Mandatory Arbitration of Securities Disputes
By: Edward O'Neal and Dan Solin (Jun 2007)
Dr. O'Neal and attorney/author Dan Solin today released a statistical analysis of the results of the mandatory arbitration process during the 1995 - 2004 period. They assessed almost 14,000 NASD and NYSE arbitration cases and found that Claimant win rates and recovery amounts have declined significantly over time. Moreover, claimants fare more poorly in large cases and in cases against larger brokerage firms. Dr. O'Neal and Mr. Solin estimate that the expected recovery before legal fees and expenses in a large case against a top brokerage firm is only 12% of the amount claimed.
Are Structured Products Suitable for Retail Investors?
By: Craig McCann and Dengpan Luo (Dec 2006)
Equity-linked notes - a type of structured product - are securities issued by brokerage firms and traded in the secondary markets like shares of common stock. These investments offer part of the upside from owning stocks but limit nominal losses if held until maturity. Once sold only to sophisticated investors, structured products are increasingly being sold to unsophisticated retail investors. Equity-linked notes are difficult to evaluate and monitor, have high hidden costs and are illiquid. They are therefore virtually never suitable for unsophisticated investors.
An Overview of Equity-Indexed Annuities
By: Craig McCann and Dengpan Luo (Jun 2006)
Equity-indexed annuities are complex investments sold by insurance companies that pay investors part of the capital appreciation in a stock index and guarantee a minimum return if the contract is held to maturity. Equity-indexed annuities to date have been regulated by state insurance commissions, rather than by the SEC and the NASD. We estimate that between 15% and 20% of the premium paid by investors in equity-indexed annuities is a transfer of wealth from unsophisticated investors to insurance companies and their sales forces and that the claimed benefits for EIAs can be had at a tiny fraction of the cost using stocks and Treasury securities.
Annuities
By: Craig McCann and Kaye A. Thomas (Dec 2005)
Regulatory scrutiny of variable annuity sales practices and private litigation have focused on the investment risk of subaccounts, on annuity 'switching' and on the purchase of annuities within IRAs. In this paper, we demonstrate that in most situations, investors being sold annuities will pay more taxes and have less wealth in retirement as a result of the tax treatment of investments within tax-deferred annuities.
Optimal Exercise of Employee Stock Options and Securities Arbitrations
By: Craig McCann and Kaye A. Thomas (Jun 2005)
In this paper, Craig McCann and Kaye Thomas extend previous analyses of employee stock options and evaluate advice to hold unexercised options.
Concentrated Investments, Uncompensated Risk and Hedging Strategies
By: Craig McCann and Dengpan Luo (Dec 2004)
In this paper, Dr. McCann and Dr. Luo explore the risk of holding concentrated investments and explain and evaluate risk management strategies.
The Use of Leveraged Investments to Diversify a Concentrated Position
By: Craig McCann and Dengpan Luo (Jun 2004)
Published in the Securities Arbitration 2004 Handbook PLI.
Brokerage firms recently recommended that investors holding a concentrated position in a single stock borrow and invest in a portfolio of additional stocks to reduce risk. Dr. McCann and Dr. Luo demonstrate that this strategy to reduce risk predictably did exactly the opposite.
Mutual Fund Share Classes and Conflicts of Interest between Brokers and Investors
By: Edward O'Neal (Dec 2003)
Dr. O'Neal describes the various mutual fund share classes and explains how differences in commissions to brokers and costs to investors across share classes can create conflicts of interests.
Churning - Revisited: Trading Cost and Control
By: Craig McCann and Dengpan Luo (Sep 2003)
Published in the Securities Arbitration 2003 Handbook PLI.
In a previous paper, Dr. McCann outlined the portfolio approach to assessing the excessiveness of trading in churning cases. In this paper, Dr. McCann and Dr. Luo demonstrate that cost-to-equity ratios of more than 4 or 5% or commission to equity ratios of 2 or 3% in accounts with turnover ratios of 2 indicate excessive trading in common stock portfolios.
Detecting Personal Trading Abuses
By: Craig McCann (Jun 2003)
Recent actions by the New York State Attorney General have highlighted abusive personal trading practices by mutual fund portfolio managers. In this paper, Dr. McCann explains how abusive personal trading practices, including those most recently identified, can be detected in a simple, cost effective manner.
