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Wall Street’s fastest growing trend is investing in Special Purpose Acquisitions Companies (“SPACs”).  SPACs are a way for private companies to go public without having to go through the traditional IPO process.  SPACs have been around for decades but have recently gained popularity in companies seeking to go public in this period of high market volatility.  Historically, SPACs were viewed as extremely risky investments.  The recent rise in SPACs does not change the high risks associated with them.  Some brokers and financial advisors ignore these risks and recommend customers invest in SPACs regardless of the customer’s investment profile and appetite for risk.  RIK’s investment fraud lawyers have extensive experience handling these types of cases and recovering losses for customers.

SPACs, also known as blank check companies, are companies created and publicly traded for the sole purpose of buying or merging with a private company in the future, known as the target company.  SPACs disclose criteria about the what kind of target company or companies it seeks.  Despite these disclosures, which are usually very limited and loosely defined, investors of the SPAC have no idea what the eventual acquisition company will be.  In other words, investors are going in blind.

In using SPACs to go public, private companies forego the process of registering an IPO with the SEC, meaning there is less oversight from the SEC.  The SPAC process also permits private companies to go public in a substantially shorter time period than a conventional IPO.  As one might suspect, the due diligence of the SPAC process is not as rigorous as a traditional IPO and no one is looking out for the best interests of investors.  Even worse, SPAC managers are not incentivized to obtain the best possible deal for investors – their job is to get a merger deal, not get the best deal.  Not surprisingly, this can lead to substantial harm to investors.  For example, the SPAC company may be overpaying for the target company – meaning investors are losing on the deal.

Annuities are insurance contracts that make routine payments to customers either immediately or at some point in the future.  This insurance contract allows investors to protect and grow their retirement savings while providing them with guaranteed income.  Some brokers and financial advisors recommend selling or exchanging annuities for “better” investment opportunities.  However, liquidating or exchanging an annuity comes with a high price– commissions, tax implications, and the loss of benefits associated with the original annuity.  For these reasons, liquidating or exchanging an annuity without very clear financial reasons may be  unsuitable for customers.  The securities fraud lawyers at Rich, Intelisano & Katz, LLP (RIK) have recovered millions for investors who suffered from annuity-related losses.

When investors sell or exchange their annuities, it comes with a heavy price.  First, when customers sell their annuity, they are subjected to costly fees and penalties.  For example, the customer may incur surrender charges and high cancellation fees.  Second, customers will lose all benefits associated with the annuity, such as legacy protection which is a death benefit to help provide a legacy for your loved ones.  Third, the customer forfeits expected benefits from the annuity– the customer will no longer have guaranteed income.  Fourth, taxes may become immediately due on the proceeds.  Lastly, there are often high commissions associated with the sale of annuities.

Regardless of the costs and losses associated with selling or exchanging annuities, brokers and financial advisors sometimes recommend such actions to customers in order to generate commissions for themselves.  Essentially, liquidating or exchanging annuities could potentially be a scheme for your broker or advisor to take money out of your savings and put it into their pocket.  What’s worse is that the broker or advisor will use your money from the sale of the annuity to purchase another annuity or other investment products further increasing commissions and fees.  Just like with any scheme to take advantage of customers, this is ill-suited and exceedingly improper.

Yes, many investors have filed claims to recover losses sustained as a result of their investments in NYC REIT, a real estate investment trust that purports to own “a portfolio of high-quality” commercial real estate located within the five boroughs of New York City.  This REIT began as a non-traded REIT, meaning it was not traded on an open exchange, making it is highly illiquid.  Not only was it difficult for investors to get out of their positions, share prices have dropped substantially since its initial private stock offering.  Investors were led to believe returns on the investment would exceed 10% on an annualized basis, but in reality, NYC REIT turned out atrocious for investors.  The securities lawyers at Rich, Intelisano & Katz (RIK) have been highly successful in recovering losses for investors who had positions in non-traded REIT investments.

NYC REIT is not a high-quality investment with annual returns exceeding 10%.  On the contrary, this REIT, like all REITs, is high risk and only suitable for a limited pool of investors – savvy investors who are wealthy and sophisticated with a long-term investment horizon.  First, NYC REIT is a non-traded REIT, which means it is significantly less liquid than REITs that trade on an open exchange.  As such, when investors want to sell their position, they are forced to sell their shares at a heavily discounted price.  Thus, non-traded REITs are rarely a suitable investment for most investors.  Second, NYC REIT owns only 8 mixed-use office and retail condominium buildings (which is miniscule compared to other REITS).  The limited portfolio creates an inherent high risk, such as limited diversification, less exposure to potential tenants, and the lack of ability to spread costs over a larger portfolio.  Unfortunately, NYC REIT severely underperformed and the risk associated with it became realized for many investors.

The NYC REIT was disastrous from the beginning.  The initial private stock offering price of the REIT was $25 per share.  By 2018, the price per share plummeted over 50%.  The board then decided to suspend future distributions – hurting investor cash flow.  Then, the board authorized a reverse stock split, an action that consolidates the number of existing shares of stock into fewer, proportionally more valuable shares (generally, a move to boost the company’s image if the stock price has dropped dramatically).  Then, when the REIT went public in August 2020, it was a complete failure.  NYC REIT, now trading on the New York Stock Exchange (“NYSE”) under the symbol “NYC,” dropped in value approximately 40% on the first day.  This abrupt decrease in share price left investors with significant losses.

Rich, Intelisano & Katz, LLP (RIK) filed a $3 million FINRA arbitration this month on behalf of clients that invested in UBS Financial Services, Inc.’s Yield Enhancement Strategy (YES).  UBS claimed the YES Program had minimal risk, but unbeknownst to its customers, the risks of this options trading strategy significantly outweighed any potential gain.  Unfortunately, investors around the world lost hundreds of millions of dollars investing in YES.

Although UBS and its brokers claimed the YES Program had limited risk of loss, in actuality, this was a high-risk strategy.  UBS implemented the YES Program beginning in 2016 after it recruited a high-profile team of brokers from Credit Suisse with massive up front bonuses.   To entice customers to invest, UBS represented that the YES Program was a low-risk way to generate incremental income of 3% to 6% annually (before the deduction of fees).  UBS further stated that the Program used protective options trading combinations to create a market-neutral strategy, meaning the Program’s performance would have little correlation to the markets, thereby protecting investors from significant losses.  These low-risk and loss protection statements made by UBS contradict the actual risks associated with the Program.

The fact is that the YES Program was a high-risk, complex options strategy that subjected UBS customers to significant market exposure and risk of loss.  This complex options strategy involved hundreds of combinations of puts and calls.  The complexity of the program and the lack of adequate risk controls exposed YES investors to significant risk of loss – loss that was far beyond the alleged risk protection.  Specifically, YES investors were exposed to 15% to 40% of losses depending on their holding period, even though their expected annual income was only 3% to 6%.  In sum, YES was not the low-risk, market neutral, downside protection strategy that UBS had stressed to its customers.

We are increasingly hearing from investors who say that their investment representative at their “self directed” broker dealer—such as T.D. Ameritrade—recommended an outside investment advisor who was not formally affiliated with the firm and incurred investment losses as a result.

There could be many reasons why this may happen: the investment representative may have a financial arrangement with the advisor, or a personal relationship, or even just trying to be helpful. However, this is a problem that is obviously foreseeable for such firms, and sometimes lands an unwitting investor with a fraudster.  In fact, such firms discourage their investment representatives from giving any investment advice because that can expose them bring to potential liability if the advisor or advice is unsuitable or fraudulent. Nevertheless, investment representatives sometimes make recommendations of outside unaffiliated advisors to their customers.  The question is can the firm be legally responsible if the recommended advisor’s strategy is not suitable or fraudulent. The general rule is that if an investment representative recommends that a customer use an outside advisor, or even brings such an advisor or her strategy to the attention of the customer, the firm may be liable in FINRA arbitration to the customer if the advisor/strategy is unsuitable or fraudulent and losses are incurred as a result.

Brokerage firms that use the self directed business model try to protect themselves by inserting language in their client agreements that purports to absolve them of such liability. However, FINRA frowns on brokerage firm attempts to insulate themselves contractually for liability resulting from breach by their registered representatives of industry rules, such as the suitability rule. In addition, at least one FINRA panel has awarded damages against T.D. Ameritrade in just such a case. https://www.finra.org/sites/default/files/aao_documents/18-01404.pdf

Many firms, such as TD Ameritrade, Charles Schwab and Fidelity, whose business model includes or is tailored primarily to investors who want the benefits of a self-directed account also offer to introduce investors who wish independent investment advice to professional investment advisors who are technically “unaffiliated” with the firm.  Such investment advisors are often small SEC Registered Investment Advisors (“RIA”s) who are thinly capitalized and have supervisory systems that are well below FINRA broker dealer standards. The brokerage firms contract with such RIAs to be on their platforms and available to provide advice to customers that the firm introduces them to.   Those contracts are often designed to, among other things, insulate the brokerage firm from liability for investment advice given to the investor. This is so even though the brokerage firms vet such advisors, who become part of a “platform” they market to investors. Investors who are “introduced” by their firm to an RIA who will provide them investment advice may not realize that the firm’s position is that if the advice is inappropriate the RIA and not the firm is legally responsible.  Indeed, the firms structure their contracts with the customer as well as the RIA to give them this protection. Customers can be easily misled by such “introductions” into believing that the firm stands behind the RIA. Although the legal documents, couched in legalese, may so specify, the customer, who often does not read all the legalese in these documents, can be forgiven for believing that the firm that recommended the advisor and investment plan should have some responsibility if that advisor acts improperly. Investors at such firms need to know that they are taking a risk that if their firm recommended RIA gives them unsuitable advice they may be stuck suing a potentially judgment proof RIA in court (rather than the more cost effective FINRA arbitration).

In a move intended to emphasize that FINRA’s ultimate mandate is to protect investors, the SRO’s National Adjudicatory Council last week issued newly-revised Sanction Guidelines including tougher ranges of recommended punishments to be meted out against member firms or brokers who commit fraud or make unsuitable recommendations to customers.

Since 1993, FINRA has maintained and published “Sanction Guidelines” setting forth common securities rule violations and the range of disciplinary actions FINRA can issue for such violations, including monetary fines as well as suspensions, bars from the industry and other sanctions.

Specifically, the revised Guidelines, announced in Regulatory Notice 15-15 available on FINRA’s website at www.finra.org, contain revisions to the Sanctions relating to two specific areas: (i) fraud, misrepresentations or material omissions of fact; and (ii) suitability and the making of unsuitable recommendations to investing customers. According to the Notice, the ramped-up sanctions are meant to reinforce that fraudulent conduct is unacceptable, and that FINRA adjudicators on the Regulatory side should consider strong sanctions for such conduct, including barring or expelling repeat offenders, particularly where aggravating factors outweigh mitigating ones. With regard to unsuitability, the heightened punishments include an increase in the high-end range of suspensions from one year to two, as well as recommending bars, suspensions or expulsions for the most egregious recidivists.

In what has become a hot issue this Spring, the Labor Department yesterday proposed a new set of standards for brokers who offer advice in connection with 401(k)’s and other retirement accounts. Currently, brokers are required only to recommend products that are “suitable” for investors, which permits the sale of products that earn the broker high fees. Reuters reports that the new standards will require brokers to put their clients’ best interests first ahead of any personal financial gain. The Labor Department proposal will require “best interest” contracts between brokers and investors.

Rich Intelisano and Katz LLP represents investors in FINRA arbitrations and other litigations against broker-dealers and other financial firms.

I noted in my March 20 post that the Chair of the SEC had just come out in favor of a rule requiring brokers to act in their clients best interests. While investors wait for the SEC to move forward on the issue, the New York City Comptroller, Scott Stringer, is proposing that New York State require brokers to disclose the present state of their relationship to clients – “I am not a fiduciary” and “I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks and expected returns for you.” The Wall Street Journal posited that New York’s adoption of such a requirement could spur other states to impose similar regulations.

A recent report by the Public Investors Arbitration Bar Association (“PIABA”) shows why Stringer’s proposal is critical. U.S. News describes the PIABA report which contrasted brokers’ advertising campaigns with the legal positions taken by those brokers in litigation against their clients. For example:

• Ad: “It’s time for a financial strategy that puts your needs and priorities front and center.”

Reuters reported that Mary Jo White, Chair of the U.S. Securities and Exchange Commission, came out in favor of creating of new rules to harmonize standards of care between investment advisers and brokers. Currently, investment advisers must act in a client’s best interest, while brokers may continue to sell products that primarily benefit their or their firm’s financial interests – so long as such products are “suitable” for the clients.

Wall Street has opposed efforts by the Department of Labor to craft rules governing such broker conduct and requiring them to put client’s interest first. White’s comments this week suggest that the SEC may be preparing to weigh in on the issue.

Rich Intelisano and Katz LLP represents investors in FINRA arbitrations and other proceedings against both investment advisers and brokers.

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