On September 24, 2020, the Securities and Exchange Commission (SEC) issued an Order Instituting Administrative Proceedings (Order) against Garden City, NY-headquartered broker-dealer Morgan Wilshire Securities, Inc. (Morgan Wilshire). In connection with the Order, which concerned allegations of unsuitable recommendations by certain Morgan Wilshire brokers for customers to buy and hold various inverse ETFs, Morgan Wilshire submitted an offer of settlement. Under the terms of this settlement, Morgan Wilshire consented to a censure, as well as agreeing to pay disgorgement of $87,609, prejudgment interest of $16,408, and a civil monetary penalty of $75,000.

As set forth in the Order, from January 2015 through March 2019, certain Morgan Wilshire financial advisors purportedly “recommended that a number of their retail brokerage customers buy non-leveraged, inverse exchange-traded funds (‘inverse ETFs’), without regard for holding period, without having a reasonable basis for believing those recommendations were suitable.” Furthermore, as alleged by the SEC, “Morgan Wilshire failed to implement its policies and procedures in order to reasonably supervise its registered representatives” with regard to their recommendations to purchase inverse ETFs for extended holding periods.

As we have recently discussed, not all ETFs are designed as mere low-cost, passive investment vehicles that are designed to track the performance of an underlying index or market sector. Rather, when it comes to leveraged, inverse, and leveraged-inverse ETFs, these complex and risky investment vehicles are likely to be suitable only for professional or highly sophisticated short-term traders, and even then, likely only for hedging purposes. In fact, as alleged by the SEC in its recent Order: “Inverse ETFs are complex financial instruments that seek investment results that are the inverse or opposite of the performance of an underlying index for a stated period, specifically a single day. When held for longer than a day, particularly in volatile markets, investors who seek the inverse return of a given index may experience losses that exceed the inverse return of the index.”

Unfortunately, in some cases, investors may be improperly solicited to invest in unsuitable and risky inverse ETFs. Moreover, in certain instances, investors steered into inverse ETFs may not be adequately informed of the considerable risk associated with holding their ETF position for longer than a single trading session. Because of the manner in which these complex ETFs are designed—including the use of derivatives to achieve an inverse return against an underlying index or benchmark—such complex inverse ETFs, when held for more than a single trading session, may actually incur losses which differ considerably from the performance of their underlying index. In other words, due to the use of derivatives and the effects of compounding, particularly in volatile markets, customers who hold inverse ETFs for more than a single trading day can be exposed to outsized losses.

The attorneys at Giarrusso Law Group LLC have extensive experience in working closely with investors who have sustained losses due to negligent portfolio mismanagement, or in some cases, securities fraud or related misconduct. Investors may pursue a claim to recover monies through securities arbitration before FINRA, or in some instances, litigation. Investors who wish to discuss a possible claim may contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost and confidential consultation.