FINRA Sanctions Four Firms $9.1 Million for Stockbroker Fraud (Part 3)

This Month’s Stockbroker Fraud Sanctions

Last week, I breezed over some of the risk factors involved with leveraged and inverse ETF’s that allowed four prominent investment firms to be sanctioned by FINRA for committing stockbroker fraud. Today, I’d like to go further into those risk factors, which are not found with traditional ETF’s, and how those risk factor led to the crux of FINRA’s accusations. [1]

Leveraged ETF’s, Inverse ETF’s and Stockbroker Fraud

There are several risk factors associated with leveraged ETF’s and inverse ETF’s that do not exist with traditional ETF’s. These factors multiply risk over time. That means, the longer you hold leveraged and inverse ETF’s, the greater your risk and potential losses become. In a volatile market, these risks are magnified and losses compounded. Risk factors the four investment giants neglected to give their investors an education on states FINRAs stockbroker fraud accusation. These three risk factors are:

  1. Daily Resets – This means the products are set to achieve their objectives on a daily basis. Unfortunately, due to compounding, their performance over the long term can deviate pretty extremely from the performance of their underlying index or benchmark during the same timeframe.
  2. Compounding – Compounding is a process by which portion of the value of a product at a first point in time plus the gain/loss of a product over a period of time is exponentially and inversely less/more than the same sized portion at the end of the gain/loss time period. For instance, with compounding interest, If I owe a debt of $10,000 at 10% interest accrued monthly and I defer payments for 3 months, at the end of month 1 I will owe, $11,000 (and pay $1,000 in interest fees); at the end of month 2 I will pay interest on last month’s $1000 worth of interest accrued, compounding my debt to $12,100 (in month 2 an extra $100 of interest charged on interest was added); and at the end of month 3 I would owe $13,310. (In month three interest charged on interest over time compounded this month’s interest fees up to $1,210, instead of the initial $1,000 interest fee in month 1.) Due to this effect, a fluctuation from zero of 1% percent and back has exponentially less effect than a fluctuation from zero to 2% and back, making this risk factor a serious red flag in the volatile markets of 2008 and 2009.
  3. Leveraging – This means the ETF uses debt to amplify the returns of an index. In cases where the chosen product resets daily, this is not recommended, especially in a volatile market and especially not for longer term investment strategies. The risk is enormous and the potential losses could be devastating. [2]

Failure to make clients aware of these risks and failure to manage and train staff on these risks led to the FINRA sanctions of the firms for stockbroker fraud.

Best Help With Stockbroker Fraud

If you are not getting anywhere with resolving your investment disputes, believe you are the victim of stockbroker fraud or just need help discussing your options with the securities arbitration process, call S. David Anton of Anton Legal Group!

S. David Anton, Esquire is a Certified Arbitrator for the Financial Industry Regulatory Authority (FINRA), formerly the NASD, which is the national organization responsible for overseeing the securities industry. He has served as a Judge/Panelist and rendered decisions in many securities arbitration, giving him a unique perspective on his client’s cases.

AT 813-443-5249