Brokerage Firm Made Unsuitable Investment Recommendations to An Inexperienced Investor
Our brokerage firm fraud lawyers at Shepherd Smith Edwards and Kantas (SSEK Law Firm) have filed a Financial Industry Regulatory Authority (FINRA) arbitration against Morgan Stanley on behalf of an elderly Dallas, Texas investor.
The investor in question sustained over $500K in losses due to the unsuitable recommendations of structured products, Master Limited Partnerships (MLPs), other oil and gas equities, and investments governed by Harvest Volatility Management’s Collateral Yield Enhancement Strategy (CYES).
Morgan Stanley Broker Touts CYES Strategy To Texas Investor
According to the claim, the client, who was an inexperienced investor, was very clear with the firm that she didn’t want to take on unnecessary risks and intended to live off of the income from the trust.
Despite this preference, Morgan Stanley and its broker, Barry Pechenik, recommended that she employ a complex options strategy that ended up exposing her to more risk than reward. They also advised her to invest in structured products, MLPS, and other risky investments. Meanwhile, the broker-dealer assured the claimant that she was taking on minimal risk and could expect to make a comfortable income.
Her assets were placed in separate accounts, with one municipal bond portfolio also containing structured notes, as well as over $1M in a mutual fund called Angel Oak that was concentrated mostly in non-agency residential mortgage-backed securities (RMBS). A second account was made up of oil and gas investments, including Master Limited Partnerships (MLPs) that were overseen by a money manager.
The third account was managed by Harvest Volatility Management and employed the CYES Strategy. This is an options overlay strategy that uses an “Iron Condor” approach involving puts and calls on the S & P 500 index and requires margin usage. Attendant to this account was a collateral account with $1M in municipal bonds and $1M in the Baring’s Global Floating Rate Fund, a mutual fund with mostly “junk” or B-rated loans.
Unsuitable CYES Options Strategy Caused Investor Losses
As alleged, a CYES Options Strategy was highly unsuitable for the client, who had no understanding of the Iron Condor Strategy.
However, because Morgan Stanley told her that this was a conservative approach, she agreed to the recommendation. Not only that, but Pechenik never told her that the firm listed the CYES Strategy as speculative and required an aggressive risk tolerance level.
The claimant is not the only customer to whom the Morgan Stanley broker recommended the CYES Strategy. He was also involved in a partnership called the Pechenik/Godat/McKinney Group that recommended this approach to many of its clients. The fees generated by the CYES Strategy grows when conducted on a large scale.
Broker-Dealer Misrepresented the Risks of Harvest Volatility Management
In addition to unsuitable recommendations, the claimant is also alleging the following:
- Misrepresentations and omissions
- Breach of fiduciary duty
- Gross lack of supervision by the firm.
While the terms “puts, calls, and margin” were used during conversations with the client, she had no idea what they were talking about. However, seeing as she trusted Pechenik, she agreed to their recommendations.
After the CYES strategy failed and the client lost money, the broker tried to convince her to use another option overlay strategy from a firm called Volaris. She eventually moved to another financial adviser.
Fortunately for this Texas investor, she made the transfer prior to the COVID-19 pandemic. Had she stayed with the Morgan Stanley broker and his recommendations during March and April 2020, her losses would be even greater. As is, she is already seeking to recover over $500K.
CYES Investor Fraud Law Firm
SSEK Law Firm represents investors throughout the US who have suffered losses because their broker and broker-dealer recommended unsuitable strategies or investments.
If broker Barry Pechenik or any financial adviser from Morgan Stanley or any other brokerage firm marketed this Iron Condor strategy to you and you suffered huge losses, contact our CYES investor lawyers today.