Massachusetts' top securities regulator is suing RBC Capital Markets LLC and one of its former registered representatives over the sale of leveraged exchange-traded funds, saying they sold them to clients who didn't understand how the investments worked.
Secretary of the Commonwealth William F. Galvin said RBC Capital and Michael Zukowski, a former agent, used “dishonest practices” in selling the funds, according to a statement e-mailed today. Galvin is seeking restitution to Massachusetts investors, a cease and desist order, and an administrative fine.
“The point of the complaint is not that the investors lost money,” Galvin said in the statement. “The dishonesty here is that the investors, and indeed the agent soliciting their investment, did not understand the workings of these funds.”
Galvin said that Zukowski, who worked in the firm's Osterville office, sold clients “non-traditional” leveraged and inverse ETFs. Leveraged ETFs use swaps or derivatives to amplify daily index returns, while the inverse funds are designed to move in the opposite direction of their benchmark. The Financial Industry Regulatory Authority warned investors and fund sellers in June 2009 that such ETFs might not be a good fit for long-term investors. Galvin opened a probe into the products in July 2009.
Craig Christie, a spokesman for New York-based RBC Capital Markets, said he couldn't comment immediately on the lawsuit.
RBC Capital is a subsidiary of Toronto-based Royal Bank of Canada.