A former representative from WFG Investments, Inc., agreed to a court decision that he be barred from the securities industry as penalty for recommending trades in particularly risky, nontraditional exchange-traded funds (ETFs). These funds led to about $8.4 million in losses to customers. This settlement was filed by the Financial Industry Regulatory Authority (FINRA).
According to the FINRA case, the representative allegedly recommended unsuitable transactions of leveraged and inverse ETFs, failed to report the numerous customer complaints he received to WFG Investments and failed to produce documents that were requested of him, among various other violations. The settlement came just days after FSC Securities Corp. agreed to pay significant fines and restitution to settle another FINRA case involving similar allegations of risky ETF trades.
These types of nontraditional ETFs use futures contracts, swaps and other types of derivatives to deliver a multiple of the index they are used to track (for leveraged funds) or the inverse of the index (for inverse funds). Some leveraged inverse ETFs accomplish of these tasks. Most of these ETFs “reset” daily. FINRA warned firms as early as 2009 that if these funds were held for too long, they could widely diverge from their benchmark, which makes them unsuitable for any clients who intend to hold them for longer than a single trading session.
In the settlement documents, FINRA said the representative recommended hundreds of purchases of these unsuitable nontraditional ETFS from June 1, 2012, to March 31, 2016. During that time, he believed a stock market crash was imminent, and believed concentrating customer portfolios in nontraditional ETFs would pay off due to rising oil prices and interest rates and declining equity values.
The gamble obviously did not pay off, but he made trades for nontraditional ETFs in 84 of his 153 accounts, regularly failing to sell the funds the same day they were purchased. In some cases, customers held on to these ETFs for years, unknowingly.
If you are aware of any financial wrongdoing within a company or agency, it’s important to report it as soon as possible. Speak with an experienced Dallas attorney at Whistleblower Law for Managers for more information and advice.