As recently reported, Brandon Curt Stimpson (CRD# 4299623) has been discharged from employment with broker-dealer Allegis Investment Services, LLC (CRD# 168577, hereinafter referred to as “Allegis”). According to FINRA BrokerCheck, Mr. Simpson’s affiliation with Allegis was terminated on or about December 13, 2017, in connection with allegations that he “[f]ailed to follow firm policies and code of ethics.”

While BrokerCheck does not provide any further information as to Mr. Stimpson’s purported misconduct, a recently reported FINRA customer award appears to shed some light on the issue. Specifically, on or about March 6, 2018, a panel of FINRA arbitrators issued an award against Allegis and Mr. Stimpson in the amount of $404,182 (the “Award”). The Award consists of $287,350 in compensatory damages, $53,730 in pre-judgment interest, reimbursement of $20,000 in fees and costs (including expert witness fees), as well as attorneys’ fees in the amount of $60,000 pursuant to Utah case law and statute.

This Award — which holds Allegis and Respondent Brandon Stimpson jointly and severally liable — was rendered following nine hearing sessions in February 2018. The causes of action raised by Claimant included unsuitability, unauthorized trading, failure to supervise and breach of fiduciary duty, in connection with “[t]he buying and selling of unspecified put options tied to the performance of the Russell 2000 Index.” According to Claimant’s attorney, Mr. Stimpson allegedly invested more than 25% of Claimant’s portfolio in index options.

As we have discussed in several recent blog posts, a put option is a contract that allows the purchaser of the underlying contract to sell a security at a specified price (the strike price). As a general proposition, this allows the purchaser to hedge a position or a portfolio, by essentially creating a price floor, such that a drop in a security price below a certain level will deliver a profit on the option contract.

On the other hand, when an investor — or financial advisor recommends selling a put option — the seller is betting that the price will stay higher than the option price. Moreover, in instances when the seller of the option contract does not own the underlying security, then the seller is engaged in naked option writing. This is an extremely risky strategy that is likely not suitable for the average, retail investor.

Mr. Stimpson was most recently affiliated with Allegis (2014 – 2017), and previous to that, he was affiliated with Signator Financial Services, Inc. (CRD#19061) (2010-2014). Further, BrokerCheck indicates that Mr. Stimpson has been involved in a total of eight customer disputes.

The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience in representing investors in cases involving non-traditional investment products, including managed futures, leveraged and/or inverse funds, as well as option contracts and option strategies. Investors may contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.

Investors in the LJM Preservation and Growth Fund suffered substantial losses in early February, 2018 as volatility in broad stock market indices spiked. LJM Preservation and Growth Fund (“LJM P&G Fund” or the “Fund”) (LJMAX, LJMCX, LJMIX) is a mutual fund advised by LJM Funds Management, Ltd., (“LJM”). LJM is headquartered in Chicago, IL, and was founded in 2012, as an affiliate of LJM Partners, an investment management firm that has been managing alternative investment strategies since 1998.

Since its inception in 2013, the LJM P&G Fund has employed an investment strategy that “seeks capital appreciation and capital preservation with low correlation to the broader U.S. equity market. The Fund attempts to profit, primarily, from the volatility premium – the spread between implied volatility (investors’ forecast of market volatility reflected in options pricing) and realized (actual) volatility. The Fund aims to capture this premium by writing (selling) call and put options on S&P 500 Index futures.”

A put option is a contract that allows the purchaser of the underlying contract to sell a security at a specified price (the strike price). This allows the purchaser to hedge a position or a portfolio, by essentially creating a price floor, where a drop in a security price below a certain level will nevertheless deliver a profit on the option contract. Conversely — when an investor, or institutional fund manager, sells a put option — the seller is betting that the price will stay higher than the option price. And in instances when the seller of the option contract does not own the underlying security, then the seller is engaged in naked option writing. This is an inherently risky strategy fraught with risk; in fact, some market pundits have referred to selling naked puts as “picking up nickels in front of a steamroller.”

As we discussed in several recent blog posts, investing in volatility-linked products is extremely complex and risky, and therefore, not likely a suitable strategy for the average, retail investor. In the same vein, writing put options – particularly naked put options – against an index such as the S&P 500 may prove to be a recipe for disaster. In part, S&P 500 option prices are determined by market volatility.

In the case of LJM P&G Fund, disaster struck on February 5, 2018, when the Fund cratered in value, its share price dropping from $9.67 to $4.27 (a 55.8% decline). The following day, February 6, saw more hemorrhaging as the Fund suffered another sharp decline of 54.6% to close at $1.94 per share. Following the Fund’s two-day decline of 80%, Gretchen Rupp of Morningstar indicated that “It may be the biggest two-day drop for a mutual fund ever.”

An 80% decline over two trading days for LJM P&G Fund is of grave concern, particularly when the Fund is marketed as a vehicle seeking capital appreciation and preservation. It is likely that many investors who bought into the Fund may well not have understood, or been informed by their financial advisor, of the extreme risk associated with investing in such a complex and risky investment product that utilized an extremely risk naked put option strategy to generate returns.

The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience in representing investors who have sustained losses due to the negligence or misconduct of their broker and/ brokerage firm. In particular, the firm has handled cases concerning certain non-traditional, or exotic investment products, including managed futures and leveraged and/or inverse ETFs and ETNs. Investors may contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.