U.S. Securities and Exchange Commission building in Washington. (Photo: New York Law Journal) September 4, 2014. Photo by Diego M. Radzinschi/THE NATIONAL LAW JOURNAL.
Call it a crude awakening.
The U.S. Securities and Exchange Commission announced Tuesday that it has obtained the cash to fully reimburse retail investors who suffered losses on a leveraged exchange-traded note tracking crude oil futures.
The SEC found that Cadaret Grant & Co. Inc., President Arthur Grant, and senior vice president Beda Lee Johnson failed to supervise the firm's registered representatives who recommended that customers buy and hold the VelocityShares Daily 3x Long Crude ETN, formerly known by its ticker UWTI, "without a reasonable basis," according to a statement from the regulator.
The order found that even as the firm's brokers were recommending the ETN, which was designed to be a daily trading tool for sophisticated investors and not meant to be held for more than a day, they didn't understand its inherent risks.
"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 SEC stated.
Broker Fined
According to the SEC's order, Cadaret Grant broker Eugene Long, who advised the greatest number of customers to buy the ETN, suggested that his clients hold the note from 2015 until spring 2016, when their holdings were sold at an average loss of more than 90 percent.
In December 2016, the ETN's ticker changed from UWTI to UWTIF after the note and a related security that bet on oil prices moving in the opposite direction were delisted by Credit Suisse Group AG and then revived by Citigroup Inc. as the new issuer.
Without admitting or denying the SEC's findings, Cadaret Grant agreed to be censured and pay a $500,000 fine plus $13,194 in disgorgement and interest. Long agreed to be censured and pay $250,000. The penalties, disgorgement and interest amounts will be used to reimburse investors who were harmed by the firm's recommendations for their losses, plus interest.
