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In this video, Jason M. Kueser discusses typical causes of action in securities cases. These typical actions are: (1) fraud, (2) securities fraud, (3) breach of fiduciary duty, (4) breach of contract, (5) violation of state securities laws, (6) violation of federal securities laws, and (7) negligence.
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Also available at KansasCityLaw.tv
Also available at KansasCityLaw.tv
This video is provided for informational purposes only and nothing contained herein is or should be constituted as legal advice. If you have questions related to any legal topic, you should consult with an attorney and should not rely solely upon information provided via the internet. All content provided on this blog are subject to the Disclaimer at the bottom of the page.
Leveraged ETFs have recently returned to the news as Direxion announced the release of two new funds. As reported on Marketwatch.com, one of these new funds seeks to obtain returns equal to 300% of the two-year Treasury yield, while the other fund seeks to obtain returns equal to 300% of the inverse return of the two-year Treasury yield (in other words, when the Treasury yield declines, the investor profits).
Despite the repeated warnings issued by FINRA and the SEC as to the tremendous risk presented by leveraged ETFs, it appears that these fund families are forging “full steam ahead.” The announcement from Direxion comes only weeks after its rival, ProShares, released eight additional leveraged ETFs. Four of the new ProShares funds seek to obtain returns equal to 300% of the daily return of the Nasdaq 100, Dow Jones Industrial Average, Standard & Poors 400 Index, and the Russell 2000 Index. The other four funds seek returns equal to 300% of the inverse daily return of these same indices (again, investors in these funds profit when the value of the respective index declines).
Leveraged ETFs invest their shareholders’ money in futures and/or derivatives in order to multiply the daily return of an index. Some leveraged ETFs seek a return that is 200% or even 300% of the daily performance of the index. Inverse ETFs work in much the same way, except that these funds seek a return that is equal to 100%, 200%, or even 300% of the opposite of the daily performance of the index. With these funds, an investor actually profits when the index declines in value. Typical leveraged ETFs and inverse ETFs reset each day and therefore, over periods longer than one day, their performance can vary considerably from the index.
Leveraged ETFs may be appropriate investments for professional asset managers and highly sophisticated investors; however, in this author’s opinion, leveraged ETFs are inappropriate for the vast majority of individual investors. Given the level of volatility in the stock markets in recent times, leveraged ETFs expose investors to tremendous potential for loss in a short period of time. Furthermore, in various instances in the retail setting, leveraged ETFs have been sold to investors without full disclosures related to these risks.
ProFunds Group, one of the largest issuers of leveraged and inverse ETFs recently issued a warning that some of its leveraged and inverse ETFs may not be suitable for all investors. In the prospectus dated October 1, 2009, the company repeatedly states:
The Fund is different from most exchangetraded funds in that it seeks leveraged returns and only on a daily basis. The Fund also is riskier than similarly benchmarked exchange-traded funds that do not use leverage. Accordingly, the Fund may not be suitable for all investors and should be used only by knowledgeable investors who understand the potential consequences of seeking daily leveraged investment results. Shareholders should actively monitor their investments.
(See, e.g., prospectus at pp. 49, 54, 59, 64, 69, 74, 79.)
While additional disclosures are an improvement, this disclosure is still somewhat vague. It is similar to telling someone that an investment is suitable for them if they are seeking growth of their investment. Who isn’t seeking growth of their investments? I have never heard anyone say “I am looking for an investment that will cause me to lose money.”
In addition, many investors who are sold leveraged ETFs such as these never receive a copy of the prospectus. If an investor does not receive the prospectus, the disclosure does not protect them (however, it could protect the fund company from liability).
Leveraged ETFs invest their shareholders’ money in futures and/or derivatives in order to multiply the daily return of an index. Some leveraged ETFs seek a return that is 200% or even 300% of the daily performance of the index. Inverse ETFs work in much the same way, except that these funds seek a return that is equal to 100%, 200%, or even 300% of the opposite of the daily performance of the index. With these funds, an investor actually profits when the index declines in value. Typical leveraged ETFs and inverse ETFs reset each day and therefore, over periods longer than one day, their performance can vary considerably from the index. In addition to ProFunds, the most popular leveraged ETFs and inverse ETFs are managed by Rydex and Direxion.
FINRA has already declared that leveraged ETFs are typically unsuitable for retail investors. Therefore, the announcement by ProFunds is not a revelation. If your stockbroker or financial advisor has sold you any leveraged ETFs or inverse ETFs, or purchased any leveraged ETFs or inverse ETFs in your accounts, you may be entitled to recover any losses on these investments. The Kueser Law Firm represents investors who were sold leveraged ETFs and inverse ETFs. If you are concerned that your investments have been mismanaged, contact us to learn more about your rights.
Earlier this week, the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) issued a joint warning cautioning investors on the dangers in investing in leveraged ETFs and inverse ETFs. The two regulators issued the warning because they “believe individual investors may be confused about the performance objectives of leveraged and inverse exchange-traded funds (ETFs).”
The warning also notes that leveraged ETFs are designed to achieve their investment performance objectives on a daily basis, rather than a long-term basis as with typical exchange-traded and mutual funds. In fact, the performance of these funds can vary significantly from their stated objectives over long-term periods. The joint warning contains a detailed description of leveraged and ETFs, as well as examples of how the funds generally operate. The SEC also included a link to a NYSE “Informed Investor” Bulletin entitled “What You Should Know About Exchanged Traded Funds.”
While this warning is welcome, it unfortunately has come after many investors have sustained significant losses in these risky and unsuitable investments. As previously discussed in this blawg, FINRA has already declared that leveraged ETFs are typically unsuitable for retail investors. The most popular of these investments are managed by Rydex, Direxion, and ProShares. If your stockbroker or financial advisor has sold you any leveraged ETFs, or purchased any leveraged ETFs in your accounts, and you have lost money on these investments, you may be entitled to recover these losses. The Kueser Law Firm represents investors who were sold leveraged and inverse ETFs. If you are concerned that your investments have been mismanaged, contact us to learn more about your rights.
Yesterday, August 17, 2009, the Attorney General of the state of New York announced that it had filed a lawsuit against Charles Schwab & Co. for its sales of auction rate securities. According to the press release, the Complaint charges Schwab with violations of the Martin Act for:
falsely representing auction rate securities as liquid, short-term investments without discussing the risks. These representations gave investors a false sense of security that their investments would always be liquid when auction rate securities, in fact, faced significant, inherent liquidity risks.
This is another action by Mr. Cuomo’s office to remedy the massive fraud perpetrated by Wall Street firms relating to auction rate securities. In fact, late last month, the Attorney General announced a $456 million settlement with TD Ameritrade related to its sales of auction rate securities.
Auction rate securities, which are also referred to as auction rate preferred shares, ARS, ARPS, and MARS, to name a few, have been at the epicenter of regulatory investigations across the country. Auction rate securities are long-term (or perpetual) investments that traded in periodic “auctions.” They are designed to allow companies, mutual funds, municipalities, and other organizations to borrow money for a long-term period while paying short-term rates of interest, which were reset during the periodic auctions. It was in these auctions that investors who held the securities could also sell their holdings if they needed to have access to cash. Because these auctions occurred on a relatively frequent basis (i.e., weekly, bi-weekly, or monthly), investors had the ability to sell their positions and obtain cash in a relatively short period of time.
For years, Wall Street firms sold auction rate securities as short-term, cash equivalent investments that paid marginally higher rates of interest as compared to other short-term investments. What these firms did not tell their customers was that the liquidity of the auction rate securities markets was entirely dependent on the ability and willingness of these same firms to participate in the auctions — in other words, these firms had to be willing and able to purchase the securities that were not purchased by the other auction market participants. In most cases, these firms were purchasing more securities than the other market participants. The firms (and their representatives) did not disclose these critical facts, but rather, only disclosed that the interest rates paid on the securities was reset at the auctions. In addition, these firms generally failed to inform investors that they would not be able to access their invested capital if the auctions froze.
In 2007, these Wall Street firms came under massive liquidity problems. As a result, these firms made a decision to cease participation in the auction rate markets, leaving investors across the country with illiquid investments that typically paid short-term rates of interest. In some cases, the auction rate securities paid no interest for months at a time. Therefore, investors were left holding a bag of illiquid long-term securities that paid little, if any interest.
Several class actions have been filed across the country on behalf of auction rate securities investors. In addition, numerous securities arbitration claims have been filed by investors. Some of these cases, as well as action by state regulators, has resulted in redemption of some investors’ auction rate securities. However, many investors remain stuck with these illiquid investments.
If you own auction rate securities that have not been redeemed, you may want to contact an attorney to discuss your rights. The Kueser Law Firm is a boutique legal practice that focuses its practice on protecting the rights of investors and recovering investment losses for companies and individuals. You may contact us by completing the form to the right, or by visiting our website.
According to a recent article on InvestmentNews.com, a study commissioned by Charles Schwab revealed that a significant percentage of investors are unaware of the losses sustained in their accounts. To make matters worse, more than one-third of the investors surveyed did not know which mutual funds they owned and less than one-third spoke with their financial advisor or stockbroker on a regular basis.
In the article, a Charles Schwab executive was quoted as stating that “some investors tend to be overwhelmed or intimidated by investing.” This is interesting because it confirms the important role that stockbrokers and financial advisors play in investors’ financial decisions. While this seems elementary, it astonishes me as to how many broker-dealers take the position in arbitration cases that the stockbroker or financial adviser played a passive role in the losses sustained in the investor’s accounts.
The survey also reported that 60% of the investors surveyed do not plan to make any changes to their investment allocations following the stock market’s rapid post-September descent. Stockbrokers and financial advisers often tell their clients to “stay the course.” In addition (or alternatively), many advisers and stockbrokers will show their clients charts or other documents that show how following a decline in the stock market a large portion of the recovery often occurs on select days — thus reinforcing their recommendation to stay the course, otherwise taking the risk that the investor will miss those few opportunities to participate in the recovery. Following this recommendation, clients feel forced to hold the same investments that created their losses.
It is important not to ignore losses in your investment accounts for many reasons, including but not limited to the following:
1. It is more difficult to recover from a significant loss than it is to sustain the loss in the first place. For example, if you start with $100,000 in an investment account and you sustain losses of 50%, the value of your account would be $50,000. Therefore, you would need a gain of 100% of this reduced amount ($50,000) in order to recover from the 50% loss you sustained.
2. If you are sustaining losses that cause you to lose sleep (or suffer other emotional distress), your investment accounts are probably invested in an unsuitable manner. This is something that you need to discuss with your stockbroker or financial adviser. If your adviser is unwilling to make significant changes to the accounts, or worse yet, if the stockbroker tries to reassure you that the investments are appropriate, you should seek a second opinion. In addition, you may want to consult with a securities attorney to discuss whether you have a legal claim.
3. If you decide to file a claim related to your losses, any failure to act could reduce or diminish your ability to succeed in arbitration or litigation. Whenever legal action is initiated, there are several issues related to the timing of the investor’s actions and the claim itself that must be considered (including statutes of limiations, equitable defenses, and arbitration eligibility rules).
When a stockbroker or financial adviser makes a recommendation to his or her client, they (and the firms they represent) may be liable for losses resulting from the recommendation. The Kueser Law Firm represents investors in securities arbitration. If you are concerned that your investments have been mismanaged, contact us to learn more about your rights.
Weeks after Edward D. Jones, Ameriprise, Linsco Private Ledger (LPL) and UBS announced that they were restricting the sale of leveraged ETFs (see here), two more broker-dealers have decided to take action related to their sales of these risky, and often misunderstood investments.
As reported by the Wall Street Journal, Morgan Stanley Smith Barney announced that it is reviewing its sales procedures related to leveraged ETFs. In addition, Charles Schwab issued an “unusual” warning to its clients that have purchased leveraged ETFs. This warning provides investors with some background discussion related to these risky investments, as well as examples of how hypothetical leveraged ETFs would perform in a few hypothetical situations.
Although many broker-dealers have instituted these measures, some broker-dealers continue to do nothing. For example, as reported in the Wall Street Journal article, Fidelity Investments continues to make leveraged ETFs available to their customers and leveraged ETFs remain available through TD Ameritrade’s web trading platform.
As previously stated in this blawg, the Financial Industry Regulatory Authority (FINRA) has declared that leveraged ETFs are typically unsuitable for retail investors. In addition, Massachusetts securities regulators have issued subpoenas to four firms in order to obtain information related to their sales practices involving leveraged ETFs.
Leveraged ETFs are unsuitable for retail investors because of their level of risk. The financial website Investopedia.com defines a leveraged ETF as “an exchange-traded fund (ETF) that utilizes financial derivatives and debt to amplify the returns of an underlying index.” The fund essentially borrows money and combines this money with investors’ money to purchase derivatives such as options, futures, or swaps. Because of the use of debt and derivatives, these ETFs carry a significant amount of risk. These funds also generally charge higher expenses to shareholders, which results in reduced returns (or increased losses if the market goes against the investment objective of the fund).
The most popular of these investments are managed by Rydex, Direxion, and ProShares. If your stockbroker or financial advisor has sold you any leveraged ETFs, or purchased any leveraged ETFs in your accounts, and you have lost money on these investments, you may be entitled to recover these losses. The Kueser Law Firm represents investors in securities arbitration. If you are concerned that your investments have been mismanaged, contact us to learn more about your rights.
On July 21, 2009, the Securities and Exchange Commission (SEC) charged Morgan Keegan & Company. In its Complaint, the SEC seeks an injunction for violation of the federal securities laws, as well as equitable relief for Morgan Keegan investors. Included in this equitable relief is a request for a court order requiring Morgan Keegan to repurchase illiquid ARS from its customers. More about the SEC’s case, including a link to the Commission’s Litigation Release and Complaint can be found here.
The SEC’s Complaint alleges that Morgan Keegan misled thousands of investors about the liquidity risks related to auction rate securities (ARS). This is another example of the massive fraud related to Auction Rate Securities that was perpetrated by financial services firms across the country. To date, several firms, including UBS, Wachovia, TD Ameritrade, Fidelity, and Stifel Nicolaus have entered into settlements with federal and/or state securities regulators. Some of these settlements have broader relief for investors, while others have left many investors still holding onto these illiquid investments.
If you were sold Auction Rate Securities and your positions have not been redeemed or repurchased, you should contact an attorney to discuss your rights. The Kueser Law Firm represents investors in securities arbitration and litigation. Feel free to contact us if you have any questions or would like additional information.
This morning, U.S. District Court Judge Denny Chin sentenced Bernard Madoff to the maximum sentence of 150 years of prison for his role in a “historic” multi-billion dollar fraud.
Judge Chin stated “Here the message must be sent that Mr. Madoff’s crimes were extraordinarily evil and that this kind of manipulation of the system is not just a bloodless crime that takes place on paper, but one instead that takes a staggering toll.”
Mr. Madoff’s “error of judgment” or “tragic mistake” (as he referred to his fraud) devastated the lives of thousands of people. While it is unlikely that Mr. Madoff’s former clients will receive any significant restitution, it is comforting to see that he was not able to buy leniency and that the maximum sentence was ordered.