First Republic Securities faces a $1 million arbitration case, due in part to their use of an investment strategy called “Harvest Volatility Management.” Harvest Volatility Management uses a risky overlay strategy to generate a return on investments. Certain investors have alleged that representatives described the strategy as low risk, with the promise of a 5% increase in returns.

UBS Exchange Traded Access Securities (ETRACS)

James Wilcox, a broker registered with First Republic Securities, is one of the brokers named in the arbitration case. A disclosure on James Wilcox’s BrokerCheck record reveals that he is involved in a dispute with an investor who alleges losses of $800,000. The same goes for investment adviser Matt Babrick, another registered representative for First Republic Securities who (as of publication) has a pending investor dispute. The investor in Babrick’s dispute also alleges losses of $800,000.

Harvest Volatility Management Strategy – How Did Investors Lose Money?

 Harvest Volatility Management allegedly relied on a “put writing strategy.” “Put writing” is a contract to sell a put option, thus opening a position. Put options are agreements to sell a stock for a specified price, i.e., the “strike price,” by an established deadline. It’s a risky strategy, and to make money, the financial adviser’s prediction about the market needs to be accurate. The put writer receives a fee for opening up the position, but they still will have to buy the shares back if the shares fall below the strike price.

This is not a conservative strategy – the potential for profits is limited, but the potential for losses is not. If the brokers received commission for recommending this strategy, that could explain their motivation for recommending a security that allegedly caused losses in their customers’ accounts.

In this case, the investor alleges that registered representatives of First Republic Securities told him that the put writing strategy was low risk and would produce consistent returns. There is no way to know for sure if an options strategy will produce consistent returns. Even more egregiously, the investor alleges that advisers combined the put writing strategy with his fixed income securities, risking investments that the investor may have relied on for their income.

The Dangers of Margin Calls

Put writing options can also trigger “margin calls” – a type of call that not many investors are in the position to receive. Margin accounts supply the cash or securities required for a broker to sell options. Brokers make margin calls when the investor’s margin account does not have enough money to execute trades. If there isn’t enough money in the account, and the investor can’t immediately deposit the funds required, the broker might sell securities in the investor’s account in order to secure the funds. According to the investor in this case, he had specified to his financial adviser that he had a low tolerance for risk and wanted to preserve his capital. This should have established that the investor was not a suitable client for a margin call, and therefore an unsuitable client for a put writing strategy.

First Republic Securities’ Duty to Supervise

Firms like First Republic Securities have a duty to supervise their registered representatives. If a broker mistakenly believed a put writing strategy to be suitable for an investor, then the firm should have caught the mistake.

Other Disclosures on First Republic’s Record

First Republic Securities has several disclosures on their record. In one dispute, the New York State Department of Financial Services alleged that the firm did not disclose that they had been named in arbitration proceedings when they applied for an insurance license. Another disclosure included allegations that First Republic failed to report information about a securities transaction to the Real-Time Transaction Reporting System for a public stock exchange.

Did Your Broker Inform You of the Risks?

If you broker did not disclose the risks of the Harvest Writing Strategy, you may be entitled to recover your losses. Get a free case evaluation from the securities attorneys at Fitapelli Kurta by calling (877) 238-4175 or emailing info@fkesq.com.

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