The elements of the claim are excessive transactions of securities, broker control over the account, and intent to defraud the investor by obtaining unlawful commissions. A similar claim, excessive trading, under FINRA’s suitability rule involves just the first two elements. Certain commonly used measures and ratios used to determine churning help evaluate a churning claim. These ratios look at how frequently the account is turned over plus whether or not the expenses incurred in the account made it unreasonable that the investor could reasonably profit from the activity.
FINRA also alleged that Bader recommended that 21 customers invest in the iPath S&P 500 VIX Short Term Futures ETN. In recent years many exotic ETN have been created that either use leverage or futures exposure to replicate an index. However, many of these investments are appropriate only for institutional investors and short term trading for various reasons. One such investment is the VXX which offers investors exposure to the returns of one-and two-month futures contracts on the CBOE Volatility Index, commonly known as the VIX Index. The VIX Index is intended to measure “investor fear” by calculating one month put and call options on the S&P 500 Index and the expectations of volatility in large cap U.S. stocks over the next 30 days.
The VXX is falls in the category of a bearish investment because market volatility typically is negatively correlated with market returns. However, VXX is not considered a suitable hedge for specific equity positions or against a down market in general. VXX has its own independent risks that make it unsuitable for such purposes such as the fact that the VXX will lose value as time moves on regardless of broader market movement and thus is not a prudent long-term investment option. VXX loses value over time because the value of futures contracts on the VIX Index generally decrease over time. In general VXX should only be held for brief periods measured in days rather than months or even weeks.
The investment fraud attorneys at Gana Weinstein LLP represent investors who have suffered securities losses due to the mishandling of their accounts. The majority of these claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover.