A Financial Industry Regulatory Authority panel has ruled that Focus Capital Wealth Management Inc. and its owner Nicholas Rowe must pay investors $1.8 million over securities fraud allegations related to the sale of high-risk exchange-traded funds. The investment adviser is accused of civil fraud, negligence, and other misdeeds related to the funds’ sale to nine clients, some of them older investors.
The claimants’ investments had been heavily concentrated in inverse and leveraged ETFs. They contend that Rowe upped their risk by purchasing and holding the ETFs for up to a few months-a strategy that some consider practically guaranteed there would be loss. Focus and Rowe have been named in civil proceedings initiated by the New Hampshire Bureau of Securities Regulation. Meantime, a state court has put out a temporary order barring Rowe and his firm from conducting business.
Inverse and leveraged ETFs are supposed to amplify short-term returns through the use of derivatives and debt. They are more appropriate for traders that are professionals than long-term retail investors or any party that cannot properly weather a risky portfolio. According to some ETF fraud lawyers, many investors don’t comprehend the degree of risk involved.
Leveraged and inverse ETFs comprise $27 billion of the $1.29 trillion ETF market in the US. A few years ago, regulators started putting out warnings about selling these particular ETFs over concerns that brokers were using them to buy-and-old investors.
N. Hampshire investment adviser must pay $1.8 mln in ETF case, Reuters, December 3, 2012
Exchange-Traded Fund, Investopedia
More Blog Posts:
Morgan Stanley, Citigroup, Wells Fargo, and UBS to Pay $9.1M Over Leveraged and Inverse ETFs, Stockbroker Fraud Blog, May 3, 2012
Goldman Sachs to Pay $22M For Alleged Lack of Proper Internal Controls That Allowed Analysts to Attend Trading Huddles and Tip Favored Clients, Institutional Investor Securities Blog, April 12, 2012
Ex-Goldman Sachs Director Rajat Gupta Pleads Not Guilty to Insider Trading Charges, Stockbroker Fraud Blog, October 26, 2011