SEC Obtains Relief to Fully Reimburse Retail Investors Sold Unsuitable Product By Cadaret, Grant & Co. Inc.
The Securities and Exchange Commission announced it has obtained monetary relief that will fully reimburse retail investors for losses on a leveraged oil-linked exchange-traded note (ETN) that registered representatives of Syracuse, New York-based broker-dealer and investment adviser Cadaret, Grant & Co. Inc. recommended without a reasonable basis.
The SEC found that Cadaret Grant, president Arthur Grant, and senior vice president Beda Lee Johnson failed reasonably to supervise the firm’s registered representatives who recommended that customers buy and hold the leveraged oil-linked ETN without a reasonable basis. The order found that before recommending the investment, the brokers did not take steps to reasonably research or understand inherent risks of the ETN or the index it tracked. According to the order, the ETN was meant to be a daily trading tool for sophisticated investors and was not designed to be held for more than one day. The brokers mistakenly believed the ETN’s value would increase over time as oil prices increased even though the ETN offered no direct exposure to spot oil prices, and recommended that retail customers buy and hold the ETN indefinitely. The order also finds that Cadaret Grant failed to adopt and implement policies and procedures concerning the sale of exchange traded products in investment advisory accounts.
The SEC charged Eugene Long, the Cadaret Grant broker who recommended the ETN to the greatest number of customers, for recommending the ETN without a reasonable basis. The order found that Long recommended his customers continue to hold the ETN from 2015 and until spring 2016, when his customers’ holdings were sold at an average loss of more than 90 percent of the amounts they invested.
“Brokers have an obligation to understand complex products and their risks before recommending them to customers,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “As this action shows, we will continue to hold people accountable at every level for unsuitable recommendations that harm investors and for the failures that allow those recommendations to be made unchecked.”
Without admitting or denying the SEC’s findings, Cadaret Grant agreed to be censured and pay a $500,000 penalty plus $13,194 in disgorgement and interest. Grant and Johnson each agreed to a 12-month supervisory suspension and will pay penalties of $100,000 and $75,000 respectively. Long agreed to be censured and pay a $250,000 penalty. The penalties, disgorgement and interest amounts paid will be placed in a Fair Fund that will reimburse harmed investors for their incurred losses, plus reasonable interest.
The SEC’s investigation was conducted by Armita Cohen and Brent Mitchell of the Complex Financial Instruments Unit, assisted by John Bowers and supervised by Jeffrey Weiss.
https://www.sec.gov/news/press-release/2018-184
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