For FINRA, unlike the SEC, blaming comics always seems to be the answer | Ulmer & Berne SARL
FINRA Enforcement has often been accused (again, it’s true, by me, and quite often) of going for the “easy fruit”, that is, of taking the easy way out when it comes. . Leaving aside the question of whether this observation is correct or not – for what it is worth, I think the answer is that it is often, but not always, true – a recent case raises a better and more nuanced question. : Does FINRA Enforcement sometimes provide the wrong case, because it’s easier?
Here’s what reminded me of this: A series of cases involving a mutual fund called the LJM Preservation & Growth Fund (the “LJM Fund”). You probably remember hearing about it. The LJM Fund was a so-called “alternative” mutual fund. Here’s how FINRA defines it:
Alternative mutual funds are mutual funds offered to the public that seek to achieve the objectives of the funds through non-traditional investing and trading strategies. . . . Alternative mutual funds are often marketed as a way for retail clients to invest in sophisticated and actively managed hedge fund-like strategies that will perform well in various market environments. Alternative mutual funds typically claim to reduce volatility, increase diversification, and deliver uncorrelated returns and higher returns compared to traditional long-term equity and fixed income funds, while providing daily liquidity.
The investment strategy of the LJM fund involved, in part, collecting premiums on writing out-of-the-money options on the S&P 500 futures index. (Although the LJM fund also bought options, in the together it was “net short.”) In fact, this is a perfectly appropriate strategy, provided you are in a relatively flat trading environment. In this setting, all you do is collect the premiums, watch the options you sold expire worthless, and sit back and look like a genius. In times of volatility, however, it carries the risk of large losses, as those out-of-the-money options suddenly become in the money.
Upon examination, the LJM Fund apparently looked like any other of the hundreds of mutual funds that appear on the long lists of available mutual funds provided by clearing houses. It did not immediately appear to be an alternative or complex fund and was therefore sold by several BDs to clients with conservative or moderately conservative investment objectives.
As you might expect in a story that begins like this, the worst-case scenario actually happened: On February 5, 2018, the S&P 500 lost 113 points, a loss of around 4.1. %. In just two days, the LJM Fund (and its companion private funds) have lost 80% of their value, or more than a billion dollars (yes, billion with a “b”). A month later, the Fund was liquidated and closed. Customers suffered significant losses.
So what has FINRA done about it? You can guess. He took the easy way out. He attacked BDs who had sold the LJM fund. In March of this year, FINRA accepted AWCs from three of these CAs. FINRA’s main allegation was that the companies authorized the sale of the LJM fund without performing due diligence, i.e. without fully understanding that it was an alternative fund. , with unique risks that set it apart from all those vanilla mutual funds that also appeared on the sales platform.
In other words, according to FINRA, the customer losses were attributable to the selling BDs. And this is how FINRA always sees the world, in much the same way as the lawyers of PIABA: it is always the fault of the BD seller.
Still, fast forward from a few months of March to about a week ago, when the The SEC filed a complaint against investment advisers LJM Funds Management, Ltd. and LJM Partners, Ltd. and their portfolio managers, Anthony Caine and Anish Parvataneni.
These are the individuals and entities who managed the LJM Fund. And what did the SEC claim these defendants did wrong? According to SEC press release for litigation, they “fraudulently deceived the investors and the board of directors of a fund they advised” – that is, the LJM Fund – “about LJM’s risk management practices and the level of risk in LJM’s portfolios ”. Specifically, while “LJM adopted a short-volatility trading strategy that carried low but extreme risks,” some of the defendants are said to have said “to allay investor concerns about the potential for losses. . . made a series of misstatements to investors and the board of directors of the mutual fund about LJM’s risk management practices, including misrepresentation about its use of stress testing of historical events and its commitment to maintain a consistent risk profile instead of prioritizing returns.
The SEC complaint further alleges “that, starting in late 2017, during a period of historically low volatility,[some defendants] increased the level of risk in the portfolios in order to pursue return objectives, while falsely assuring investors that the risk profiles of the portfolios remained stable.
In other words, at least according to the SEC complaint, these defendants, who were well aware that “investors of funds and their financial advisers were primarily concerned about the risk of loss – including estimated worst-case loss scenarios – and how the risk of loss of investment was managed, ”intentionally and artfully created a false narrative about the Fund’s risk management practices LJMs designed to hide the real risks associated with the fund. And hide these risks not only from investors, but also from their financial advisers. That is, the same comics that FINRA decided to sanction because somehow they failed – LIKE EVERYONE – to understand that the people who ran the LJM fund were hiding – allegedly – fraudulently its real risks.
So, now we come to the point: for FINRA, it seems that when client losses occur, especially after spectacular explosions like the sudden explosion of the LJM fund, they go after any successful comic strip. to have his fingerprints on things. Rather than adopting a more deliberative approach, one which takes full account of the fact that we are dealing strictly with a “reasonable” standard of supervision, and which is open to the possibility that the CD itself has been victimized. someone else’s conduct. fraud, FINRA takes the “easy” route, as it did here with the three firms whose AWCs it demanded, and is content to blame the BD.
Attentive readers may recall that not so long ago I wrote a blog generally complaining about plaintiffs’ attorneys seeking clients by posting notices on their websites of alleged “investigations” they are carrying out into suspected fraud, and in particular noting the intensive campaign they have waged to induce investors to GPB to file arbitrations against the comics that sold GPB. All that despite the fact that, according to the SEC, the selling comics were not the bad guys, but were themselves the victims of the alleged fraud perpetrated by GPB.
Yet, this SEC finding notwithstanding, who among us would be the least bit surprised if FINRA began filing enforcement actions against the selling BDs, alleging an alleged failure to conduct adequate due diligence on GPB? Unfortunately, the answer is none of us. Because we know from its historical practice of acting as plaintiffs’ counsel, that FINRA will inevitably blame CAs. Because it’s easy.
 Remarkably enough, just minutes after I originally posted this blog, I received an email from the “Strategic Communications and Media Relations Company” which represents LJM Funds Management. According to the company’s website, among the services it offers to its clients is “reputation management”, which is described as follows: “We actively monitor and advise our clients on market and market opinion. public regarding their activities in the media and online. To this end, I have been asked to share with you a statement from Mr. Caine in which he (1) denies the allegations, (2) insists that he “summarily declined” the offer to settle. of the SEC, and (3) declares its intention to “vigorously defend these false allegations while continuing to aggressively pursue actions to seek financial recourse for LJM investors”, among others.