• May 17, 2023
• SEC

The Wolper Law Firm, P.A. represents investors around the country who have lost money in complex options strategies.  Complex options strategies have become more popular for brokerage firms, registered investment advisers and other financial professionals, often times being sold as safe income producing investment strategies.  Many of these financial professionals do not understand the risks associated with options and, therefore, do not accurately communicate those risks to their clients.  Sanford Bernstein/Alliance Bernstein is the latest financial services firm to find themselves under fire for a failed options strategy—which they called the Sanford Bernstein/Alliance Bernstein Options Advantage Fund (“Options Advantage”).

If you have experienced investment losses due to the Options Advantage strategy, please contact the Wolper Law Firm, P.A., P.A. for a free consultation.  We can be reached at (800) 931-8452 or by email at mwolper@wolperlawfirm.com.

What is the Sanford Bernstein/Alliance Bernstein Options Advantage Fund?

The Options Advantage fund was a managed strategy that was marketed and presented to clients as a low-risk strategy that would be “seeking incremental return in a low yield environment.”  Clients were advised that they could expect additional returns of 1%-2% on top of the return received on other assets at the firm with very little draw-down or risk of loss.  Sanford Bernstein/Alliance Bernstein further represented that the options strategy was professionally managed, utilizing margin in order to avoid clients having to deposit additional capital.  Clients were also reassured that the Options Advantage strategy produced “solid results.”

The Options Advantage strategy was supposed to “capture the implied volatility embedded” within the options transactions such that the probability of success of each options transaction was maximized.  “Volatility” is a measure of the size of price fluctuations in an underlying asset over time, without regard to the direction in which the moves occur. Stocks which have low volatility tend to be relatively stable, with small price moves. Stocks which have a high volatility tend to exhibit large price moves.  “Implied Volatility” is the volatility which can be inferred from option prices. It can be thought of as the marketplace’s consensus of the likely future volatility of the stock.  “Volatility” and “Implied Volatility” are two criteria that every professional options trader can and should analyze so that a framework exists for measuring the statistical probability of success with each trade.

In reality, Sanford Bernstein/Alliance Bernstein purchased and sold “call” and “put” options on the S&P 500 that neither provided positive returns to clients nor the represented level of protection.  In the fullness of time, it appears that either no volatility calculations were completed or they were ignored.  During the recent market volatility, the Options Advantage strategy substantially declined in value, creating large losses for clients and unplanned margin maintenance issues.  Since the decline, Sanford Bernstein/Alliance Bernstein has admitted that the Options Advantage strategy was not designed for volatile markets, which should have caused financial professionals to abstain from recommending the strategy.

The Securities and Exchange Commission (SEC) Has Sanctioned Financial Institutions with Regard to Similar Complex Options Strategies

The SEC has closely scrutinized options strategies offered to retail clients because these strategies are often misunderstood by both the financial professionals that work at brokerage firms and the clients that invest.  This is due to a lack of education, training and enforced compliance policies and procedures.

In the case of In re UBS Financial Services, Inc., 2022 SEC LEXIS 1620, (SEC June 29, 2022), UBS sold the UBS Yield Enhancement Strategy (YES) to its retail clients as an income producing options strategy.  The strategy precipitously declined, and its risk disclosures were incomplete and inaccurate.  The SEC determined that UBS “provided its financial advisors with inadequate training or dedicated supervisory oversight in this complex options trading strategy during the relevant time period, as a result certain of them did not understand the significant downside risk.”  “Certain financial advisors and clients expressed surprise by these losses…”  In finding that UBS violated securities laws, it agreed to penalties, disgorgement and interest of more than $31MM.

In the case of In re Frontier Wealth Management, LLC and Shawn Sokolowsky, 2021 SEC LEXIS 2577, *2-4 (SEC Sep. 3, 2021), the SEC initiated an enforcement action against Frontier for violation of securities laws, stemming from the use of a complex options strategy.  The SEC specifically determined that Frontier “gave its IARs broad autonomy on client investments” but “failed to adopt or implement an adequate supervisory system for determining whether IARs had developed a reasonable belief that their advice was in the best interest of each client…Frontier IARs did not assign any Frontier supervisor the responsibility of reviewing, monitoring, or approving Frontier IAR recommendations or IAR representations to clients and potential clients concerning complex financial products like the Feeder Fund.”

The Wolper Law Firm, P.A., P.A. Offers Free Consultations to Discuss Losses in the Options Advantage Strategy

The Wolper Law Firm, P.A. represents investors nationwide in securities litigation and arbitration on a contingency fee basis.  Matt Wolper, the Managing Principal of the Wolper Law Firm, P.A., is a trial lawyer who has handled more than 1,000 securities cases during his career involving a wide range of products, strategies and securities. Prior to representing investors, he was a partner with a national law firm, where he represented some of the largest banks and brokerage firms in the world in securities matters. We can be reached at (800) 931-8452 or by email at mwolper@wolperlawfirm.com.