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MetLife Variable Annuities

FINRA has notified MetLife that it is recommending disciplinary action due to its sales of variable annuities. FINRA’s  concerns include misrepresentations, unsuitable investments, and supervision in connection with the sales and replacements of variable annuities and certain riders associated with them. Please contact us if you have any questions or concerns about your purchase of MetLife variable annuities.

SEC Slams UBS Over its Sale of Structured Notes

As reported by The Wall Street Journal on October 13, 2015 (“UBS in $19.5 Million Settlement Over Structured Notes”), UBS Group AG has agreed to pay $19.5 million to settle charges from the U.S. Securities and Exchange Commission that the firm had provided false or misleading information to investors in materials related to structured debt securities that were linked to a proprietary foreign exchange trading strategy.

Between $40 billion to $50 billion of structure notes are registered with the SEC per year, with many of those notes sold to relatively unsophisticated retail investors.

The case is reportedly the SEC’s first enforcement action involving misstatements and omissions by an issuer of structured notes, a complex financial product that typically consists of a debt security with a derivative tied to the performance of other securities, commodities, currencies, or proprietary indexes.

UBS, one of the largest issuers of structured notes in the world, agreed to settle the SEC’s charges that it misled U.S. investors in structured notes tied to the V10 Currency Index with Volatility Cap by falsely stating that the investment relied on a “transparent” and “systematic” currency trading strategy using “market prices” to calculate the financial instruments underlying the index, when undisclosed hedging trades by UBS reduced the index price by about five percent.

According to the WSJ article and the SEC’s settlement order, UBS offered and sold about $190 million of medium-term notes linked to the V10 Currency Index to roughly 1,900 individual investors in the U.S. between December 2009 and November of 2010.

According to the SEC’s order instituting a settled administrative proceeding:

  • UBS perceived that investors looking to diversify their portfolios in the wake of the financial crisis were attracted to structured products so long as the underlying trading strategy was transparent.  In registered offerings of the notes in the U.S., UBS depicted the V10 Currency Index as “transparent” and “systematic”;
  • Between December 2009 and November 2010 approximately 1,900 U.S. investors bought approximately $190 million of structured notes linked to the V10 index;
  • UBS lacked an effective policy, procedure, or process to make the individuals with primary responsibility for drafting, reviewing and revising the offering documents for the structured notes in the U.S. aware that UBS employees in Switzerland were engaging in hedging practices that had or could have a negative impact on the price inputs used to calculate the V10 index;
  • UBS did not disclose that it took unjustified markups on hedging trades, engaged in hedging trades with non-systemic spreads, and traded in advance of certain hedging transactions;
  • The unjustified markups on hedging trades resulted in market prices not being used consistently to calculate the V10 index.  In addition, UBS did not disclose that certain of its traders added spreads to the prices of hedging trades largely at their discretion; and
  • As a result of the undisclosed markups and spreads on these hedging transactions, the V10 index was depressed by approximately five percent, causing investor losses of approximately $5.5 million.

The SEC settlement includes a civil penalty of $8 million and a combined $11.5 million of disgorgement and prejudgment interest.

The SEC’s release relating to this enforcement action can be accessed at http://www.sec.gov/ news/pressrelease/2015-238.html and the SEC’s Order can be accessed at http://www.sec.gov/ litigation/admin/2015/33-9961.pdf.

If you are an individual or institutional investor who has any concerns about your investment in structured notes, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Oil and Gas Investment Schemes

Oil and gas investment scams are alive and well. High oil prices have created a heightened interest in investments in energy-related business ventures. Most oil and gas investment opportunities, while involving varying degrees of risks to the investor, are legitimate in their marketing and responsible in their operations. However, as in many other investment opportunities, it is not unusual for unscrupulous promoters to attempt to take advantage of investors by engaging in fraudulent practices.

Although some of the con artists moved on to more lucrative venues since the oil boom ended in the mid-1980s, many continued to linger on in the oil field. Now with the constant fluctuation of oil prices, some of these people have made their way back to these kinds of scams. When there is a highly publicized economic circumstance, which creates an opportunity for money to be made legitimately, scamsters follow in the shadows to take advantage of the situation.

Oil and gas investments take many forms, including limited partnership interests, ownership of fractional undivided interests in leases, and general partnerships. Tax consequences and investor participation vary according to the type of program.

In a drilling limited partnership, an oil or gas company sells partnership units to investors and uses the money it raises to lease property and drill wells. In return for managing the project, the sponsor company usually takes an upfront fee that averages about 15-16% of one’s investment (commonly referred to as tangible and intangible drilling costs) and also shares in a percentage of any revenue generated. In return, the promoter offers the investor the prospect of a substantial first year tax write-off and potential quarterly cash distributions from the sale of any oil and gas the partnership finds until the wells run dry.

Drilling partnerships have always been a gamble, but recently, they have proven somewhat riskier than usual. This type of investment is very speculative, is a highly illiquid investment and can have a long holding period.

Fraudulent oil and gas deals are frequently structured with the limited partnership (or other legal entity) in one state, the operation and physical presence of the field in a second state, and the offerings made to prospective investors in states other than the initial two states. Thus there is less chance of an investor dropping by a well site or a nonexistent company headquarters. Such a structure also makes it difficult for law enforcement officials and victims to identify and expose the fraud.

In order to attract the interest of potential investors, unprincipled promoters frequently use the Internet and “boiler room” offices with banks of phones manned by salespeople with little or no background in energy exploration, but plenty of experience in high-pressure sales. Their techniques include repeated unsolicited phone calls to members of the public, hyping the profitability of the deal. Some swindlers use professionally designed brochures.

Some of the following claims are common in a typical high-pressure sales pitch, whether through unsolicited telephone calls or e-mail messages:

  • You will have an interest in a well that cannot miss;
  • The risks are minimal;
  • A geologist has given the salesperson a tip;
  • The salesperson has personally invested in the venture;
  • The promoter has “hit” on every well drilled so far;
  • There has been a tremendous “discovery” in an adjacent field;
  • A large, reputable oil company is operating or planning to operate in the area;
  • Only a few interests remain to be sold and you should immediately send in your money in order to assure the purchase of an interest;
  • This is a special private deal open only to a lucky chosen few investors.

If you receive an unsolicited telephone call about an oil and gas investment, the first critical step that you should do is to call your state securities regulator and check on the investment opportunity, the salesperson and the promoter.

If you are an individual or institutional investor who has any concerns about an oil and gas investment having been purchased in your individual and/or retirement account, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Oil and Gas Terms

Crude Oil: Crude oil is, quite simply, oil in its natural state. It is what is extracted from the ground. Often described as the world’s most important commodity, crude oil is what refineries use to make products such as gas, diesel fuel and kerosene.

Crude oil can be categorized as “light,” “heavy,” “sweet” and “sour.” The latter two are a nod to the days when oil prospectors would actually taste oil to get a sense of its composition. Crude oil that contained less sulfur was considered sweet, while oil with more sulfur tasted sour. Light crude oil has a lower density than heavy crude oil. Light, sweet crude oil is the easiest and cheapest to refine into gasoline and diesel fuel.

Hydraulic Fracturing: Hydraulic fracturing, otherwise known as fracking, has gotten a lot of attention over the last eight years, but the technique has actually been in use since the 1940s. Fracking itself involves pumping water, sand and chemicals into a well to create fractures in rocks that then release crude oil as well as other petroleum products and/or natural gas.

Shale Oil: While hydraulic fracturing has been around for a long time, the recent development of horizontal drilling has allowed U.S. companies to pull oil and natural gas out of previously hard-to-reach shale beds. The new mining technique, which involves angling drill bits to blast through rock horizontally, allows energy companies to tap a much greater underground area for energy resources. With oil being drawn from new shale fields, U.S. crude oil production has soared, reducing U.S. demand for foreign countries’ oil exports.

Oil Sands: These may sound like beaches, but they’re really mixtures of sand, clay, water, and bitumen, which is so viscous that it appears solid at a temperature of 50 degrees Fahrenheit. Some oil from the sands is recovered using the kind of open-pit methods that wouldn’t be out of place in an iron ore mine. In other cases, companies drill horizontal wells and pump steam into the ground to heat the bituminous oil, which in turn allows it to be pumped to the surface. The world’s largest oil sands are in Alberta, Canada.

Barrel (bbl): A unit of volume holding 42 U.S. gallons. Crude oil prices are listed per barrel or bbl — for example, $45/bbl — on commodities exchanges.

Organization of the Petroleum Exporting Countries (OPEC): OPEC is a group of 12 countries that produce about 40 percent of the world’s crude oil. Established in the early 1960s with Saudi Arabia, Iran, Iraq, Kuwait and Venezuela as its founding members, OPEC sought to coordinate oil production and export policies to gain greater influence over oil prices and supply.

The Benchmarks

West Texas Intermediate (WTI): West Texas Intermediate is a light, sweet crude oil produced in the U.S. and delivered to Cushing, Oklahoma, which is the country’s largest oil storage hub and the price settlement point for WTI. It is the oil underlying the New York Mercantile Exchange’s (see below) oil futures contracts.

North Sea Brent: Brent crude oil is oil that comes from the North Sea. The price of Brent crude is used to benchmark the price of most oil. Though it’s considered a sweet crude oil, it is more sour than West Texas Intermediate. It trades on the ICE Futures Europe exchange (see below).

Dubai and Oman Crude: The average price of oil from Dubai and Oman, which both produce sour crude, is used to create a third major oil benchmark that helps to price Middle Eastern crude oil that is exported to Asian markets.

OPEC Basket: The OPEC basket is a benchmark derived from the prices of crude oil produced in OPEC member countries. It’s a weighted average of those prices, which includes blends such as Arab Light of Saudi Arabia, Merey of Venezuela and Bonny Light of Nigeria.

The Exchanges

New York Mercantile Exchange (NYMEX): The New York Mercantile Exchange, part of the larger CME Group, is the world’s largest physical commodities futures exchange. Based in Manhattan, NYMEX is home to the trading of futures and options on energy-based commodities, including oil and natural gas contracts, as well as metals.

Intercontinental Exchange (ICE): The Intercontinental Exchange is a network of exchanges that include all-electronic commodities futures markets such as ICE Futures U.S. and ICE Futures Europe. ICE also owns the New York Stock Exchange, which it purchased in 2013.

Oil and Gas Business

Master Limited Partnerships (MLPs): Master limited partnerships are publically-traded investment vehicles that pay quarterly distributions to shareholders. MLPs are often used to raise capital to develop infrastructure in the oil and gas sector including pipelines and storage facilities. Unlike corporations, MLPs are taxed as partnerships, offering potential tax advantages to investors.

Offshore Drilling: Offshore drilling refers to the extraction of oil and natural gas from wells drilled into the ocean floor. Under the International Law of the Sea, the area stretching 200 miles from a country’s coastlines is called the Exclusive Economic Zone. Energy companies lease parts of the EEZ from governments for energy development, which is more costly than drilling on land.

Early efforts at offshore drilling were confined to areas with ocean depths of less than 300 feet, but today, wells can be drilled to depths of 10,000 feet or more through floating platforms. In 2013, offshore drilling accounted for some 18 percent of U.S. crude oil production.

Upstream, Midstream and Downstream: These are the three primary categories of activity in the oil industry, and you may hear companies being referred to as “upstream”, “midstream” or “downstream”.

Upstream: Upstream operations are also often called exploration and production companies, or E&P companies. Upstream companies are involved in searching for and locating new oil sources and actually extracting oil from the ground.

Midstream: Extracting oil from the ground (or seabed) is only the first step in its journey to an end-user. Companies that store and transport crude oil from wells to refineries make up the so-called midstream in energy production.

Downstream: In the oil business, the downstream encompasses everything that happens to crude oil after it hits a refinery. Refineries, one of the most important downstream segments, process crude oil into usable petroleum products such as gasoline. Transportation is another important segment – refined products find their way to the companies that will sell them to end-users via pipelines, railways, trucks, and ships. Finally, the downstream also includes the companies that make final sales of refined products, including wholesalers and retail gas stations.

Integrated Companies: Vertically integrated companies that take care of upstream, midstream, and downstream operations all under one roof are known as integrated oil companies.

Spruce Alpha Fund Decimates its Investors

As reported by the New York Times on September 30, 2015 (“Risky Strategy Sinks Small Hedge Fund”), the Spruce Alpha LP Fund, a Stamford, Connecticut based hedge fund which had been pitched to investors as offering large returns in periods of market turbulence, lost 48% of its value during the month of August 2015.

Spruce Alpha, managed by Spruce Investment Advisors, was launched about a year ago and reportedly used a complex and controversial trading strategy that involved derivatives to amplify returns from trading in exchange-traded funds, or E.T.F.s, of various strategies.

“To sell the fledgling fund to investors, Spruce emphasized not only an outsize hypothetical performance going back as far as 2006,” but according to documents reviewed by the New York Times, the fund’s back-testing projections in documents provided to potential investors indicated that “at the height of the 2008 financial crisis, investors would have had a gain of more than 600 percent.”

As noted by the New York Times, “for the investors who have lost nearly half of their investment, however, it is a cautionary tale of relying on glowing, but backdated, performance data. Back-tested results in hedge fund marketing materials have long drawn scorn from some in the hedge fund world. The results are typically recreated with the benefit of hindsight, making it easier for a fund to post hypothetical good results.”

If you are an individual or institutional investor who has any concerns about your investment in the Spruce Alpha LP Fund, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Auto-Liquidation Brokerage Firms Threaten Investors

A reported in a recent blog posting by the Securities Litigation & Consulting Group, (“The Recent Market Turmoil Spells Trouble for ‘Auto-Liquidators’ like Interactive Brokers”), brokerage firms that require their clients to agree to the automatic liquidation of positions when their accounts are in a margin deficit face renewed questions after the wild stock-market gyrations in August and September exposed severe cracks that some critics had warned about for months.

It is estimated that recent sharp market drops may have caused hundreds of accounts at auto-liquidating firms, such as Interactive Brokers, to be severely damaged by faulty algorithms – the computerized programs that select which securities will be sold and the timing of those sales. As noted in the blog posting, “poorly designed algorithms can execute trades that have no hope of efficiently alleviating a margin deficit and actually can convert a curable margin deficit into a death spiral liquidation.”

The accounts that would appear to be most at risk for this issue are those which hold thinly traded stocks and certain stock index options.

“Auto-liquidation algorithms fail when they liquidate thinly traded positions with large bid ask spreads. The margin deficit is calculated based in part on values at or inside the bid ask spread. If the liquidating trades are executed at prices equal to the prices used to value the portfolio the customers’ equity remains the same, the margin requirement is lowered and the deficiency is reduced. Poorly designed algorithms may execute trades at or above the ‘bid’ when closing a short position and at or below the ‘ask’ when closing a long position. When this happens, the customer’s equity is reduced by the liquidating trades which may worsen rather than improve the margin deficiency. Some of these accounts will be converted from an equity position to a debit position in milliseconds because of the faulty algorithm without any change in the value of the portfolio holdings.”

If you are an individual or institutional investor who has any concerns about positions in your account having been automatically liquidated in the past few months, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

LPL To Pay More Than $3.4 Million To Settle Latest Two Probes

LPL Financial Holdings Inc. will pay more than $3.4 million to settle two separate regulatory probes into how the brokerage sold certain complex investment products.

In one instance, the Boston-based firm must pay $2 million to settle allegations by the Massachusetts Attorney General’s Office and the Delaware Justice Department stating LPL failed to supervise its financial advisers who caused clients to hold ETFs for extended periods. Leveraged ETFs are typically designed to deliver a multiple of an index’s performance each day, but results over longer periods can be far different from what the daily objective might suggest.

According to LPL spokesman, “LPL will make enhancements to its oversight of leveraged ETFs including implementation of a renewed training and monitoring program to ensure the proper and effective use of leveraged ETFs as part of investors’ overall financial plans”.

The other instance, is with the North American Securities Administrators Association, which represents state securities regulators, LPL must pay civil penalties of $1.425 million for lapses regarding the firm’s sale of nontraded real-estate investment trusts.

, including the Financial Regulatory Authority and Securities Exchange Commission, for inadequate disclosure of risks and their high fees, which typically range from 12% to 15% at the time of sale.

LPL is the leading securities firm serving so-called independent investment representatives, who typically own their own local business and sell securities as a financial investor of a separate securities firm. In 2014, the firm spent $36.3 million to settle regulatory charges. These regulatory charges have weighed financially on LPL. They continue to resolve remaining compliance issues, resulting from a period of rapid growth.

Risks Associated with ETFs are Exposed by Volatility in the Markets

As reported by The Wall Street Journal on September 14, 2015, (“The Problem With ETFs”), one of Wall Street’s most popular products –Exchange Traded Funds – faces renewed questions after the wild stock-market gyrations in August exposed cracks that many critics had warned about for months.

Investors have poured hundreds of billions of dollars into ETFs over the past decade, drawn by low fees and the prospect of being able to buy or sell a mutual-fund-like product whenever they want like a stock.

But, according to the article, trading records and conversations with investors show that ETFs couldn’t keep that promise when the Dow Jones Industrial Average dropped more than 1,000 points, in the first minutes of trading on Aug. 24, as “steep share-price declines triggered a slew of trading halts that started in individual stocks and cascaded into ETFs. Dozens of ETFs traded at sharp discounts to the sum of their holdings, worsening losses for many fund holders who sold during the panic. The strange moves highlighted concerns raised by academics and others over the years that ETFs might not be as easy to move in and out of as advertised in times of stress. For investors of all sizes, the problems set off alarms that a core component of their portfolios might not always function as expected.”

This recent market volatility has once again placed a spotlight on the “growing concern about how bond ETFs, a popular niche, will perform if investors rush to the exits, as some predict might happen when U.S. interest rates rise” – what some observers refer to as “a recipe for a breakdown” that could be significant and prolonged.

If you are an individual or institutional investor who has any concerns about ETF investments having been recommended for purchase in either your retirement or non-retirement accounts, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Office of Compliance Inspections and Examinations Released Their Latest Risk Alert

The below link is to the OCIE Risk Alert released this week on August 24th.

National Exam Program Risk Alert

Citigroup Subject of Massive SEC Settlement Stemming from Fraudulent ASTA/MAT and Falcon Hedge Fund Products – Firm to Pay Nearly $180 Million to Defrauded Investors

On August 17, 2015, The Securities and Exchange Commission announced that two Citigroup affiliates have agreed to pay nearly $180 million to settle charges that they defrauded investors in the ASTA/MAT and Falcon hedge funds by claiming they were safe, low-risk, and suitable for traditional bond investors. The funds later crumbled and eventually collapsed during the financial crisis.

The SEC investigation found that the Citigroup affiliates made false and misleading representations to investors in the ASTA/MAT fund and the Falcon fund, which collectively raised nearly $3 billion in capital from approximately 4,000 investors before collapsing. In talking with investors, they did not disclose the very real risks of the funds. Even as the funds began to collapse and Citigroup accepted nearly $110 million in additional investments, the Citigroup affiliates did not disclose the dire condition of the funds and continued to assure investors that they were low-risk, well-capitalized investments with adequate liquidity. Many of the misleading representations made by Citigroup employees were at odds with disclosures made in marketing documents and written materials provided to investors.

“Firms cannot insulate themselves from liability for their employees’ misrepresentations by invoking the fine print contained in written disclosures,” said Andrew Ceresney, Director of the SEC’s Enforcement Division. “Advisers at these Citigroup affiliates were supposed to be looking out for investors’ best interests, but falsely assured them they were making safe investments even when the funds were on the brink of disaster.”

According to the SEC’s order instituting the settled administrative proceeding:

*  Neither Falcon nor ASTA/MAT were low-risk investments, akin to a bond alternative, as investors were repeatedly told.

*  Citigroup failed to control the misrepresentations made to investors as their employees misleadingly minimized the significant risk of loss resulting from the funds’ investment strategy and use of leverage among other things.

*  Citigroup failed to adopt and implement policies and procedures that prevented the financial advisers and fund manager from making contradictory and false representations.

The plan of distribution for investors is expected to be presented to the SEC before the end of 2015.

Pimco Facing Possible SEC Lawsuit

After receiving a Wells notice from the SEC, about some Pimco securities that contain bundled mortgages, Pimco released a statement disclosing the possibility of facing a federal lawsuit over how it valued positions held by one of its enormous bond funds.

Between Feb. 29th and June 30th 2012, Pimco may have misrepresented the value of certain securities purchased by its Total Return Active Exchange-Traded Fund (BOND).

The Total Return Active ETF has more than $2.5 billion net assets, according to Pimco, and invests primarily in low-risk debt securities. The fund has a year-to-date return of about 2%.

“The Wells process provides us with our opportunity to demonstrate to the SEC staff why we believe our conduct was appropriate, in keeping with industry standards, and that no action should be taken,” Pimco said in a statement.

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