Articles Posted in ETFs

Stoltmann Law Offices are investigating cases where brokers have sold clients single-stock, Exchange-Traded Funds (ETFs). Massachusetts Secretary of the Commonwealth William Galvin office has announced a probe of single stock ETF offerings, according to Investment News. Galvin’s office, Investment News reports, is “seeking to protect ‘Main Street investors’ from harm by initiating a sweep of complex single stock exchange traded fund offerings recently made public.”

“These are risky products, investing in only one stock, with no diversity cushion whatsoever,” Galvin said in a statement. “For nearly all Main Street investors, there is no difference between investing your money in single-stock ETFs and gambling with that money at a casino,” he added. “Under no circumstances should an investor use these products as a long-term investment.”

ETFs are typically broad-based baskets of stocks, bonds and other securities in one package. They are known for their tradability and relatively low costs. But some of these products can pose high risks to investors, who can lose money.

Chicago-based Stoltmann Law Offices is representing investors who’ve suffered as a result of financial advisors recommending high risk leveraged exchange-traded funds (ETFs).  Broker-dealer Purshe Kaplan Sterling Investments was charged by the Massachusetts Securities Division with selling “unsuitable investments to investors while operating as independent investment advisers of Harvest Group Wealth Management,” according to thediwire.com.  “Despite warnings from FINRA that leveraged exchange-traded funds are typically unsuitable for average investors who plan to hold them for more than a day, the Harvest Group invested more than 340 client accounts in leveraged exchange-traded funds for days, weeks, months, and even a year,” the state regulator stated. FINRA is the federal regulator of the U.S. securities industry.

According to the Massachusetts complaint, “more than $2.3 million in losses were incurred as a result of unsuitable investments in leveraged ETFs. Purshe Kaplan had a duty to review the transactions as part of their supervisory responsibilities, even though they were conducted outside of the firm.”

Investments like ETFs can be highly leveraged, which means they carry high downside risk and can easily lose money under certain market conditions. Brokers are under a legal obligation to carefully vet all trades and investments with you to ensure that the investments they are selling meet your financial goals and risk tolerance. Leveraged ETFs specifically, are designed to be trading vehicles, not held long-term, because they will not achieve their stated objectives long-term. They are designed to achieve their objectives daily, and are totally unsuitable for buy-and-hold investors. Unfortunately, many financial advisors do not understand this.

Chicago-based Stoltmann Law Offices represents investors who’ve suffered losses from dealing with financial advisors who recommended investments linked to Russia with inappropriate risk for their clients. Financial advisors sometimes ignore the political risk of the investments they are selling at great peril to their clients. Case in point was the recent massive devaluation of Russian bonds that resulted from Vladimir Putin’s invasion of Ukraine, which triggered a punitive wave of sanctions from the U.S. and European Union.

Certain Russian bond prices were cut to zero after the country’s invasion of Ukraine. That was also bad news for investors in those bonds, who were forced to add more cash to margin brokerage accounts since the securities could no longer be used as collateral. Further, Moody’s the credit rating agency, cut Russia’s credit rating to Ca, which is one step above full default.

The Swiss wealth manager UBS “is calling on some investors to add either cash or securities to their portfolio after cutting the lending value of some Russian bonds to zero, people with knowledge of the matter said,” according to Yahoo Finance. Here’s more bad news for UBS clients and holders of certain Russian bonds: “UBS may liquidate the securities at market value for those clients that can’t meet the additional requirements, the people said, asking not to be identified as the matter is private.”

Chicago-based Stoltmann Law Offices is investigating financial advisors who switch clients into more expensive alternative investments that trigger unnecessary fees and investment losses.

FINRA, the federal securities industry regulator, has settled charges with McNally Financial Services Corporation that the broker-dealer failed “to develop appropriate oversight procedures for sales of non-traditional exchange traded products (ETFs).” The regulator found that the firm “failed to supervise a representative offering complex options trading to customers and determined that a firm representative recommended trades with, in some cases, a maximum potential loss nine times higher than maximum potential gain, and in other cases, with an assured loss.”

Brokers often recommend and trade “non-traditional” vehicles such as options contracts and Exchange-Traded Products (ETPs) with the promise of offering higher returns. These products, however, carry higher risk and generate exorbitant fees and commissions for brokers. These investments, Finra notes, “typically are not suitable for retail investors who plan to hold them for more than one trading session.”

Would you complain about your broker to the Financial Investor Regulatory Authority (FINRA) if you thought your odds of success were good?  They are, at least so far in 2019.  In the first half of 2019, investors won 44 percent of the arbitration cases they filed against brokers and brokerage firms from January through June of this year, according to FINRA statistics.  This is an improvements from the 38 percent investor win rate five years ago.

Another piece of good news for investors is mediation cases are being decided faster.  Mediation is a common way to resolve investor cases filed with FINRA without having to go through an arbitration hearing.   The turnaround time it takes to resolve cases through mediation has shrunk from 126 days to 93 days, a 26 percent improvement.

The number of private equity claims filed by investors cases are increasing as more of these types of investment products are appearing in the portfolios of retail investors with 63 claims filed in the first half of 2019 compared to 54 filed in all of 2018.  Investors are also bringing more actions involving Real Estate Investment Trusts (REITS) while claims involving Exchange Traded Funds (ETFs) declined by close to half from January to June 2019 (60) compared to January to June 2018 (104).  Claims involving muni bonds, a mainstay of retirees aiming to safeguard their principal, have also dropped from 331 from 462.

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