April 14, 2021
The Financial Industry Regulatory Authority (FINRA) Department of Enforcement recently accepted Letters of Acceptance, Waiver and Consent (AWC) from three brokerage firms to resolve allegations that the firms failed to reasonably supervise their representatives’ recommendations of LJM Preservation & Growth Fund (LJM), an alternative mutual fund that lost 80 percent of its value in two days resulting in massive losses to its customers.
According to the AWCs, Cambridge Investment Research, Securities America, and J.W. Cole Financial—headquartered in Fairfield, Iowa, La Vista, Nebraska, and Tampa, Florida, respectively—permitted the sale of LJM on their platforms without conducting reasonable due diligence and without understanding the risks and features of this strategy. In its 2015 National Examination Priorities Letter, FINRA noted concerns regarding brokerage firms’ abilities to supervise the sale of alternative mutual funds and representatives’ and customers’ abilities to understand how the funds would respond to various market conditions.
LJM primarily invested in long and short call and put options on the S&P 500 futures index and did not hold underlying stock. Despite FINRA’s warnings of this risky strategy, several Cambridge representatives sold over $18 million in LJM to approximately 550 customers, one Securities America representative sold approximately $616,000 in LJM shares to 33 customers, and J.W. Cole’s representatives sold approximately $1 million in LJM shares to about 45 customers. FINRA asserts that these brokerage firms also failed to appropriately supervise their registered representatives which resulted in one Cambridge customer holding more than 80 percent of the $18 million investment total and a J.W. Cole customer holding over 60 percent of their total customer investments in the LJM strategy.
On February 5, 2018, this already risky strategy became especially volatile when its value dropped 80 percent. The S&P 500, to which LJM was primarily invested, fell 4.1 percent and subsequently caused market volatility that dramatically increased the price of short option position sold by LJM. By March 2018, the fund liquidated and closed, resulting in millions of dollars in losses for investors.
Based on the foregoing, Cambridge Investment Research, Securities America, and J.W. Cole Financial violated NASD Rule 3010 and FINRA Rules 3110 and 2010. FINRA Department of Enforcement ordered the following sanctions: 1) Cambridge was ordered to pay a $400,000 fine and over $3 million in restitution, plus interest; 2) Securities America was ordered to pay a $100,000 fine and nearly $236,000 in restitution, plus interest; and 3) J.W. Cole was ordered to pay a $50,000 fine and restitution totaling almost $164,000, plus interest. All three brokerage firms are censured and are required to obtain certification signed by firm officers and registered principals that confirms each respective brokerage firm has established and implemented policies, procedures, and internal controls reasonably designed to address and remediate the alleged violations in the AWCs.
Did you invest in the LJM Preservation & Growth Fund through Cambridge Investment Research, Securities America, or J.W. Cole Financial? If so, we may be able to help you recover your losses from the broker or the firm that sold it to you. Since 1998, the attorneys at ChapmanAlbin have been representing victims of investment fraud and broker misconduct. Call us at 1-877-410-8172 today for a free consultation.