ETF Tag Archives — Page 2 of 2 — Securities Lawyers Blog

Oil and Gas Investment Goodrich Petroleum Corp. Losses Exceed 90% In Last Year

November 4, 2015 | by Staff Attorney

The law offices of Gana Weinstein LLP are currently investigating brokerage firms that placed investors in oil and gas related investments and who have suffered losses as a result. One company under investigation is oil and gas producer Goodrich Petroleum Corp., (Goodrich) (Stock Symbol: GDP). Goodrich has gone through a number of negative events such as a credit downgrade, the company’s CFO resigned within a year of his predecessor, the chairman of the board announced his retirement for health reasons, and even Henry Goodrich, the company’s founder, has died. According to Bloomberg the company is laden with debt and investors are jockeying for position in a potential bankruptcy.

Recently, investors holding $158.2 million of Goodrich’s debt agreed to take 47 cents on the dollar in exchange for stock warrants for some note holders and a lien on Goodrich’s oil acreage. The purpose of the exchange was to place them in a better position if Goodrich liquidates its assets in bankruptcy.

Our offices continue to report on investment losses suffered by investors in energy and oil and gas related investments that brokerage firms have increasingly recommended to retail investors in recent years. According to Bloomberg, U.S. high-yield debt issued to junk-rated energy companies grew four-fold to $208 billion. Most of these companies are now struggling to stay afloat with oil prices at $45. Investors have been exposed to energy investments through a variety of investment vehicles including private placements, master limited partnerships (MLPs), leveraged ETFs, mutual funds, and even individual stocks.

Former Ameriprise Advisor Jack McBride Discharged Over Soliciting Leveraged ETFs

April 22, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Jack McBride (McBride) has been the subject of at least 4 customer complaints over the course of his career. Customers have filed to recent complaints against McBride alleging that the broker made unsuitable investments in leveraged ETFs and the use of margin. McBride has been registered with FINRA since 1994. From that time until August 2014, McBride was registered with Ameriprise Financial Services, Inc. (Ameriprise). In August 2014, Ameriprise discharged McBride claiming that the broker violated the company’s policies relating to making a settlement and for soliciting prohibited securities.

All advisers have a fundamental responsibility to deal fairly with investors including making suitable investment recommendations. Part of the suitability requirement is that the broker must have a reasonable basis to believe, based on appropriate research and diligence, that all recommendations are suitable for at least some investors. Thus, the product or investment strategy being recommended must be appropriate for at least some investors and the advisers must convey the potential risks and rewards before bringing it to an investor’s attention.

In the case of Non-Traditional ETFs, these products contain drastically different risk qualities from traditional ETFs that most investors and many brokers are not aware of. While traditional ETFs simply seek to mirror an index or benchmark, Non-Traditional ETFs use a combination of derivatives instruments and debt to multiply returns on underlining assets, often attempting to generate 2 to 3 times the return of the underlining asset class. Non-Traditional ETFs can also be used to return the inverse or the opposite result of the return of the benchmark.

Broker Investigation: Thomas Tedeschi’s Sales Practices

April 14, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Thomas Tedeschi (Tedeschi) has been the subject of at least 6 customer complaints, one judgment and lien over the course of his career. Customers have filed complaints against Tedeschi alleging a litany of securities law violations including that the broker made unsuitable investments, unauthorized trades, breach of fiduciary duty, misrepresentations and false statements, and churning, among other claims. The claims involve different investment recommendations including claims involving warrants, penny stocks, and Exchange Traded Notes, among other speculative securities.

An examination of Tedeschi’s employment history reveals that Tedeschi moves from troubled firm to troubled firm. The pattern of brokers moving in this way is sometimes called “cockroaching” within the industry. See More Than 5,000 Stockbrokers From Expelled Firms Still Selling Securities, The Wall Street Journal, (Oct. 4, 2013). In Tedeschi’s 20 year career he has worked at 17 different firms.

Since 2008 alone Tedeschi has been registered with Westrock Advisors, Inc., Obsidian Financial Group, LLC, John Thomas Financial, Prestige Financial Center, Inc., Blackbook Capital LLC, and Aegis Capital Corp.

World Equity Group Alleged to Have Sold Private Placements Without Proper Due Diligence Part III

March 20, 2015 | by Staff Attorney

This post continues our firm’s investigation concerning the recent allegations brought by The Financial Industry Regulatory Authority (FINRA) sanctioning brokerage firm World Equity Group, Inc. (World Equity) concerning at least seven different allegations of supervisory failures that occurred between 2009 through 2012. FINRA’s allegations include failures to implement an adequate supervisory system and concerned both internal processes at the firm and procedures and in the handling of customer accounts in the areas of suitability of transactions in non-traditional ETFs, private placements, and non-traded REITs.

FINRA requires firms preserve for at least 6 years all communications relating to its business and to provide for ways to store electronic media. FINRA found that in May 2011, the World Equity opened a new branch office at 311 W. Monroe Street, Chicago, Illinois. FINRA alleged that errors in the process of transferring several representatives at that branch to World Equity emails of the representatives were not maintained and preserved before April 13, 2012. In addition, FINRA found that the firm failed to maintain business related emails for ten representatives who used their personal emails for business purposes.

FINRA also alleged that World Equity failed to conduct due diligence in connection with private placements offering from July 2009, through January 2012. During that time FINRA alleged that the firm conducted at least eight private placements including a product called Newport Digital Technologies, Inc. (NDT) and sold more than $6 million in these offerings. In addition, FINRA found that from August 23, 2010 to July 17, 2012 the firm conducted at least five Non-Traded REIT offerings and sold more than $3 million in these offerings.

World Equity Group Fined $225,000 Over Supervisory Failures Part I

March 17, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm World Equity Group, Inc. (World Equity) alleging that between 2009 through 2012, the firm failed to implement an adequate supervisory system reasonably designed to detect and prevent potential rule violations including: (1) failure to preserve emails; (2) failure to establish and maintain account records and obtain suitability information; (3) failure to implement a supervisory system to ensure suitability of transactions in non-traditional ETFs; (4) failure to properly document adequate due diligence in connection with private placements and non-traded REITs; (5) failure to establish an adequate supervisory system for the review of activity for options activity in unapproved accounts; (6) failure to have a reasonable supervisory system to ensure compliance with Section 5 of the Securities Act of 1933; and (7) failure to adequately enforce information barrier procedures.

World Equity is a full service broker dealer and has been a FINRA member since 1992. The firm is based in Illinois and has approximately 160 brokers operating out of 68 registered branch offices.

One of the offerings FINRA investigated at World Equity was Newport Digital Technologies, Inc. (NDT). In 2008, according to FINRA, World Equity hired a new syndicate manager by the initials MN to lead the business line out of the firm’s Spokane office. During MN’s tenure as syndicate manager, World Equity was involved in several private offerings including the NDT offering for which the firm acted as the placement agent. NDT had been registered with the SEC since 2000 and originally was known as Golden Choice Foods Corporation and then as International Food Products Group, Inc. (IFPG). These companies were in the consumer food business until December 2008.

Cary Olson Sanctioned by FINRA Over Non-Traditional ETF Sales

March 3, 2015 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Cary Olson (Olson) concerning allegations that Olson made recommendations in non-traditional exchange-traded funds (ETFs) to several customers without having reasonable grounds to believe his recommendations were suitable in relation to the holding periods for the ETFs. FINRA also alleged that Olson permitted the execution of options transactions in the account of a customer who was not approved for options activity.

Olson entered the securities industry in 1993. In June 2006, Olson became registered at FlNRA firm Great Circle Financial until July 2013. From June 2013 until November 2013, Olson was registered with GBS Financial Corp. Finally, Olson is currently associated with Calton & Associates. This disciplinary matter is not the first time FINRA has sanctioned Olson. In January 2006, Olson consented to the entry of findings by NASD that he exercised discretion in customer accounts without obtaining written authorization. Olson was suspended for one month and fined $5,000.

FINRA alleged that from October 2010 through October 2012, Olson recommended transactions of various leveraged and inverse-leveraged ETFs in the accounts of five customers. As a background, these types of ETFs are designed to achieve their objectives over the course of a single day only and are generally not appropriate for long term holdings. By holding these ETFs over longer periods of time the value of the investment differs dramatically from the index it tracks because the investment is reset daily.

Infinex Investments Fined Over Unsuitable Sale of Non-Traditional (Leveraged) ETFs

July 2, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned Infinex Investments, Inc. (Infinex Investments) concerning allegations that from April 2009, through March 2011, Infinex Investments permitted 35 registered representatives who received minimal training on inverse and inverse-leveraged Exchange-Traded Funds (Non-Traditional ETFs) to sell them to customers. FINRA alleged that the firm and brokers failed to perform reasonable due diligence to understand the risks and features of the product necessary in order to recommend 229 customers approximately 835 transactions in these products. In addition, FINRA also found that some of the recommendations were also unsuitable on a customer specific basis. Finally, FINRA also found that Infincx Investments also failed to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable FINRA rules relating to the sale of Non- Traditional ETFs.

Infinex Investments has been a FINRA firm since 1994, is a full service broker-dealer with its primary business being the retail sale of mutual funds and variable annuities. The firm employs approximately 400 registered representatives located in approximately 500 branches.

As a background, ETFs attempt to track a market index. ETFs can be either attempt to track the index or apply leverage in order to amplify the returns of an underlying stock position. A leveraged ETF with 300% leverage will attempt to return 3% if the underlying index returns 1%. Nontraditional ETFs can also be designed to return the inverse or the opposite of the return of the benchmark. Leveraged ETFs are generally used only for short term trading. The Securities Exchange Commission (SEC) has warned that most Non-Traditional ETFs reset daily and are designed to achieve their stated objectives on a daily basis. In addition to the risks of leverage the performance of Non-Traditional ETFs held over the long term can differ drastically from the underlying index or benchmark during the same period. FINRA has also acknowledged that leveraged ETFs are complex products that carry significant risks that are typically not suitable for retail investors.

PNC Investments Fined by FINRA Over Sale of Non-Traditional ETFs

February 24, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm PNC Investments LLC, (PNC) concerning allegations from January 2008, through June 2009, PNC failed to establish a supervisory system, including written procedures, reasonably designed to achieve compliance with the FINRA rules in connection with the sale of leveraged, inverse, and inverse leveraged Exchange-Traded Funds (Non-Traditional ETFs).

Non-Traditional ETFs have grown in popularity since 2006. By April 2009, over 100 Non-Traditional ETFs had been issued with total assets of approximately $22 billion. Leveraged ETFs seek to deliver multiples an index or benchmark the ETF tracks. Some Non-Traditional ETFs are “inverse” or “short” funds that return the opposite of the performance the index or benchmark. ETFs can also be both inverse and leveraged and return a multiple of the inverse performance of a index or benchmark. Non-Traditional ETFs contain significant risks that are not found in traditional ETFs. Non-Traditional ETFs have risks associated with a daily reset, use of leverage, and compounding.

In addition, the performance of Non-Traditional ETFs over long periods of time can differ significantly from the performance of the underlying index or benchmark it tracks. For example, between December 2008, and April 2009, the Dow Jones U.S. Oil & Gas Index gained two percent while a leveraged ETF seeking to deliver twice the index’s daily return fell six percent. In addition, a related ETF seeking to deliver twice the inverse of the index’s daily return fell by 26 percent over the same period. These risks prompted FINRA to issue a Notice to Members clarifying brokerage firm obligations when selling Non-Traditional ETFs to customers.

What are Leveraged or Non-Traditional ETFs?

November 6, 2013 | by Staff Attorney

A leveraged Exchange Traded Fund (non-traditional or leveraged ETFs) is a security that employs debt, or leverage, in order to amplify the returns of an underlying stock position. Leveraged ETFs are generally available for most security indexes such as the S&P 500 and Nasdaq 100. A leveraged ETF with 300% leverage will return 3% if the underlying index returns 1%. Nontraditional ETFs can also be designed to return the inverse of the benchmark.

Leveraged ETFs are generally used only for short term trading. The Securities Exchange Commission (SEC) has warned that most leveraged ETFs reset daily, meaning that they are designed to achieve their stated objectives on a daily basis. As a result, the performance of nontraditional ETFs held over the long term can differ significantly from the performance of their underlying index or benchmark during the same period. The Financial Industry Regulatory Authority (FINRA) has acknowledged that leveraged ETF carry significant risks and are inherent complexity of the products. Accordingly, FINRA advises brokers that nontraditional ETFs are typically not suitable for retail investors.

Recently, FINRA sanctioned and suspended broker Michael E. French (French) over allegations that the broker recommended unsuitable transactions in leveraged and inverse ETFs in the accounts of elderly customers. FINRA also alleged that French held the leveraged ETFs in his customers’ accounts for extended periods contrary to Wells Fargo Advisor’s (Wells Fargo) written supervisory procedures.