VIX Tag Archives — Securities Lawyers Blog

Wells Fargo Sanctioned and Fined Over VIX Sales Practices

December 5, 2017 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) ordered Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC (Wells Fargo) to pay more than $3.4 million in restitution to customers for unsuitable recommendations of volatility-linked exchange-traded products (ETPs) and supervisory failures concerning the sales of these products. FINRA found that between July 2010, and May 2012 Wells Fargo brokers recommended volatility-linked ETPs without fully understanding their risks and features.

These complex products are extremely difficult to understand and are easy to improperly sell. In recent years many exotic ETN have been created that either use leverage or futures exposure to replicate an index. However, many of these investments are appropriate only for institutional investors and short term trading for various reasons.

The most popular volatility-linked ETP is the Chicago Board Options Exchange Volatility Index (VIX). The VIX tends to be negatively correlated with broader financial indexes and rises in period of market distress. However, it is not possible to directly invest in the VIX and instead investments are made in VIX derivatives such as futures or options. The three main Volatility ETPs offered to retail investors are VXX, VXZ, and VIXY. Volatility ETPs attempt to provide exposure to the VIX through VIX futures contracts but these Volatility ETPs do not track the VIX Accordingly, VIX investments held for long periods of time will almost certainly lose value.

SEC Charges Arthur Jacob and Innovative Business Solutions LLC with Defrauding Investors

November 23, 2015 | by Staff Attorney

The Securities and Exchange Commission issued a press release announcing securities fraud charges against a Florida based purported “investment adviser” Arthur F. Jacob (Jacob) and his firm, Innovative Business Solutions LLC (IBS), for allegedly deceiving clients over a period of at least five years. According to the SEC, the unregistered investment adviser had about 30 client households and approximately $18 million under management.

In the SEC order the agency alleges that from at least mid-2009 through July 2014 Jacob and IBS misrepresented the risks and profitability of investments he purchased for advisory clients. The SEC alleged that Jacob was informed of investment risks of certain exchange traded funds but failed to disclose these risks to clients and told them that the investment strategy he was using was safe, carried low or no risk, and would produce predictable profits when in fact it was not.

For instance, the SEC alleged that Jacob bought and held for long term a highly volatile exchange-traded product (ETP) called the Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN (VXX). The VXX is designed to provide exposure to stock market volatility through futures contracts on the CBOE Volatility Index. However, importantly the VXX does not track the performance of the VIX Index because of the use of futures causes the investment to drift significantly from its benchmark and is therefore inappropriate for long-term holding. Nonetheless, the SEC alleged that Jacob purchased VXX in clients’ accounts in March 2010, and again in the May through July 2010 time period and held the VXX positions in clients’ accounts for years causing steady declines until the investors lost almost all of their investment.

Spruce Alpha Hedge Fund Investors Suffer Massive Losses

November 17, 2015 | by Staff Attorney

According to the New York Times, the Spruce Alpha hedge fund was pitched to investors as providing large returns in periods of market turbulence through the implementation of a complex trading strategy. According to the Spruce Alpha fund, during the 2008 financial crisis investors should have had made gains of more than 600 percent. But what Wall Street pitches in theory almost always goes wrong in practice. Thus when markets turned volatile in August 2015, Spruce Alpha, which had only just started up in April 2014, did not turn the volatility into gains for investors. Instead, the fund turned in one of the worst performances losing 48 percent of their money.

The fund’s holdings at the time were under $100 million and was managed by the $1.5 billion Spruce Investment Advisors. Spruce Investment specializes in managing money for the wealthy and institutional investors. According to the New York Times, half of Spruce Investment’s assets under management come from three family offices, a corporation, and a pension plan. The Spruce Alpha fund was the asset management firm’s first direct hedge fund trading fund that was intended to raise a $500 million portfolio.

After the collapse the Spruce Alpha moved its positions into cash and told investors that they can redeem what remains of their money. The Spruce Alpha tale is only the latest example of how managers market hedge funds and complex investment products to investors that often turn out to be too good to be true. Using back-tested results in hedge fund marketing materials are fantasy recreations with all the benefits of hindsight knowledge that are then advertised as likely future performance. However, back-tested results are derived assuming optimum trading conditions, not what the fund will encounter in real life.