Randall Robert Hayes (also known as Randy Hayes) of Seattle Washington a stockbroker formerly registered with Morgan Stanley is the subject of a State of Washington Department of Financial Institutions Securities Division Statement of Charges in which Hayes has been accused of making unsuitable recommendations to customers concerning investments in leverage and inverse exchange-traded funds. In the Matter of Randall Hayes Order No. S-15-1636-17-SC01 (Mar. 14, 2018).
According to the Statement of Charges, between 2009 and 2016, during the time that Hayes was an investment advisory representative and stockbroker with Morgan Stanley Smith Barney, Hayes effected leveraged and inverse exchange-traded funds in customers’ accounts including those of a retired widow, CM. The Statement of Charges indicated that CM was not sophisticated with respect to investments and depended on her money to be managed by Hayes. Apparently, Hayes was authorized by CM to effect trades in CM’s investment account on a discretionary basis; Hayes was able to effect the purchases and sales of securities in CM’s account without obtaining her consent.
CM purportedly informed Hayes that she intended to investment on more of a conservative basis and was focused on protecting her principal. The Statement of Charges further stated that CM informed Morgan Stanley Smith Barney that she did not want her account to be placed in speculative investments. Apparently, CM prohibited speculation in her account for the several years that she maintained accounts at Morgan Stanley.
Nonetheless, the Statement of Charges alleged that $100,000.00 in CM’s investment advisory account had been invested by Hayes in non-traditional exchange traded funds including ProShares UltraShort Financials – an inverse leveraged exchange traded fund with an objective to return two times of the inverse daily performance of the Dow Jones United States Financials Index. CM’s investment was apparently sold fifty-five days later for a loss of $14,401.60.
The Statement of Charges alleged that in April of 2010, Hayes invested $24,739.74 of CM’s funds in ProShares Short S&P 500 and $62,486.66 in ProShares Short QQQ. Apparently, ProShares Short QQQ aimed to return the inverse of NASDAQ 100 Index’s daily performance, where the ProShares Short S&P 500 was designed to return the inverse of S&P 500’s daily performance. Despite CM reportedly sustaining a $17,903.70 loss after holding those investments for a year; Hayes invested an additional $39,412.80 of CM’s funds in ProShares Short S&P 500. Hayes then purportedly executed another $5,685.60 purchase by the time that CM had sustained $44,250.04 in losses from the inverse exchange traded fund investments.
The Statement of Charges stated that stockbrokers like Hayes had been apprised by Morgan Stanley that leveraged and inverse exchange traded funds were geared towards investors who intended to invest on a short-term basis in speculative investments. Moreover, investors were apparently warned that the exchange traded funds were not appropriate to be held for more than one trading period. Apparently, CM’s non-traditional exchange traded fund positions were maintained for months at a time.
Consequently, the Securities Division alleged that Hayes’ investment of CM’s funds in those products was not suitable for CM. Specifically, the Securities Division noted that Hayes’ investments in inverse exchange traded funds did not conform to CM’s conservative-to-moderate objectives for investing because the exchange traded funds were overly-speculative and not designed to produce income. Critically, the inverse exchange traded funds reportedly contained risks which largely exceeded CM’s risk tolerance. Further, the Securities Division claimed that CM had a ten-year investment horizon but was placed in securities which were designed to achieve their objectives in one trading session. The Statement of Charges alleged that Hayes ultimately caused CM to lose $63,490.45.
Further, the Securities Division noted that Hayes utilized the same investment strategy with several Morgan Stanley Smith Barney Clients, where he placed customers’ assets in non-traditional exchange traded funds for extended holding periods, causing customers to sustain losses. Particularly, the Statement of Charges alleged that Hayes solicited one-hundred twenty two inverse exchange traded fund investments from customers between 2013 and 2014, where those investments had been held in customers’ accounts for an average of five-hundred fifty days. Apparently, most of the customers who incurred losses had risk tolerances similar to CM and considered income and no-speculation a priority.
The Securities Division alleged that Hayes effected transactions in CM’s account despite lacking an adequate basis to conclude that the securities transactions were appropriate for CM; conduct violative of WAC 460-24A-220(1) and RCW 21.20.702. The Securities Division reportedly intends to impose sanctions including a fine and the denial of Hayes’ securities registration.
FINRA Public Disclosure reveals that Hayes has been referenced in three customer initiated investment related disputes containing accusations of his misconduct while employed with Morgan Stanley Smith Barney. Particularly, a customer initiated investment related arbitration claim that pertained to Hayes’ conduct was settled for $250,000.00 in damages supported by allegations that Hayes, inter alia, placed exchange traded fund transactions in the customer’s account that were not suitable for the customer. FINRA Arbitration No. 13-02627 (Jan. 9, 2015).
On March 3, 2015, another customer filed an investment related complaint involving Hayes’ activities where the customer sought $70,000.00 in damages based upon accusations of suitability relating to the customer’s exchange traded fund investments. Then, on Mach 15, 2016, a customer filed an investment related complaint concerning Hayes’ actions in which the customer requested $38,150.00 in damages founded on allegations that inappropriate exchange traded funds were executed in the customer’s investment account.
Hayes’ employment with Morgan Stanley was terminated on January 12, 2016.
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