Dale R. Isaak, Securities Service Network Inc., and ETFs

We are currently investigating allegations made against Securities Service Network Inc., a Knoxville, Tennessee-based securities brokerage firm.  The Missouri Securities Division (MSD) brought a regulatory action against Securities Service Networks, making numerous allegations regarding its conduct, including its failure to supervise a financial advisor, Dale R. Isaak, from Webster Groves, Missouri.  Isaak was alleged to have sold numerous leveraged and inverse ETFs between January 2010 to December 2011 to his clients, who lost at least $900,000, some of whom were elderly.  To settle these allegations, Securities Service Network agreed to pay $500,000 in restitution, a fine of $35,000, and $15,000 for the MSD’s investigation costs.

Dale Isaak used the Sherman Market Timing Strategy and recommended inverse and leveraged ETFs to his customers.  Isaak and Securities Service Network were alleged to have failed to adequately disclose that this was a “risky investment strategy” (according to the MSD) to customers.  Moreover, Securities Service Network was alleged to have failed to adequately supervise Isaak, despite internal emails that Isaak was a “terrible investment adviser”.  Isaak was previously barred from the securities industry by the MSD for one year.

The MSD alleged that Securities Service Network failed to reasonably supervise the ETFs transactions, that they failed to perform adequate due diligence on these products, and that the failed to adequately supervise the customers’ high concentrations in ETFs.

ETFs

ETFs (or Exchange Traded Funds) have become increasingly popular over the last 15 years.  ETFs are typically used to track and replicate the performance of an index, such as the S&P 500, the Russell 2000, or the Dow Jones.  ETFs are popular, because investors can invest in a basket of securities that provides diversification but with the simplicity of being a single stock.

In recent years, many companies have also created leveraged or inverse ETFs.  Leveraged ETFs try to replicate the performance of a particular index, but attempt to replicate the performance by doubling or even tripling the index.  As an example, the Proshares Ultra Russell 2000 ETF seeks to double the performance of the Russell 2000 Index.  Inverse ETFs also try to replicate the opposite (or even multiple opposites) of a particular index.  For example, Ultrashort QQQ Shares seeks a return of two times the inverse (-2x) of the daily performance of the NASDAQ-100 Index. Leveraged and inverse ETFs can be useful investment tools for investors seeking intra-day trading.

The regulators and others have long-warned the securities industry about the dangers of inverse and leveraged ETFs.  These are designed to be day-trading vehicles, but often financial advisors recommend holding these ETFs in an investor’s accounts for weeks or even months.

FINRA, the Financial Industry Regulatory Authority, has stated that “inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.”  See FINRA Regulatory Notice 09-31 at page 1.  This Notice reminds members who sell these products to “make every effort to familiarize themselves with each customer’s financial situation, trading experience, and ability to meet the risks involved with such products and to make every effort to make customers aware of the pertinent information regarding the products.”  Id. at 3, citing to NASD Notice To Members 05-26.

FINRA has punished other brokers and firms for using leveraged and inverse ETFs improperly.  In an action against Michael Venable, FINRA barred a broker from the industry for using unsuitable leveraged and inverse ETFs with his clients.  See In re Michael Douglas Venable.   FINRA also fined Citigroup, Morgan Stanley, UBS, and Wells Fargo a combined $9.1 million for sales of inverse and leveraged ETFs, in May 2012.

Our attorneys have represented over one thousand investors who have been defrauded by their financial advisor or stockbroker.  While we have offices in Denver and the Seattle area, we have also previously represented clients in Missouri.  If you have lost money with Securities Service Network or Dale R. Isaak in leveraged or inverse ETFs, and want to hear about ALL legal options, please visit https://www.israelsneuman.com/ and go to our CONTACT page or call us at 720-599-3505.

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