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Investors who bought into inverse volatility-linked exchange traded funds (ETFs) on the recommendation of their broker or financial advisor may be able to recover their losses in FINRA arbitration.  Inverse volatility-linked investments are designed to return a profit when the market experiences periods of calmness, or low volatility.  However, unlike more traditional investments and strategies such as a buy-and-hold stock portfolio, investing in volatility-linked products is extremely complex and risky, and therefore, not likely a suitable strategy for the average, retail investor.

Certain inverse ETFs are structured to provide investors with returns that are positive when the  CBOE Volatility Index (the “VIX”) falls, and negative when the VIX rises, and investors in these products essentially are taking the view that the market will remain relatively steady.  However,  earlier this month stock market volatility and the VIX rose rapidly as the stock market whipsawed erratically.

ETFs that lost value during this market turmoil include the following:

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Money MazeFinancial advisor Melvin Elwood Case (CRD# 2393464) has been suspended from the securities industry.  According to publicly available information through FINRA, on January 19, 2018, Mr. Case, without admitting or denying FINRA Enforcement’s findings, consented to being barred from the securities industry in all capacities for a period of six months (the suspension is set to terminate on August 4, 2018).

Specifically, FINRA enforcement entered into a settlement via Acceptance, Waiver and Consent (“AWC”) with the Respondent, pursuant to which Mr. Case consented to a finding that he “willfully omitted to state a material fact on a Form U4, and that under Section 3(a)(39)(F) of the Securities Exchange Act of 1934… this omission makes him subject to a statutory disqualification with respect to association with a [FINRA] member.”  As disclosed by FINRA, Mr. Case pled guilty to a felony charge of exploitation of an aged adult on or about August 2016.  It appears that final adjudication of guilt was withheld, and Mr. Case was placed on probation for a period of 24 months.

Based on his purported failure to report his criminal infraction to his employer, LPL Financial LLC (“LPL”) (CRD# 6413), Mr. Case was terminated by LPL on or about May 2, 2017.  As disclosed through FINRA, Mr. Case’s termination by LPL concerned allegations of “criminal charges involving exploitation of an aged adult after converting the victim’s money for his own benefit.”

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Apartment BuildingInvestors in American Finance Trust (“AFIN”), formerly known as American Realty Capital Trust V, Inc., may have arbitration claims to be pursued before the Financial Industry Regulatory Authority (“FINRA”), if their AFIN position was recommended by an investment advisor who lacked a reasonable basis for the recommendation, or if the nature of the investment was misrepresented by the stockbroker or financial advisor.  According to its website, AFIN is structured to protect shareholder capital and produce stable cash distributions through the acquisition and management of a diversified portfolio of commercial properties leased to investment grade tenants.

AFIN is a publicly registered non-traded real estate investment trust (“REIT”) that is based in New York, NY.  Incorporated in early 2013 as a Maryland REIT, AFIN is registered with the SEC, and therefore, the non-traded REIT was permitted to sell securities to the investing public at large, including numerous unsophisticated retail investors who bought shares through the initial public offering (“IPO”) upon the recommendation of a broker or money manager.

According to publicly available information through the SEC, MacKenzie Capital Management LP (“Mackenzie”) recently made an unsolicited tender offer to purchase up to 1 million shares of AFIN common stock at $13.66 per share.  This tender offer is set to expire on March 22, 2018, unless extended.

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House in HandsAs highlighted in our previous blog posts concerning the Woodbridge Group of Companies (“Woodbridge”) of Sherman Oaks, CA, Woodbridge filed for Chapter 11 bankruptcy on December 4, 2017, in Delaware Bankruptcy Court (Case No. 17-12560-KJC).  Thereafter, on December 21st, the Securities and Exchange Commission (“SEC”) formally filed charges against Woodbridge and its owner and former CEO, Robert Shapiro, alleging that “[D]efendant… used his web of more than 275 Limited Liability Companies to conduct a massive Ponzi scheme raising more than $1.22 billion from over 8,400 unsuspecting investors nationwide through fraudulent unregistered securities offerings.”

By January 2, 2018, the SEC further alleged, among other things, that the timing of the Chapter 11 proceeding called into question whether Mr. Shapiro had preemptively sought bankruptcy protection, in the first instance, in order to shield himself from impending charges of misconduct, and sought appointment of an independent trustee.

On January 23, the SEC announced a resolution under which the Bankruptcy Court for the District of Delaware approved a settlement Term Sheet, calling for the appointment of a new Board of Managers consisting of representatives recommended by the parties which will take necessary actions for managing Woodbridge, with the first course of action to be selecting a CEO or Chief Restructuring Officer for the Debtors. The Term Sheet also calls for the formation and appointment of Unitholders and Noteholders committees to represent the interests of investors who purchased Woodbridge notes and unit investments.

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Piggy Bank in a CageIf you have invested with financial advisor Gina Chaney (CRD# 1628957) and have sustained losses, you may be able to recover your losses in FINRA arbitration.  According to publicly available information through FINRA, on September 29, 2017, Ms. Chaney was discharged from employment by her former firm, Center Street Securities, Inc. (“Center Street”) (CRD# 26898).

FINRA records indicate that Ms. Chaney was employed with Center Street of Stone Mountain, GA, for only a brief period of time in 2017.  Prior to her employment with Center Street, Ms. Chaney was affiliated with a number of brokerage firms, including most recently Next Financial Group, Inc. (CRD# 46214), from September 2016 – October 2017, and Dempsey Lord Smith, LLC (CRD# 141238), from November 2011 – September 2016.

According to publicly available information through FINRA’s BrokerCheck, Ms. Chaney was discharged from her employment with Center Street due to “non-compliance with firm policy requiring pre-approval of fixed indexed annuity applications.”

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financial charts and stockbrokerInvestors who bought into Credit Suisse’s Velocity Shares Daily Inverse VIX Short Term Exchange-Traded Note (“XIV”) on the recommendation of their broker or financial advisor may be able to recover their losses in FINRA arbitration.  As we discussed in several recent blog posts, inverse volatility-linked investments are designed to return a profit when the market experiences periods of calmness, or low volatility.  However, unlike more traditional investments and strategies such as a buy-and-hold stock portfolio, investing in volatility-linked products is extremely complex and risky, and therefore, not likely a suitable strategy for the average, retail investor.

By design, Credit Suisse’s XIV was structured to provide investors with the opposite return of the CBOE Volatility Index (the “VIX”), or the so-called ‘fear-index’, and was thus essentially a bet that the market would remain calm.  Earlier this month — as the market’s prior 12-month rally gave way to a sharp rise in volatility and an approximate 8% loss in the S&P 500 index, this inverse or short volatility trade proved to be an absolute train wreck.

As stocks returned all the year’s gains in trading on Monday, February 5, the VIX skyrocketed to 37 by close of trading, an increase of 95%.  Unsurprisingly, many inverse volatility-linked investment vehicles sustained massive losses.  Among the hardest hit ETNs was Credit Suisse’s XIV, which plunged approximately 90% in value.  In light of XIV’s losses, Credit Suisse recently announced that the last day of trading for VelocityShares Daily Inverse VIX Short-Term Exchange-Traded Note will be Tuesday, February 20, 2018.  Credit Suisse has elected to trigger an accelerated liquidation of XIV because the product could no longer perform as it was designed.

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money whirlpoolInvestors who have lost money on the recommendation of their broker or financial advisor to invest in volatility related financial products may be able to recover their losses in FINRA arbitration.  As we discussed in a recent blog post, inverse volatility-linked investments are designed to return a profit when the market experiences periods of low volatility.  Unlike more traditional investments and corresponding strategies such as a buy-and-hold stock portfolio, investing in volatility-linked products is likely not a suitable strategy for the average, retail investor.  In fact, when volatility-linked ETFs first began rolling out in early 2011, Michael L. Sapir, Chairman and CEO of ProShare Capital Management, stated that “The intended audience for these ETFs are sophisticated investors.”

Put simply, investing in a volatility-linked product is a very risky enterprise that is likely only suitable for professional investors seeking to trade on a short-term basis (e.g., several hours or day trading).  Further, because the VIX or so-called ‘fear index’ is not actually tradeable, investors who wish to invest in the VIX must trade derivatives instead (including volatility-linked ETFs and ETNs).  And when it comes to investing in derivatives, such as future contracts and options on futures, the majority of retail investors do not fully understand the extreme volatility and risk associated with these complex investment products.

Earlier this month, equity indices declined sharply following a steady rally in the prior 12 months that saw the benchmark S&P 500 stock index gain nearly 20%.  It was during this year-long market rally that many retail investors were lured into investing in inverse volatility-linked products, essentially seeking to capture even bigger gains, provided that there was no price correction.  However, the idea of shorting volatility, or betting on calm stock market conditions, is a strategy best suited for sophisticated, institutional investors.

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Money in WastebasketOn February 9, 2017, FINRA Enforcement signed off on a Letter of Acceptance, Waiver and Consent (“AWC”) between FINRA and former financial advisor Matthew C. Maczko (“Maczko” or “Respondent”) (CRD# 1888519).  Without admitting or denying FINRA’s findings, Mr. Maczko voluntarily consented to an industry bar from associating with any FINRA member firm in any capacity.

Mr. Maczko first became associated with a FINRA member firm in 1988 as a general securities representative under the employ of UBS Financial Services Inc. (“UBS”) (CRD# 8174).  During the course of his career, he worked at UBS for nearly twenty years, and thereafter, from 2008-2016, worked as a registered representative for Wells Fargo Advisors, LLC (“Wells Fargo”) (CRD# 19616).

According to the AWC, “[M]aczko had been terminated on September 2, 2016” by Wells Fargo in connection with the brokerage firm’s “[i]nternal review for adherence to industry standards of conduct based on concerns about the level of trading in a customer account.”  Furthermore, the AWC specifically referenced the following instance of alleged excessive trading, or churning, purportedly conducted by Maczko while affiliated with Wells Fargo:

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broker misappropriating client moneyA number of investors have recently filed arbitration claims with the Financial Industry Regulatory Authority (“FINRA”) against broker Austin Richard Dutton, Jr. (CRD# 2739167).  Publicly available information indicates that Mr. Dutton was previously affiliated with Newbridge Securities Corporation (“Newbridge”) (CRD# 104065) from 2007-2017.  Currently, Mr. Dutton is affiliated with Sandlapper Securities, LLC (“Sandlapper”) (CRD# 137906), and conducts his financial advisory business through his own independent firm, Bridge Valley Financial Services, LLC.  Upon information and belief, Mr. Dutton marketed certain risky non-traded investment products to a client base which includes Philadelphia law enforcement and firefighters.

According to publicly available information, Mr. Dutton appears to have recommended and sold certain complex and risky non-conventional investments (“NCIs”) including direct participation programs (“DPPs”) and non-traded financial products, including non-traded REITs.  In particular, it appears that Mr. Dutton recommended and sold numerous non-traded REITs previously packaged and marketed by Nicholas Schorsch’s firm, American Realty Capital (ARC), now known as AR Global.

FINRA disclosures concerning Mr. Dutton include, but are not limited to, four pending customer complaints and a July 2017 regulatory enforcement proceeding by state securities regulators.  Of the pending complaints, three pending customer disputes were filed in December 2017 and all center on allegations of unsuitability, misrepresentations, and omissions of material facts concerning the risks and features of certain securities.

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Investors in AEI Accredited Investor Fund V, L.P. (“AEI V” or the “Limited Partnership) may be able to recover losses on their investment through initiating an arbitration proceeding with FINRA Dispute Resolution, if the recommendation to invest in FSEP was unsuitable, or if the broker or financial advisor who recommended the investment made a misleading sales presentation.   AEI V is structured as a Minnesota limited partnership and is based in St. Paul, MN.  The Limited Partnership was formed as a capital investment entity for the purpose of investing in a portfolio of income producing commercial real estate.

Money MazeOn May 29, 2013, AEI V first offered securities through its private placement pursuant to Regulation D (“Reg D”) of the federal securities laws.  The total initial offering amount was $1,915,573, and investors who participated in the offering were required to invest a minimum of $5,000.

In general, limited partnerships — particularly non-traded limited partnerships, such as AEI V — are very complex and risky investments.  For this reason, investing in a limited partnership through a private placement is typically only available to accredited investors (to be accredited an investor must have an annual income of $200,000 or joint annual income of $300,000, for the last two years, or alternatively, have a net worth in excess of $1 million).

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