FINRA arbitration has recently been filed against Harper for Collateral Enhancement Strategy (CYES) Losses
The Sonn Law Group is investigating allegations that Gordon Harper recommended unsuitable investments. If you or a family member has suffered losses investing, we want to discuss your case. Please contact us today for a free review of your case.
Gordon Harper (CRD#: 5039713) has been a registered representative of Merrill Lynch, Pierce, Fenner & Smith in Houston, Texas since 2016. He has recently been named the subject in FINRA arbitration for Collateral Yield Enhancement Strategy (CYES) losses.
The clients bringing the suit are an elderly married couple in Texas. Their complaint alleges:
In or about late 2016, Harper recommended that the client open a new Merrill Lynch account to invest in the Harvest Volatility Management, LLC CYES. Harvest is a registered investment advisor (RIA) that manages an options overlay strategy it calls CYES. CYES is high risk and was an unsuitable investment strategy for the customers.
According to the claim, Merrill Lynch and Harper were targeting their marketing of this flawed strategy to high net-worth investors, such as the customers bringing this claim. The CYES program was allegedly falsely represented to investors, including these clients, as a low-risk strategy that allows investors to generate advanced yield while keeping risk low, all without requiring a deposit of material additional funds into their new Merrill Lynch account in order to participate.
Merrill Lynch touted the CYES program as having “no direction bias,” being “directionally agnostic” and able to “deliver uncorrelated absolute returns” through an options strategy known as an “iron condor,” named for the strategy’s profit/loss diagram.
An iron condor strategy purports to generate income through the sale of “out-of-the-money” put and call options contracts while providing hedging against losses through the purchase of further out-of-the-money put and call options on the same asset to limit the investor’s downside risk.
Merrill Lynch claimed its iron condor strategy was a market-neutral strategy, which means that is not a directional wager that the price of the underlying asset will increase or decrease in value, but rather the strategy seeks to profit from a relative lack of volatility in the price of the underlying asset.
In other words, the investor is betting that the underlying asset’s price will remain within a specified trading range, allowing all of the options to expire worthless, at which point the investor retains the premiums received from the sale of the options (minus the cost of purchasing the options that were used to limit the downside exposure.)
In the event the price of the underlying asset increases or decreases significantly, the purchased put or call options would provide a maximum limit to the investor’s downside risk. In the case of the CYES program, the investor’s profits would also be reduced by the attendant fees and commissions.
According to the claim, Merrill Lynch’s marketing materials emphasized that the CYES program purportedly “mitigated” the risk of loss. Consistent with Merrill Lynch’s marketing materials, the customers allege that Harper represented to the client that the CYES program that would generate “incremental income” all while requiring no additional investment of capital.
Contrary to Merrill Lynch’s representations, the CYES program was not “directionally agnostic” or free of “direction bias.” The CYES strategy did actively engage in market timing and taking directional positions on the market and suffered significant losses as a result.
Harper’s representations minimized the risk of loss and he assured the clients that any loss would merely be a temporary “paper loss” and quickly covered by gains. Harper never disclosed to the clients that the clients could lose hundreds of thousands of dollars in CYES. In fact, Harper’s representations led the clients to believe that his realistic downside was not earning income as opposed to losing capital.
Merrill Lynch and Harper failed to provide a balanced presentation of the benefits and risks of CYES as required. Merrill Lynch failed to adequately disclose the significant risks associated with the CYES program.
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The Sonn Law Group is currently investigating allegations that brokers recommended investments in CYES programs. We represent investors in claims against negligent brokers and brokerage firms. If you or your loved one experienced investment losses, we are here to help. For a free consultation, please call us now at 866-827-3202 or complete our contact form.