SEC Litigation Releases: Week in Review - June 28th, 2013
(Jun 2013)
Court Enters Final Judgments Against JBI, Inc. and Former Officer in Accounting Fraud Case
June 27, 2013, (Litigation Release No. 22735)
Final judgments were entered against JBI, Inc. and John W. Bordynuik, "two defendants in a fraud action filed by the Commission in 2012." In its original complaint, the SEC alleged that JBI, Bordynuik (JBI's former CEO) and Ronald Baldwin Jr. (JBI's former CFO) engaged in a scheme that allowed JBI to state "materially false and inaccurate financial...
Structured Investments Linked to Proprietary Indices
(Jun 2013)
Structured products are often linked to well known indices like the S&P 500 or the Dow Jones Industrial Average, but recently it has become more and more common for banks to issue structured investments linked to proprietary indices that they create themselves. The use of proprietary indices (also known as 'self-indexing') has begun to arouse suspicion from various sources and so we thought we'd take a step back and talk about the issue for a moment.
Structured products linked to well-known...
Reverse Convertibles and Event Risk
(Jun 2013)
Reverse convertibles are short-term debt securities issued by banks whose return of principal at maturity is contingent upon the returns of the linked stock. Although these notes typically pay relatively high coupons, they expose investors to losses on the underlying asset, especially if those losses are beyond the trigger level. Academic research shows that these coupons are not adequately compensating the investor for the market risk that they are bearing by investing in the notes. For...
SEC Commissioners Vote Unanimously on Money-Market Reform Measures
(Jun 2013)
The SEC voted on Wednesday on changes to rules governing money market funds (MMFs). As we discussed on Tuesday, MMFs are considered low risk, low return investments similar to bank accounts, but experienced 'runs' during the financial collapse of 2008 that helped freeze financial markets. The SEC's new rules hope to prevent such runs by changing how MMFs report their assets.
As widely suspected, the changes target MMFs favored by large institutional investors (dubbed 'prime funds'). While...
Dodging Hedge Fund Requirements: The Case of Mariner Access
(Jun 2013)
Nowadays, there are several ways that retail investors can purchase risky investments which would typically be considered unsuitable. For example, many exchange-traded funds (ETFs) use derivatives to offer investors access to risky asset classes (such as CDOs) or complex options positions (such as covered calls). Since ETFs can be bought and sold like any other listed stock, essentially any investor can now take covered call positions regardless of her understanding of options. There is even...
FINRA Fines Wells Fargo and Banc of America Over Unsuitable Sales of Floating-Rate Bank Loan Funds
(Jun 2013)
Yesterday, the Financial Industry Regulatory Authority (FINRA) announced fines totalling more than $2.1 million levied against Wells Fargo and Banc of America. In addition, FINRA has ordered the two institutions to pay restitution in excess $3 million to customers who suffered "losses incurred from unsuitable sales of floating-rate bank loan funds."
A floating-rate bank loan fund is a mutual fund that mainly invests in floating-rate high-yield senior secured loans. The floating-rate on the...
Investors Bristle at New Structured Product Valuations
(Jun 2013)
Back in February, the SEC issued a letter to structured product issuers that required them to estimate and prominently state the estimated value of the notes to investors. According to Risk.net, as issuers have begun doing so, many investors have "expressed surprise" at how low those valuations are.
However, these valuations should be no surprise to anyone familiar with the structured product literature, which has documented significant discounts for a wide variety of product types. You can...
Investors Returning to Capital-at-Risk Products
(May 2013)
Yakob Peterseil of Risk.net recently noted that "[b]anks are boosting issuance of leveraged notes linked to US equity indexes and notes that pay out when yield curves steepen." According to the article, reverse convertibles and buffered notes are seeing a resurgence as investors begin to be more optimistic about stock market growth. In addition, principal-protected structures like structured certificates of deposit and principal-protected notesare falling out of favor as attractive terms are...
Massachusetts Fines Five Brokerage Firms for Sale of Non-Traded REITs
(May 2013)
Secretary of the Commonwealth of Massachusetts William Galvin, who has previously come out swinging on behalf of investors in both warehoused CLOs as well as leveraged and inverse ETFs, announced yesterday that the state has settled with five independent brokerage firms regarding improper sales of non-traded REITs. Non-traded REITs are pooled real estate investments that have become notorious for high fees, lack of liquidity, and numerous potential conflicts of interest, as we detail in our...
Options Strategies Embedded in Exchanged Traded Products
(May 2013)
In theory, exchange traded products (ETPs) can be linked to almost any underlying asset, including derivatives. While many ETPs are linked to portfolios of bonds or stocks, some are linked to portfolios of futures contracts, which we have discussed at length before. Bill Luby at VIX and More has written a couple posts on ETPs that are linked to portfolios of options, which are gaining some traction with investors. As usual, we greatly enjoyed Bill's posts and thought we'd explain some of the...
