World Equity Group, ETFs, and Private Placements

We are currently investigating allegations made against World Equity Group, an Arlington Heights, Illinois-based securities brokerage firm.  FINRA (the Financial Industry Regulatory Authority) brought a regulatory action against World Equity Group, making numerous allegations regarding its conduct, including: a) failure to supervise the sale of non-traditional ETFs; b) failure to preserve email communications; c) failure to maintain records and suitability information for at least 13 customer accounts with one broker; d) failure to properly document adequate due diligence performed on private placements and non-traded REITs; e) failure to supervise the Brick, New Jersey branch office for unapproved option trading; and f) failure to have adequate anti-money laundering (AML) procedures in place.  To settle these allegations, World Equity Group agreed to pay a $225,000 fine and a censure.

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 alleged that numerous clients of World Equity Group held these ETFs for periods longer than one day, but it had no adequate supervisory procedures in place to detect this.

FINRA 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.

Private Placements and Non-Traded REITs

FINRA also sought to punish World Equity Group for its sale of private placements and non-traded REITs.  FINRA alleged that World Equity Group sold at least $6 million in eight different private placements (including a company called Newport Digital Technologies) from July 2009 to January 2012, and it also sold $3 million in at least 5 non-traded REITs.  Private placements and non-traded REITs generally are illiquid products and can be high risk, speculative products.  As such, they are typically not suitable for many investors.

Because of the nature of private placements and non-traded REITs, FINRA requires that firms perform adequate due diligence on these products before they are sold, to ensure that the brokerage firm understands its risks and characteristics and so that they are suitable for the investors.  FINRA alleged that World Equity Group failed to adequately document its review of due diligence materials for these private placements and non-traded REITs.

If you have lost money with World Equity Group in leveraged or inverse ETFs, private placements, non-traded REITs, or Newport Digital Technologies, 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.

Click to view FINRA AWC:  WEG FINRA AWC