Cadaret Grant Co. Inc. a broker-dealer headquartered in Syracuse New York along with its president Arthur Grant and chief compliance officer Beda Lee Johnson and stockbroker Eugene James Long have been named in a Securities and Exchange Commission (SEC) Order Instituting Administrative and Cease-and-Desist Proceedings containing findings of the firm’s failure to supervise its representatives’ recommendations to customers concerning non-traditional exchange traded notes. In the Matter of Cadaret Grant et. al. Administrative Proceeding File No. 3-18738 (Sept. 11, 2018).
According to the Order, from January 2015 to December 2016, Cadaret, Johnson and Grant had failed to adequately supervise registered representatives of the firm concerning recommendations for customers to purchase and maintain their holdings of inverse and leveraged exchange traded notes and exchange traded funds.
The Order revealed that in January of 2015, registered representatives including Eugene Long concluded that there was a decline in oil prices that would eventually recover over the ensuing months. Customers had evidently been advised to purchase and hold an exchange-traded note – VelocityShares 3X Long Crude Oil ETN (UWTI) – which apparently provided customers triple leverage and exposure to crude oil futures contracts.
The Order stated that Eugene Long and other Cadaret Grant registered representatives were under the impression that if crude oil prices increased, there would be a corresponding increase in UWTI, including in situations where the investment in UWTI had been held by customers for months. SEC stated that the prospectus for UWTI disclosed that the exchange-traded note was not meant to be held for longer than a trading session. The prospectuses apparently stated that the investments were appropriate for sophisticated investors with brief investment horizons. Moreover, the UWTI prospectuses stated that there was no direct exposure to a crude oil spot price.
The Order stated that registered representatives of Cadaret Grant Co. either failed to read (or had ignored) warnings laid out in the prospectuses concerning the suitability and composition of the exchange-traded note. Apparently, they recommended for the investments to be purchased and held for indefinite periods. Representatives reportedly failed to conduct any investigation into the security and did not develop an adequate foundation from which to advise customers; conduct violative of Securities Act of 1933 Sections 17(a)(2) and 17(a)(3). SEC indicated that the customers of Cadaret Grant that invested in UWTI held their investments for more than four hundred days, and lost nearly ninety percent of their invested amounts as a consequence of the recommendations made by the firm’s registered representatives.
The Order further stated that in the January 2015 to December 2016 timeframe, policies used by Cadaret Grant indicated that the non-traditional exchange traded products like UWTI should not be recommended for investors with medium or long-term investment horizons. The policies also reportedly stated that trainings and other procedures should be undertaken by representatives for them to become knowledgeable about the products before making investment recommendations. SEC stated that the firm’s supervisory personnel neglected to provide non-traditional exchange traded product training to the firm’s registered representatives, precluding them from forming an adequate foundation for making recommendations.
SEC additionally referenced that the procedures and policies of the firm had not been implemented by the supervisory personnel in reference to the inverse and leveraged exchange traded notes and exchange traded funds recommendations made by registered representatives to customers. The firm’s supervisors apparently devoted insufficient resources to supervise their own staff. Moreover, the firm seemingly neglected to establish and maintain procedures and policies with a view towards preventing inappropriate non-traditional exchange traded product sales by the firm’s advisors given customers’ financial statuses and objectives for investing.
The Order stated that the firm’s supervisory personnel failed to supervise the non-traditional exchange traded product recommendations to customers in a manner prescribed by Sections 15(b)(6) and 15(b)(4)(E). SEC also found Cadaret Grant’s conduct violative of Advisers Act Section 206(4) and Rule 206(4)-7.
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