Delaware Securities Fraud Lawyers
Delaware, one of the smallest and least populous states, is home to the cities of Dover and Wilmington. It is also the home state of President Joe Biden, who, along with other retirees and wealthy Delawareans, maintains a beach home on the Atlantic. Where there are retirees and wealthy investors, fraudsters lurk, and Delaware is no different. Malecki Law is an investment loss law firm based in Manhattan, serving investors across the nation, including in Delaware. For over 25 years, the firm’s proprietor, Jenice L. Malecki, Esq. and her securities fraud lawyers have recovered tens of millions of dollars in investment losses from financial firms, whether due to fraud, negligence, failed supervision, or the recommendation of unsuitable investments – often brought in actions relating to the recommendation and sale of riskier investment products.
Delaware’s state securities regulator, the Investor Protection Unit (IPU), housed within the Fraud and Consumer Protection Division of the Delaware Department of Justice, published its top threats to investors to include products, and sales practices associated with the sale of those products, such as promissory notes, real estate investments, oil & gas investments, and variable annuities. In one action, the regulator secured a settlement that included sanctions against the brokerage firm LPL Financial for its use of Leveraged Exchange Traded Funds, otherwise known as leveraged ETFs, which the settlement described as follows:
“Leveraged ETFs are exchange traded funds that seek to return, on a daily basis, two hundred percent or, negative two hundred percent, of a particular index, commodity, currency, or economic sector. Leveraged ETFs typically do not invest directly in the underlying index or asset class but rather attempt to accomplish this daily objective by using financial derivatives, such as futures and swaps contracts. When Leveraged ETFs are held for periods longer than a day, compounding (among other factors) typically causes the Leveraged ETFs return to diverge from that which might be expected from simply multiplying the change in the underlying index by the relevant factor. This potential divergence is magnified in periods of greater volatility. Due to this divergence, an investor can lose money when holding Leveraged ETFs over long periods, even if the investor bets correctly on the direction of the relevant index over the same term.”
The settlement further detailed LPL Financial’s failure in warning investors:
“LPL operates as a broker-dealer and a federally covered investment advisor in Delaware. The State’s investigation found that certain LPL investment professionals failed to disclose risks associated with Leveraged ETFs, including the risks described above, and failed to ensure that Leveraged ETFs were suitable investments for their clients. In addition, the investigation found that LPL failed to adequately supervise those investment professionals whose clients held leveraged ETFs for extended periods of time.”
The above finding by the state of Delaware is consistent with federal regulators like the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). According to FINRA, leveraged ETFs are considered Non-Traditional Investments because of the many risks they carry to investors. From 2003 through 2010, FINRA sent out many Notices to Members (NTMs) and Regulatory Memoranda to member firms regarding the risks of leveraged ETFs, including:
- Obligations When Selling Non-Conventional Investments (NTM 03-71);
- Best Practices for Reviewing New Products (NTM 05-26);
- Non-Traditional ETFs (Regulatory Notice 09-31); and
- Increased Margin Requirements for Leveraged ETFs (Regulatory Notice 09-53).
These repeated notices and guidance from FINRA highlighted the important suitability obligations when recommending such new and complex products. FINRA’s guidance further emphasized the extreme volatility and risk in these ETFs (which are known to be nearly impossible to recover from), as well as heightened margin scrutiny and higher equity balances being required. The notices also stressed that firms must understand these products on each level (broker, supervisor, compliance, etc.), and that training was critical. It is not atypical in many instances of misconduct that the brokers who recommend these complex products do not understand them any better than the investors who bought them. It is, therefore, important that you hire a securities fraud law firm knowledgeable in non-traditional securities products.
The securities fraud attorneys at Malecki Law have been successful at recovering money for investors who purchased leveraged ETFs at the recommendation of their broker, even when the investor was considered “sophisticated” and knowledgeable about the financial markets. Once such investor who purchased leveraged ETFs was the recipient of a substantial monetary award in FINRA Arbitration Case No. 18-03033, in which Malecki Law recovered the investor’s full financial loss, in addition to interest and attorneys’ fees. If you are a Delaware resident and lost money in the financial markets or a non-traditional product like leveraged ETFs, contact the securities fraud lawyers at Malecki Law for a free consultation.