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:

VelocityShares Daily 2X VIX Short-Term ETN (TVIX)

ProShares Short VIX Short-Term Futures (SVXY)

iPath S&P 500 VIX Short-Term Futures ETN (VXX)

VelocityShares Daily Inverse VIX Short-Term ETN (XIV)

ProShares Ultra VIX Short-Term Futures (UVXY)

ProShares VIX Short-Term Futures (VIXY)

Last year, FINRA reminded member firms of the dangers of selling such volatile products to ordinary investors. However, according to Bloomberg, these products have rapidly grown in popularity, and as much as $8 billion of financial products may have been tied to the VIX index alone.

Some investors with losses in these complex financial products may not have understood, or been informed by their financial advisor, of the extreme risk associated with investing in inverse ETFs. At a minimum, investors who are steered into inverse volatility-linked products as XIV should be fully informed of the characteristics and risk components of such investments. Furthermore, under FINRA Rule 2111, the so-called suitability rule, stockbrokers and investment advisors must have a reasonable basis for any investment recommendations that they make to a customer.

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 stockbrokers or investment advisors. 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.

Reportedly, in early 2012, one of LaRue’s clients made a complaint that LaRue had executed a series of unauthorized trades on her account prior to his departure. As a result of the complaint, the Arkansas Securities Department reportedly discovered similar problems in other customer accounts, as well as other violations.

“The unauthorized trading was occurring in margin accounts,” says Scott Freydl of the ASD. “In looking at this, we saw there were leveraged and inverse exchange traded funds. That’s when the issue of suitability came up.”

According to the allegations against him, LaRue made unauthorized trades in investments meant to be held for just one day; instead, he held them for days, weeks or months in client accounts. According to the findings, he bought and sold ETFs — short-term, speculative investment s— for one client account that stated “long-term growth with greater risk” as the listed investment objective.

According to securities arbitration lawyers, FINRA and the ASD sanctioned LaRue in October. He was fined $10,000 by each and his securities trading privileges were suspended. The ASD suspension ended on February 21, 2014 and the FINRA suspension ends on March 3. According to ASD findings, Stephens did not have a written compliance policy addressing inverse or leveraged ETF transactions until August 2009. Months later, the firm’s internal computer system could not track the sale of these products to enforce the new written policy. Stephens was fined $25,000 and paid $475,000 to settle a $1.9 million claim by one of LaRue’s clients.

Reportedly, unauthorized trading and the unsuitable sale of inverse and leveraged ETFs increased following the 2008 economic downturn. As a result, investment fraud lawyers have filed numerous arbitration claims on behalf of investors who suffered significant losses in inverse and leveraged ETFs. “We saw an explosion of non-traditional investments,” notes Heath Abshure, ASD Commissioner and last year’s president of the North American Securities Administrator Association. “Instead of sophisticated investors, we started seeing Ma and Pa buy. It’s common to push non-traditional investments during times of market fears.”

LaRue worked for Stephens from October 1998 until August 2011. From September 2011 until his regulatory suspension, LaRue worked for Morgan Keegan & Co. in the Conway offices, and Raymond James & Associates following its acquisition.

If you suffered significant losses as a result of unauthorized and/or unsuitable trades in exchange-traded funds, you may be able to recover your losses through securities arbitration. To find out more about their legal rights and options, contact a stock fraud lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyes.net for a no-cost, confidential consultation.

The U.S. District Court for the Southern District of New York recently dismissed the class action lawsuit that was reportedly filed in 2009. According to securities arbitration lawyers, reports indicated that the plaintiffs’ claims that certain risks were omitted from the registration statements disclosures were rejected by the courts. Reportedly, these omitted risks were associated with holding inverse and leveraged exchange-trade funds, or ETFs, for periods exceeding one day.

In a warning issued by FINRA, the regulatory authority stated that leverage inverse ETFs are unsuitable for ordinary investors and that these investments should be held for a short time period only. Brokers have been known to sell ETFs and ETNs as conservative ways to track a sector of the market, or the market as a whole. However, complicated trading strategies are necessary to accomplish this, and using these investments to track a sector of the market may or may not be a conservative trading strategy. This depends on the sector of the market and assets in the account relative to the investment’s concentration level. For more information on ETFs and ETNs, see the previous blog post, “Investors Could Recover Losses from their Inverse ETF and ETN Investments.”

Following the dismissal of the class action lawsuit, investors who suffered losses as a result of their investment in the ProShares ETF are seeking alternative methods for recovering their losses. Those investors can contact a securities fraud attorney about filing a Financial Industry Regulatory Authority arbitration claim against the broker-dealer or financial advisor that recommended the investment. In many cases, firms, brokers and/or advisors can be held liable for investor losses if they failed to fully disclose the risks associated with the investment or recommended an investment that was unsuitable for the investor.

If you suffered losses in ProShares exchange-traded funds, you could recover your losses through securities arbitration. To find out more about your legal rights and options, contact a securities arbitration lawyer at The Law Office of Christopher J. Gray at (866) 966-9598 for a no-cost, confidential consultation.