Recovery Options for Investors with Losses in VIX-Linked Exchange Traded Notes

  • December 3, 2020
  • VIX

The Wolper Law Firm, P.A., P.A. is currently investigating claims against various brokerage firms who permitted their Financial Advisors to sell VIX-Linked Exchange Traded Notes to their retail customers.  In many instances, these securities were sold for extended periods of time and without full disclosure of the characteristics and risks underlying these securities.

The Chicago Board of Options Exchange (CBOE) Volatility Index, or the “VIX,” represents the market’s expectation of thirty (30) day forward-looking volatility.  It is commonly referred to as the “fear index.”  The VIX is a complex statistical measure of trading activity and price action in options (i.e., calls and puts) on the S&P 500.  The short-term options activity on the S&P 500 provides a window into how sophisticated institutional traders view market risk in the short-term.  Mechanically, when the overall financial markets are in turmoil, the VIX will spike.  When the overall financial markets are stable or appreciating, the VIX is stagnant or will decline.

The VIX is not tradeable in the retail markets—it is just an index.  However, in recent years, various asset managers have created exchange traded investment vehicles that track the performance of the VIX.  Two such investment vehicles are the Barclays Bank IPATH Series B S&P 500 VIX Short Term Futures Exchange Traded Note, which trades under the symbol “VXX” and the ProShares VIX Short-Term Futures ETF, which trades under the symbol “VIXY.”

VXX and VIXY trade an underlying portfolio of options on the S&P 500 and seeks to correlate performance to the VIX.  Thus, investors who trade the VXX or VIXY will experience similar portfolio increases/decreases than if they were able to trade the VIX.  Investors who purchase shares of the VXX or VIXY are predicting an increase in market volatility.  If that prognostication proves correct, the VXX or VIXY trade will turn profitable.  If volatility decreases, the value of VXX or VIXY shares will also decrease and the investor will lose money on the trade.  Given that the underlying options positions within the VXX and VIXY are leveraged, and market volatility in and of itself can change by the minute, the VXX and VIXY are speculative securities that carry a high degree of risk.  VXX and VIXY are not securities designed for retail investors.

In November 2020, the Securities and Exchange Commission (SEC) alleged that several brokerage firms recommended the VXX and/or VIXY to their retail clients in violation of the securities laws.  The firms all settled with the SEC, agreeing to pay fines and disgorge profits.  Among the brokerage firms are Benjamin F. Edwards, Royal Alliance, American Portfolios, Securities America and Summit Financial Group.  The SEC alleged that Financial Advisors at Benjamin F. Edwards, Royal Alliance, American Portfolios, Securities America and Summit Financial Group recommended that customers hold the VXX and VIXY positions for long periods of time, often times resulting in a complete loss of the investment.  Given the volatility underlying the VXX and VIXY securities, holding the positions are not intended to be held for extended periods of time.

  • Benjamin F. Edwards disgorged $716,000 and paid an additional fine of $650,000
  • Royal Alliance paid a fine of $502,000
  • American Portfolios Financial Services paid a fine of $653,000
  • Securities America paid a fine of $603,000
  • Summit Financial disgorged $606,000 and paid an additional fine of $600,000

Contact the Wolper Law Firm, P.A. to Explore Your Legal Options if Your Financial Advisor Recommended that You Invest in the VXX or VIXY

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 hundreds of 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.

Attorney Matthew Wolper

Attorney Matthew WolperMatt Wolper is a trial lawyer who focuses exclusively on securities litigation and arbitration. Mr. Wolper has handled hundreds of securities matters nationwide before the Financial Industry Regulatory Authority (FINRA), American Arbitration Association (“AAA”), JAMS, and in state and federal court. Mr. Wolper has handled and tried cases involving complex financial products and strategies ranging from traditional stocks and bonds to options, margin and other securities-based lending products, closed/open-end mutual funds, structured products, hedge funds, and penny stocks. [Attorney Bio]