Investments connected to the VIX index were known to be highly speculative.
We are a firm that specializes in investor loss recovery. Investors of Inverse VIX Exchange Traded Notes (ETNs) and Inverse VIX Exchange Traded Funds (ETFs), including VelocityShares Daily Inverse VIX Short-Terms ETN (XIV), the ProShares Short VIX Short-Term Futures ETF (SVXY), and the LJM Partners’ Preservation and Growth fund (LJMIX and LJMAX) may have grounds for the recovery of their losses.
If you were sold an Inverse VIX ETN please call 1-844-5858 for a free and confidential consultation with an attorney.
The first thing to understand is that many of these investments are “geared.” That means they are leveraged 1.5x, 2x and 3x and inversely -1x, -2x and -3x against a certain index. Most commonly, they are leveraged against the VIX. Such investments are designed to not be held for more than a single trading day. Recommending otherwise is often actionable.
These investments are also suitable for very few investors. The sale of unsuitable investments by a securities broker is a form of negligence and possibly fraud. These investments carry such a high level of risk and are so complicated that they were likely not suitable for any retail (non-institutional) investor. “Unless you were a hedge fund manager you should not have been sold these funds.” If you were recommended such investments as part of a retirement savings portfolio you have grounds to recover your losses. The makers of these funds have acknowledged that the fund was for hedge fund managers only, and not individual investors.
In March, 2021, regulators announced sanctions against firms selling LJM. These firms include Securities America, J.W. Cole Financial, and Cambridge Investment Research. These firms were all sanctioned for failing to conduct due diligence into LJM to understand the high level of risk that was known when the firms sold the investment to their investors. Insufficient due diligence makes an investment unsuitable for any investor, and unsuitable investments cannot be legally sold to investors.
Investment advisory firms also sold these investments, and in many cases sold the investments inappropriately. These include SRS Capital, IFAM, Movants Capital Management, Tradition Capital Management, and Investment Advisor Group.
Starting on February 2 and continuing through February 6, 2018 investors saw portfolios implode due to investments in obscure products that tracked market volatility. Such investments tracked the VIX index. The VIX index is a complicated monitor of investment market volatility or “investor fear.” An “inverse VIX” investment is an investment that benefits from stable markets but loses value quickly in times of volatility. The losses in the inverse VIX investments mounted quickly until NASDAQ halted the trading of these investments on February 6, with some suffering losses of almost all value in just a few days.
For example, VelocityShares XIV plummeted 80 percent in extended trading on February 5, 2018. This is a security issued by Credit Suisse this tracks the inverse of the VIX index tracking market volatility. As the market rose and sank the value of XIV dropped sharply. Such sudden drops have a cascading impact that can lead to margin calls and other losses.
Of particular concern, though any sale of such an investment to a retail investor is concerning, are investors who purchased such shares through the following brokerage firms: Credit Suisse, Fidelity, Merrill Lynch, and Wells Fargo.
The dramatic losses was foreseeable to securities brokerages, often referred to as securities “broker-dealers.” The regulator that oversees broker-dealers, FINRA, the Financial Industry Regulatory Authority, issued its latest warning in a string of warnings on October 2017 to broker-dealers about VIX and inverse VIX investments. FINRA identified such investments speculative and warned the “major losses” could result from such investments from a failure to understand how such investments work. For example, many are short-term trading vehicles that can degrade over time.
FINRA also warned all financial advisers that VIX ETNs may be unsuitable for non-institutional investors and any investor looking to hold investment as opposed to actively trading the investment. While this warning occurred in October 2017, similar warnings were issued in 2012. That same month, FINRA fined Wells Fargo for unsuitable recommendations of similar volatility 
funds.
FINRA stated in 2012 in a Regulatory Notice, RN 12-03, that heightened supervision is required of any broker who sells such complex investments, and specifically identified the need for brokerage firms to oversee any recommendation of an investment based upon the VIX.
While all short VIX trading is suspect and potentially recoverable, the following investments are of particular concern: XIV, SVXY, VMIN, EXIV, IVOP, LJMIX (“LJM”), LJMAX, XXV, and ZIV.
FINRA is conducting sweep investigations of all brokerages that sold any and all of these investments to retail investors. ‘The sweep is part of Finra’s continuing focus on the suitability of sales of complex products, including leveraged and volatile products, to retail customers,’ stated FINRA.
In addition to suitability, there is also concern that due diligence by these brokerages should have revealed that the index was subject to manipulation. This was recently reported by the Financial Times of London. A scholarly report from researches at the University of Texas in 2017 identified the mechanism for manipulating the VIX. FT reports that the Securities and Exchange Commission is currently investigating such allegations.
Investors suffering losses in such investments may have valid claims despite the warnings contained in the prospectus. These investments should not have been offered to any retail investors.
PedersonLaw has represented investors in similar actions in most of the 50 states either directly or pro hac vice.
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