FINRA Fines Broker-Dealers $3.5M For LJM Preservation & Growth Fund

The Financial Industry Regulatory Authority (FINRA) has censured and fined three broker-dealers, Securities America, J.W. Cole Financial, and Cambridge Investment Research for failing to supervise their brokers’ recommendations and conduct due diligence on LJM Preservation & Growth Fund (the LJM Fund). The matter originates from a 2019 FINRA investigation. The broker-dealers were fined collectively $3.5 million in restitution and $550k in fines.

LJM Preservation and Growth Fund Investigation (LJMAX, LJMCX, LJMIX)

LJM Preservation and Growth Fund (LJMAX, LJMCX, LJMIX) was a high-risk, alternative mutual fund that suffered a massive loss due to a market volatility spike. FINRA alleges that LJM Preservation & Growth Fund engaged in a very risky strategy that relied, in part, on purchasing naked/ uncovered options. The firm invested primarily in purchased (long) and sold (short) calls and put options on the S&P 500 futures index that were naked.   Nake options are when the option seller and did not hold any underlying stock as a part of its strategy. Uncovered calls have the potential of unlimited losses for investors.

The S&P 500 fell 113 points (4.1%) on February 5, 2018, which caused LJM Preservation & Growth Fund to lose 80% of its value in the following two days.  It closed to new investors on February 7, 2018.  The fund liquidated and dissolved in late March 2018.

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Summary and Timeline:

  1. The LJM Preservation and Growth Fund (the LJM Fund) was launched in January 2013.  The three different share class ticker symbols are LJMAX, LJMCX, LJMIX.

  2. LJM Preservation & Growth Fund had net assets of $768 million as of October 31, 2017.

  3. the LJM Fundplaced massive bets using complicated options and high-risk strategies that depended on the market remaining calm and not experiencing volatility.

  4. LJM Fund’s prospectus states that the objective of the fund is “capital appreciation and capital preservation with low correlation to the broader U.S. equity market”. However, this appears to be a conflicting statement from the investment strategy deployed.

  5. On February 5 and 6 2018, investors in LJM Preservation and Growth Fund lost 80% ($600 million) of the value of their investment.

  6. In late March LJM Preservation and Growth Fund close and liquidates.

Securities America, J.W. Cole Financial, and Cambridge Investment Research FINRA FINES

According to FINRA, Cambridge financial advisors sold more than $18 in LJM Preservation & Growth Fund to about 550 customers.  Many of these customers had conservative or moderate risk tolerance.  One broker was responsible for 80% of the sales total.

As a result, Cambridge was fined $400k and pay over $3.1 million in restitution.  FINRA took into consideration that Cambridge had hired a consultant to create an equitable system of restitution to clients and had already paid $740K to clients.

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FINRA stated that Securities America had one financial advisor for selling $616K in LJM Preservation & Growth Fund to 33 customers. The broker-dealer was fined $100k and pay $236K in restitution.

J.W. Cole’s brokers sold approximately $1 million in shares of LJM Preservation & Growth Fund to approximately 45 customers, many that were risk-averse. One broker was responsible for about 60% of the sales. The broker-dealer was fined $50K and pay $163K in restitution.

LJM Preservation and Growth Fund Lawsuits & Recovery

Investors that bought LJM Preservation and Growth Fund have filed lawsuits and arbitration claims to recover their losses.  Haselkorn and Thibaut, P.A.,is currently investigating claims against financial advisors and broker-dealers that sold the fund.

Haselkorn and Thibaut is a national investor rights firm with offices in Texas, Florida, New York, Arizona, and North Carolina. They have over 45 years of experience and a 95% win rate. If you or someone you know was sold this the LJM fund, please contact the law firm at 1 888-628-5590.

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