Exchange Traded Funds

Gana LLP Files Complaint on Behalf of Five Customers Against JP Turner and National Securities Concerning Ralph Calabro’s Churning

August 12, 2014 | by Staff Attorney

Gana Weinstein LLP has recently filed securities arbitration case on behalf of a group of five investors against J.P. Turner Company, L.L.C. (JP Turner) and National Securities Corporation (National Securities) concerning the alleged complete lack of supervision at JP Turner and National Securities to monitor and prevent Ralph Calabro (Calabro) from churning customer accounts.

As a background, Calabro was expelled from the securities industry when on November 8, 2013, the SEC issued an order (SEC Order) finding that JP Turner registered representatives including Calabro, Jason Konner, and Dimitrios Koutsoubos churned customer accounts and Executive Vice President (EVP), Michael Bresner (Bresner), as head of supervision, failed to supervise the representative’s activities.

The SEC alleged that JP Turner knew that numerous accounts had a cost-to-equity ratio greater than 20%, a number sufficiently high to establish an inference of churning requiring close supervision and corrective action. The reports of these accounts resulted in an report being emailed to principals and the compliance office for review including Bresner. The SEC found that the average number of accounts being reviewed for high costs was shockingly high for each quarter in 2008-2009 and was between 300 and 325 accounts and included more than 100 JP Turner registered representatives. Even though these accounts bore the hallmarks of churning, Bresner testified that he could not recall closing an account, personally contacting any JP Turner customers, or even imposing a trading limitation.

Bank Loan ETFs – Buyer Beware

July 11, 2014 | by Staff Attorney

A recent statement by BlackRock Inc (BlackRock) Chief Executive Larry Fink concerning leveraged exchange traded funds (Leveraged ETFs) has provoked a chain reaction from the ETF industry. Fink runs BlackRock, the world’s largest ETF provider. Fink’s statement that structural problems with Leveraged ETFs have the potential to “blow up the whole industry one day” have rattled other ETF providers – none more so than those selling bank loan ETFs. Naturally, sponsors of Leveraged ETFs, a $60 billion market, called the remarks an exaggeration.

As a background, leveraged ETFs use a combination of derivatives instruments and debt to multiply returns on an underlining asset, class of securities, or sector index. The leverage employed is designed to generate 2 to 3 times the return of the underlining assets. Leveraged ETFs can also be used to return the inverse or the opposite result of the return of the benchmark. While regular ETFs can be held for long term trading, Leveraged ETFs are generally designed to be used only for short term trading – sometimes as short as a single day’s holding. The Securities Exchange Commission (SEC) has warned that most Leveraged ETFs reset daily and FINRA has stated that Leveraged ETFs are complex products that are typically not suitable for retail investors. In fact, some brokerage firms simply prohibit the solicitation of these investments to its customers, an explicit recognition that a Leveraged ETF recommendation is unsuitable for virtually everyone.

Despite these dangers, bank loan Leveraged ETFs may be an easy sell to investors. Investors in fixed income instruments are compensated based upon the level of two sources of bond risk – duration risk and credit risk. Duration risk takes into account the length of time and is subject to interest rate changes. Credit risk evaluates the credit quality of the issuer. For example, U.S. Treasury’s have virtually no credit risk and investors are compensated based on the length of the bond. At the other end of the safety spectrum are low rated floating-rate debt – what bank loan Leveraged ETFs invest in. These funds are supposed to reset every 90 days in order to get exposure to the credit side but not take on much duration risk.

Bill Tatro and Mary Helen Caprice Mallett Accused of Selling Unsuitable Private Placements Securities Part II

April 1, 2014 | by Staff Attorney

This post continues our investigation into the recent bar of broker William (Bill) Tatro by the Financial Industry Regulatory Authority (FINRA) and his relationship with Mary Helen Caprice Mallett (Mallett), Tatro’s wife, colleague, and business partner.

Mallett has also had a large number of customer complaints initiated against her. Mallett’s BrokerCheck reveals that she was associated with First Allied at roughly the same time as Tatro. Thereafter, from September 2010 until May 2011, Mallett was associated with Morgan Stanley Smith Barney (Morgan Stanley). From 2011 until June 2013, Mallett was associated with Independent Financial Group, LLC. Mallett is also associated or is involved in Biltmore Wealth Advisors, LLC, Capital Financial Management, Ltd, South Race Street, LLC, Red Rock, LLC, Mango Lizard LLC, and EZ Plan LLC.

In April 2011, Morgan Stanley filed a Form U5 taking the position that Mallett “engaged in outside business activities without prior written approval of [Morgan Stanley] and facilitated clients’ relationships with an outside investment manager”, believed to be Tatro, “who was not approved by or affiliated with [Morgan Stanley].” According to a lawsuit Morgan Stanley filed against Mallett she told Morgan Stanley that she and Tatro had used the same investment strategy over the previous nine years, presumably while associated with First Allied, and that she had bought Tatro’s book of business. However, Morgan Stanley charged that Mallett had falsely told them Tatro was no longer servicing his former clients.

Bill Tatro and Mary Helen Caprice Mallett Accused of Selling Unsuitable Private Placements Securities Part I

March 25, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred broker William (Bill) Tatro, formerly registered with First Allied Securities, Inc. (First Allied), concerning allegations that he failed to respond to two requests for information by FINRA staff in connection with an investigation into whether he violated federal securities laws or FINRA conduct rules. According to FINRA, Tatro admitted that he received both information requests but did not provide any of the requested information and documents because he claimed that he believed the bankruptcy court had stayed all requests pending the bankruptcy’s resolution. FINRA rejected Tatro’s bankruptcy defense and that Tatro violated FINRA Rules by failing to provide the information and documents FINRA staff requested and determined that Tatro should be permanently barred from associating with any FINRA member firm in any capacity.

FINRA initiated the investigation against Tatro after it received customer complaints and a series of Uniform Termination Notices (Forms U5) filed by Tatro’s former broker-dealer, First Allied. According to FINRA, the amended termination notices disclosed numerous customer complaints alleging fraud and other sales practice violations of more than 80 individuals who might be victims of Tatro’s alleged misconduct. Tatro total career related losses have been estimated to be anywhere from $10 million to $100 million and may potentially involve as many as 1,000 clients. On July 30, 2012, Tatro filed a petition for bankruptcy with the United States Bankruptcy Court for the Western District of New York.

Tatro began his securities career in 1975 and worked at six different broker-dealers before becoming associated with First Allied in November 2003. After Tatro left First Allied he operated Biltmore Wealth Advisors, LLC, an investment advisory firm in Phoenix, Arizona. Tatro also operated Eagle Steward Wealth Management, an investment advisory firm. Tatro’s wife, colleague, and business partner, Mary Helen Caprice Mallett (Mallett) has also advised Tatro clients and has been accused of recommending the same or similar speculative investments that characterizes Tatro’s practice.

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.