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Suitability and Firms' Duty to Disclose Comes into Focus as VelocityShares Daily Inverse VIX Exchange Traded Notes (XIV) Falls

After losing 95% of its value in early February, issuer Credit Suisse announced plans to liquidate VelocityShares Daily Inverse VIX Short-Term Exchange-Traded Note (NASDAQ:XIV), capping off a rough winter for investors who purchased the risky product and putting squarely into the spotlight the duty owed by registered representatives and their firms to customers in recommending the XIV product, whose downfall may very well have been predicted by the ETN's own prospectus.

Full-service brokerage firms who failed to disclose that the Inverse VIX ETN's long-term expected value is zero, or that the ETN should not be held as a long-term investment potentially may be liable for damages incurred by low-risk and long-term investors who purchased the product.

As a sample case, FINRA in 2013 cited Carmine Claudio Capone, Jason Lyn Figueroa, and The GMS Group for unsuitably recommending the Velocity Shares Daily Inverse VIX ETN, in addition to several other leveraged and inverse-leveraged ETPs unsuitable for their unsophisticated and retired investors with limited investment experience and a moderate risk tolerance.

Figueroa's BrokerCheck report contains a series of pending and settled customer disputes with alleged damages in excess of $1 million; Figueroa left GMS in 2015, while Capone is still associated with the firm (a dispute filed against Capone settled in 2015 for $350,000).

FINRA in October 2017 ordered Wells Fargo to pay $3.4 million to customers who purchased volatility-linked ETPs—including ETNs—that investigators say were unsuitably recommended, including by representatives who didn't understand the risks and improperly marketed the products as long-term investments.

Credit Suisse warned in its prospectus for the VelocityShares Daily Inverse VIX Short-Term Exchange-Traded Note that its product was not designed for investors with a long-term horizon in mind: "The long term expected value of your ETNs is zero. If you hold your ETNs as a long-term investment, it is likely you will lose all or a substantial portion of your investment."

The prospectus also warned that the ETNs may not be a suitable investment if: "you seek a long-term investment objective...you prefer the lower risk...you seek current income from your investment...you are not a sophisticated investor...you seek an investment with a longer duration than a daily basis."

On a similar note, FINRA in September 2017 fined and suspended former JP Morgan Securities representative Todd Jason Jones for exercising discretion without authorization to purchase over $200,000 in VelocityShares 3x Long Crude Oil ETNs.

Similar to the XIV disclosure, the Long Crude Oil ETN prospectus warned that the ETNs may not be suitable for unsophisticated investors, those seeking income or a low risk product, or for investors who seek an investment objective longer than one day.

FINRA previously disciplined broker Edward Beyn for unsuitably recommending a customer invest in Barclay's iPath S&P 500 VIX Short Term Futures ETN (VXX), and two additional leveraged ETNs (VelocityShares 3X Long Gold ETN [UGLD], and Velocity Shares 3X Long Silver ETN [USLV]).

Similarly, in a decision arising from a complaint of churning, FINRA found that several Newport Coast Securities representatives recommended a series of unsuitable investments including leveraged and inverse exchange-traded funds and exchange traded notes, including the aforementioned VIX Short Term Futures ETN (VXX) that FINRA disciplined Beyn for recommending.

If you have invested with a full-service brokerage firm in Credit Suisse's VelocityShares Daily Inverse VIX Short-Term Exchange-Traded Note (XIV) or in another similarly complex ETN product that was unsuitable given your investment objectives and risk tolerance preferences, and your broker's failure to disclose the significant risk factors involved in such an investment has proven harmful to your interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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The Law Offices of Jonathan W. Evans & Associates - California Securities Fraud Attorney
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