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LJM Preservation & Growth Fund Investors May Have Claims Against Investment Advisers Who Are Not Parties to Class Actions

As we previously reported, investors in the LJM Preservation and Growth Fund (the “LJM Fund”) (LJMAX, LJMCX, LJMIX) sustained considerable losses in early February 2018, due to the LJM Fund’s risky underlying strategy premised on capturing income from options in a low-volatility market. Following the LJM Fund’s two-day decline of approximately 80% in trading on February 5th and 6th, one Morningstar analyst stated: “It may be the biggest two-day drop for a mutual fund ever.”

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According to public documents, a class action case brought in the U.S. District Court for the Northern District of Illinois and a related case brought in Illinois state court in Cook County have settled, with investors required to submit a proof of claim by December 11, 2019 in the federal action and by April 30, 2020 in the state action. However, the class action case settlement reportedly resolves claims against only certain parties defined as the “Settling Defendants”, including Two Roads Shared Trust, Northern Lights Distributors, LLC, NorthStar Financial Services Group, LLC, and Mark D. Gersten, Mark Garbin, Neil M. Kaufman, Anita K. Krug, Andrew B. Rogers, and James Colantino. The class notice in the federal class action is accessible here. LJM Class Notice Federal

Please note that Law Office of Christopher J. Gray, P.C. is NOT representing the Plaintiffs in the class action cases referenced above and is referring to the class action cases only to inform investors that they may potentially have rights of recovery against non-parties to the class actions. This article is not an official notice and is intended as attorney advertising.

Whether or not investors choose to file a proof of claim in the class action case, they may have separate legal claims against brokerage firms or financial advisors who recommended the LJM Fund. Many investors have reportedly bought into the LJM Fund on the recommendation of an investment advisor who, in turn, employed supposed third-party tactical mutual fund allocation through a “sleeves” strategy. The “sleeves” strategy has reportedly been espoused by Horter Investment Management, headquartered in Cincinnati, Ohio. A brokerage firm known as Cambridge Investment Research, Inc., headquartered in Fairfield, Iowa but reportedly maintaining over 2,000 branch offices, has also reportedly had customer claims filed against it involving LJM Fund, including one case in which a customer won an award in a Financial Industry Regulatory Authority arbitration proceeding.

From its 2013 inception, the LJM Fund purportedly 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.”

In lay terms, the fund’s “short volatility” investment strategy used to generate returns for investors was the equivalent of picking up nickels and dimes in front of a steamroller. This analogy is appropriate because, in order to execute on its “short volatility” investment strategy, the Fund implemented an options trading scheme called a “short strangle” – which is an options trading strategy widely known to have an unlimited downside (meaning no preservation) and limited upside (meaning no real growth). As a result, the name of the fund itself – LJM Preservation and Growth Fund – was misleading in that its true strategy exposed investors to potentially unlimited losses, with little upside growth potential. Any licensed investment advisor selling a fund that employs a complex options strategy like this is duty-bound to understand how the strategy works.

These basic facts about the LJM Fund were all available to brokerage firms and investment advisers prior to purchasing the fund for retail investors or recommending it to customers. Moreover, a cursory review of the fund’s performance from 2013 to the various dates of purchase would have revealed that while the fund’s returns for the same time period were smoother than the S&P 500, the fund had suffered large losses in 2014 and 2015 when the S&P 500 dropped. In short, the LJM Fund’s historic performance indicated that it presented a poor risk/reward tradeoff and the potential for large losses under certain market conditions. In addition to the high risk/low return proposition that the fund offered, LJM Fund was a very expensive fund to invest in for clients given the high expense ratio the I shares carried (2.43%).

Registered investment advisers owe a fiduciary duty to investors. Accordingly, investment advisers’ duty to investors includes conducting due diligence on any investment prior to its selection as part of a recommended investment strategy. Depending on the state, stockbrokers and brokerage firms may have a fiduciary duty to investors, but at a minimum have a duty only to make investment recommendations to customers that have a “reasonable basis” within the meaning of FINRA Rule 2111. Investors who sustained losses as a result of recommendations or investment management that did not live up to these standards may be able to recover their losses in arbitration proceedings or through litigation.

Investors with questions about a possible claim concerning a financial advisor, stockbroker or investment adviser concerning LJM Fund may contact Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.

PLEASE NOTE THAT LAW OFFICE OF CHRISTOPHER J. GRAY, P.C. IS NOT REPRESENTING PLAINTIFFS IN THE CLASS ACTION CASES REFERENCED ABOVE AND IS REFERRING TO THE CLASS ACTION CASE ONLY TO INFORM INVESTORS THAT THEY MAY HAVE RIGHTS OF RECOVERY AGAINST NON-PARTIES TO THE CLASS ACTION. THIS ARTICLE IS NOT AN OFFICIAL NOTICE AND IS INTENDED AS ATTORNEY ADVERTISING.