In this special episode, Roger and Brian unpack the deeper implications of LPL’s acquisition of Commonwealth for advisors. From hidden non-solicit clauses to vendor lock-in, platform disruptions, and shifting custodianship, this isn’t just a firm-changing event—it’s potentially a career-defining one.
A recent investigation and analysis into auto-callable structured products has uncovered massive losses for investors, with the 100 worst-performing ones collectively losing over $1 billion. To put that into perspective, that’s more than 55% of their original total value of $1.84 billion. This sheds light on the significant risks tied to these complex financial investment products, which are commonly issued and recommended by financial institutions like UBS, Goldman Sachs, JP Morgan, and Morgan Stanley.
Auto-callable structured products are a type of investment that pays periodic interest and can be redeemed early, but only if certain conditions tied to an underlying asset are met. If the asset performs well, the investment is called early, and investors get their principal back with interest. But if things go south and the asset’s value drops beyond a certain point, investors can face serious financial losses.
According to an article analyzing the $1 billion loss in 100 auto-callable notes, Goldman Sachs alone is linked to $234 million of the losses from the worst-performing 100 auto-callables. Other major financial institutions, such as JP Morgan, UBS, Morgan Stanley, and Credit Suisse each racked up more than $100 million in losses. According to the article, there are also concerns that UBS, Credit Suisse, and Bank of Montreal may have overstated their initial valuations in their regulatory filings, which could explain why their products experienced higher-than-average losses of 62.6%, compared to 53.4% for other issuers.
A FINRA Arbitration Panel ordered UBS Financial Services, Inc. and one of its financial advisors, Andrew Burish, to pay $92.2 million in damages, consisting of $24.6 million in compensatory damages and $75.3 million in punitive damages, to nine customers with brokerage accounts at UBS. According to the FINRA Award, the customers asserted claims for breach of fiduciary duty, violation of FINRA suitability rules, failure to supervise/negligent supervision and fraud. The customers allege that UBS and Burish “solicited and recommended an aggressive, high-risk trading strategy designed to produce speculative, short-term profits (not long-term wealth preservation), facilitated this solicited, aggressive trading strategy by furnishing boilerplate paperwork to Claimants (who are not professional investors) and recommended holding highly risky positions at odds with the asset protection and multi-generational wealth transfer advertised as its marketing offering.” More specifically, the customers alleged that UBS and Burish recommended that they sell Tesla, Inc. (TSLA) common stock short, betting that its price would decline. At the time, Tesla shares were trading at around $60 per share. Tesla’s stock price skyrocketed over the next year, reaching over $700 by mid-2020 resulting in losses to these customers. The customers also in the arbitration alleged that UBS and Burish “recommended that they continue to hold the positions in the face of mounting losses.”
According to UBS’s website and FINRA BrokerCheck, Andrew Burish is a financial advisor from Madison, Wisconsin who has been in the financial services industry for over 40 years. He leads Burish Group at UBS, a 50-person team consisting of 17 financial advisors, and manages more than $6.2 billion in client assets. The Panel held Burish individually liable for almost $3.1 million.
This case highlights the significant risks of short-selling stock, especially with highly volatile stocks, such as Tesla. Short selling can be a risky investment strategy even for experienced or sophisticated investors. Financial advisors and financial institutions, like UBS, have an obligation to recommend suitable investments, ensure that investment strategies align with their client’s best interests and disclose all material risks (not just the potential rewards). Financial institutions, including UBS, also have a duty to supervise the recommendations advisors make to their clients.
On April 30, 2024, a class action was filed against Merrill Lynch in the Western District Court of North Carolina to recover the deferred compensation that Merrill Lynch cancelled upon Plaintiffs’ voluntary resignation. While we believe there are strong claims against Merrill Lynch for violation of ERISA, we believe that they must be arbitrated at FINRA. See Regulatory Notice 16-25 here. Lax & Neville is pursuing arbitration claims on behalf of former Merrill Lynch advisors for their cancelled deferred compensation comprised of both Long-Term Incentive (LTI) Cash Plans/WealthChoice and Restricted Stock Units (RSUs).
In a similarly situated class action, Shafer, et. al. v. Morgan Stanley, et. al., the Plaintiffs, former Morgan Stanley financial advisors, sued Morgan Stanley in December 2020 to recover their deferred compensation, which was cancelled by Morgan Stanley when those advisors voluntarily resigned. Morgan Stanley moved to compel those advisors’ claims to FINRA arbitration. On November 21, 2023, almost three years after the filing of the Complaint, the Federal Court granted Morgan Stanley’s motion requiring any Morgan Stanley advisor who wants to recover their deferred compensation to file FINRA arbitration claims against Morgan Stanley. See the Court’s Order and Opinion here. For more information on the Morgan Stanley decision, see here.
Our firm has extensive experience successfully pursuing deferred compensation claims in FINRA arbitration. Most recently, we have won more than $35 million in unpaid deferred compensation, interest, costs, and attorneys’ fees for more than two dozen former Credit Suisse investment advisers, and we represent dozens of Morgan Stanley financial advisors seeking to recover their deferred compensation.
On November 22, 2023, the Southern District of New York granted Morgan Stanley’s motion to compel arbitration in the class action Shafer, et. al. v. Morgan Stanley, et. al. (Case 1:20-cv-11047-PGG).
Plaintiffs, former Morgan Stanley financial advisors, sued Morgan Stanley asserting that Morgan Stanley violated the Employee Retirement Income Security Act of 1974 (“ERISA”) by not paying Plaintiffs all of their deferred compensation when they resigned from Morgan Stanley, and Morgan Stanley moved to compel arbitration on June 29, 2022. The Court’s decision forces Plaintiffs and any similarly situated former Morgan Stanley financial advisor to file their claims for unpaid deferred compensation in FINRA Arbitration.
In its opinion, the Court held that Morgan Stanley’s Compensation Incentive Plan and Equity Incentive Plan are ERISA plans and “‘individual account plans,'” which under ERISA “means a pension plan which provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant’s account….” (Order, p. 44). The Court’s holding may significantly strengthen FINRA arbitration claims against Morgan Stanley, which primarily depend on the applicability, and Morgan Stanley’s violation, of ERISA.
On November 7, 2024, a class action lawsuit was filed against Lightstone Value Plus REITs I, II, III, their external advisers, and their 2022 directors, in New Jersey Federal Court. The Lightstone Value Plus REIT is a real estate investment trust focused on acquiring and managing income-producing properties, primarily residential and commercial. It aims to provide investors with regular income and long-term capital appreciation by investing in a diversified portfolio of real estate assets. The investors who filed the claim state that Lightstone breached their contract and fiduciary duty as a company. They also claimed that proxy statements produced by Lightstone, an information packet used to show the outlook for the fiscal year, had misleading and missing information. Investors alleged that officers and directors of the company were withholding dividends from investors.
A non-traded REIT can be risky for uninformed investors because it lacks the liquidity of publicly traded REITs, meaning it’s harder to buy or sell shares quickly. Additionally, these REITs often have high fees, less transparency, and may have more complex valuation methods since they are not traded on an exchange. Because of the high fees involved, there may be instances where your advisor could have potentially recommended this product to you without fully explaining the risks involved with Lightstone Value Plus REIT.
Our firm has extensive experience successfully pursuing similar claims in FINRA arbitration. If you believe your advisor recommended that you invest in Lightstone Value Plus REITs I, II, or III, please reach out to our firm at 212-696-1999 for a free consultation.
The T-Rex 2X Inverse Nvidia Daily Target ETF (NVDQ) has recently caused significant losses for investors. This Exchange Traded Fund or ETF, which aims to capitalize on declines in Nvidia’s stock, was recommended by some financial advisors as a strategic investment for clients seeking to profit from the tech giant’s perceived downturn. However, as Nvidia’s stock price surged, this leveraged inverse ETF led to substantial losses.
Leveraged and inverse ETFs like the T-Rex 2X are intended for short-term, tactical trades. Despite this, financial advisors recommended the product to customers without fully explaining the complexities and risks involved, particularly the daily resetting feature that compounds return over time. For investors who held the ETF for extended periods, this investment product’s inverse structure led to significant losses as Nvidia’s stock rose instead of falling.
Financial advisors have duties to recommend investments that are suitable to their clients and perform due diligence on the investment products they recommend and sell to investors. If your financial advisor recommended that you invest in T-Rex 2X Inverse Nvidia Daily Target ETF, you may have a claim to recover your investment losses.
On November 5, 2024, Judge Paul G. Gardephe of the United States District Court for the Southern District of New York denied Morgan Stanley’s motion to reconsider and, in a detailed opinion, reaffirmed his November 21, 2023 ruling that Morgan Stanley’s deferred compensation plans are ERISA plans.
Last year, Judge Gardephe held that Morgan Stanley’s Compensation Incentive Plan and Equity Incentive Plan are “individual account plans” for the purposes of the Employee Retirement Income Security Act of 1974 (ERISA), a ruling that would require the Plans to comply with ERISA’s statutory protections for employee plan participants. On December 5, 2023, Morgan Stanley moved for “reconsideration and/or clarification” of the Court’s ruling, arguing that (i) the Court overstepped its authority and (ii) factual issues precluded the Court’s determination that Morgan Stanley’s Plans are governed by ERISA. On May 24, 2024 Morgan Stanley took the unusual step of seeking a writ of mandamus from the Second Circuit Court of Appeals, which the Second Circuit denied on August 27, 2024.
In his November 5, 2024 Order, Judge Gardephe examined Morgan Stanley’s arguments at length and rejected them, finding that Morgan Stanley’s contention that this Court committed “clear error” in deciding the ERISA coverage question is “disingenuous and incorrect” and that “[t]he issue of ERISA’s applicability to [Morgan Stanley’s] deferred compensation programs has been front and center since this lawsuit was filed in 2020.” Considering whether testimony proffered by Morgan Stanley in a separate arbitration precluded the Court’s determination that the Plans are governed by ERISA, Judge Gardephe found the testimony “irrelevant” because the question of whether a plan is governed by ERISA is determined from the plan documents. Judge Gardephe again rejected Morgan Stanley’s argument that the deferred compensation plans fall within the U.S. Department of Labor’s bonus regulation and reaffirmed his prior ruling that “Morgan Stanley’s deferred compensation programs are ERISA plans.”
Lax & Neville LLP is investigating claims against brokerage firms for the sale of auto-callable notes to customers or investors.
An auto-callable note is a complex, highly risky structured product that can result in a complete loss of principal. Financial advisors at brokerage firms are highly incentivized to recommend these structured products to their customers despite the facts that these auto-callable notes may neither be suitable nor in the best interests for their customers.
Prior to recommending these investment products to investors, financial advisors are required to fully explain the details and risks of these complex investment products, such as, illiquidity due to the highly customized nature of the investment; market risk, including market volatility or changes in the underlying stock or index; and credit risks, including defaulting on its debt obligations, which could expose investors to lose some, or all, of the principal amount they invested as well as any other payments that may be due on the structured notes.
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Join Jenny Kim from The Gershman Group as she sits down with Brian Neville from Lax and Neville to discuss the latest retention package in the financial industry. They explore the unusual nature of KKR’s acquisition of Janney and what it means for financial advisors. Tune in to gain valuable insights into how this deal differs from past transactions and its potential impact on the industry.
