NAPLES, Fla., Jan. 29, 2014 (GLOBE NEWSWIRE) -- Similar to other multi-million dollar claims filed recently by investors rights law firm of Vernon Healy, this claim filed against J.P. Morgan today addresses what the law firm believes to be deceptive sales strategies designed to appeal to high net worth investors. "We see a recent trend in pitching 'risk management' as a sales tool," explained attorney Chris Vernon. The investors drawn to these types of sales pitches by Wall Street firms and Family Offices want to focus on reasonable returns with downside protection, not speculate with their net worth. But, according to Vernon, "Too often, investment firms sell strategies that result in devastating losses to investors who were trying to avoid speculative investing."
In the J.P. Morgan case filed today, the financial advisor exercised both discretion and direction over the client's account. The advisor, who is based out of a California office of J.P. Morgan, has a number of investor complaints that have resulted in FINRA arbitration claims filed against J.P. Morgan as his employer. Although the complaining investors are from diverse states-- New Jersey, Washington, Florida, and California--the substance of virtually all the complaints seem to involve U.S. Treasury STRIPS or other government debt. Like the Claim filed today, the FINRA arbitration claims filed by his other customers collectively include allegations of: misrepresentation of the level of risk, misrepresentation of the risk associated with the recommended strategy, over-concentration of the account, breach of fiduciary duty, failure to follow instructions and inappropriate use of margin and leverage.
According to the claim filed by Vernon Healy (and consistent with other investor complaints against J.P. Morgan), this financial advisor exposed clients to an inappropriate level of risk by making a speculative bet that U.S. Government debt would fall in value. Again, Vernon Healy sees this as a troubling industry-wide trend of luring conservative high net worth investors into high-risk strategies falsely promoted as low risk/reasonable return strategies.
The Claim filed today alleges that J.P. Morgan and its advisor's use of margin and leverage compounded the harm caused by the incompetent investment advice. According to the Claim, at one point the margin balance in this customer's account spiked to more than $2 million. This added to the leverage imbedded within the U.S. Treasury STRIPS strategy used by J.P. Morgan's advisor. Because STRIPS are traded at deep discounts to maturity value in lieu of interest, they are more volatile than traditional U.S. Treasuries. Thus, in effect, there were two levels of leverage in this strategy, according to the Claim. The first level of leverage was at the account level with the utilization of margin; the second level of leverage was at the position level with the use of STRIPS, which are typically much more volatile than Treasuries with the same maturity.
The Claim also argues that the J.P. Morgan advisor evolved his short selling of these STRIPS into more and more distant maturities, which further increased the risks of these investments. Notably, the lion's share of the alleged losses from this shorting of STRIPS resulted from the trades in the longest maturity STRIPS.
Just like a hedge fund, J.P. Morgan not only charged management fees but also charged performance or incentive fees. According to the Claim, these types of fees actually incentivized its advisors to take risks with clients' money because it resulted in extra fees for successful bets (and no reimbursement of incentive fees if the gains are reversed or losses are suffered). It is hard for firms like J.P. Morgan to justify that the success of a portfolio should be measured over a long period of time by the client when incentive fees are collected annually.
"Although the Claim we filed today is against J.P. Morgan, others are following the same disturbing trend," warned attorney Chris Vernon. The Vernon Healy firm is currently conducting an aggressive nationwide and international investigation into similar practices on behalf of clients of other firms that cater to high net worth investors. Specifically, Vernon Healy believes that firms such as J.P. Morgan and its Wall Street competitors (as well as Trust Companies and Multi Family Offices) often lead such investors to believe these investment strategies are customized and that the risks are managed to a far greater extent than they are. Chris Vernon predicts that this is just the beginning, "Unfortunately, these marketing pitches will likely continue as long as they generate more in fees than what is paid out in lawsuits and arbitrations."
Based in Naples, Florida, the securities attorneys at the Vernon Healy law firm have conducted aggressive nationwide investigations of hedge funds, fund of fund hedge funds, managed futures, structured products, reverse convertibles, municipal bonds, bond funds, Puerto Rico bonds, non-traded REITs, private equity, EB-5, complex insurance products and strategies, TICS, and various securities fraud cases and Ponzi schemes. The firm's investigations and advocacy on behalf of investors have been featured in AARP magazine and Forbes. More recently, one of Vernon Healy's ongoing investigations was reported in Barron's.