Advisor Group firm faulted for lapses in sales of now-defunct mutual fund

A midsize brokerage that’s part of one of the largest wealth managers failed to supervise a risky alternative product any differently than a traditional mutual fund, according to FINRA.

Registered representatives of Advisor Group’s Triad Advisors sold $2.3 million worth of shares in the LJM Preservation & Growth Fund — an alternative mutual fund relying on uncovered options that shut down in 2018 after losing 80% of its value “during an extreme volatility event” that year, the regulator alleges. The 58 clients lost hundreds of thousands of dollars, according to FINRA. Without admitting or denying the allegations of supervisory deficiencies, Atlanta-based Triad settled the case on Dec. 29 with restitution and a fine totaling $705,000.

Similar to FINRA cases against Cambridge Investment Research and other wealth managers last year involving the same products, a single, unidentified Triad rep sold $1.7 million in LJM shares to 37 clients between September 2016 and February 2018, according to investigators. That month, a slump in equity values created a steep surge in volatility that investors at the time described as a “vol-mageddon.” LJM closed, and the fund’s issuer is currently fighting SEC and Commodity Futures Trading Commission cases accusing the firm of misleading investors to the tune of $1 billion in losses across its products.

In the LJM cases and ones like it over the years, wealth managers and financial advisors often display an “undue reliance on whatever the issuer's management says about the program,” said attorney Alan Rosca of Goldman Scarlato & Penny, which plans to file several client claims involving the same fund over the next few weeks.

“There was all this talk about the risk monitoring, the safety features of the program, the controls,” said Rosca. “It looks like the SEC found something very different behind the curtains when you read the complaints.”

Howard Rosenfield, another attorney who has represented LJM investors in arbitration cases against Cambridge, offered a similar assessment of the products.

“The pitch was that these are non-correlated to the fixed income market or the equity market,” Rosenfield said. “It really wasn't for retail folks because it was a volatility bet.”

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Representatives for Triad, which has more than 1,050 reps in 350 branches, didn’t respond to requests for comment. In its last FINRA supervision case nearly a year ago with a combined fine and restitution of $194,000, the firm settled the regulator’s allegations of other deficiencies with respect to Class A shares of mutual funds and exchanges of variable annuities. Three other Advisor Group firms settled other FINRA cases last month relating to 529 plans and supervision.

Triad “permitted the sale of LJM on its platform without conducting reasonable due diligence of LJM and without a sufficient understanding of its risks and features,” according to FINRA investigators. Despite repeated warnings from FINRA over the past decade and cautionary language in the fund’s prospectus, the firm put no procedures in place to identify whether a new mutual fund was a complex product nor did it train reps about the risks in times of spiking volatility, according to FINRA. In addition, for nearly five years, the firm’s corporate office didn’t gather the required new account forms and other documentation relating to the sales of LJM products within one of its offices of supervisory jurisdiction, investigators said.

The firm accepted a censure as part of the settlement. In separate class action cases in federal and state courts in Chicago, LJM investors have received a combined $14 million in settlements. The SEC and CFTC filed parallel actions last May against the fund’s Chicago-based issuers, LJM Funds Management and LJM Partners, as well as their portfolio managers, Anthony Caine and Anish Parvataneni. The value of the company’s products tumbled by over 80% in the course of two trading days in February 2018, the SEC said.

“LJM adopted a short volatility trading strategy that carried risks that were remote but extreme,” according to the SEC. “In order to ease investor concerns about the potential for losses, LJM, Caine and Parvataneni made a series of misstatements to investors and the mutual fund's board about LJM's risk management practices, including false statements about its use of historical event stress testing and its commitment to maintaining a consistent risk profile instead of prioritizing returns.”

Representatives for LJM didn’t respond to requests for comment. In its own filings in response to the SEC case, the company’s lawyers have denied the allegations.