Calton & Associates Inc., a midsize broker-dealer with close to 400 financial registered reps and financial advisers, squirreled away an additional $535,000 in 2020 for future legal costs involving paying back investors who bought leveraged exchange-traded funds from the firm's advisers several years ago.
According to the firm's annual audited financial statement, which it filed at the end of November, Calton & Associates was party to 13 legal proceedings with future legal costs associated with those matters to be $1,042,000. A year earlier, that cost was estimated at $507,000, according to the firm's 2019 Focus report.
Dwayne Calton, president of the firm, said in an interview this week that it was working to make restitution of $472,000, plus interest, to resolve the issue stemming from the sale of leveraged ETFs.
"There were 74 transactions that we will reimburse clients for," Calton said. "We routinely have legal issues. It’s part of the business."
Leveraged and inverse ETFs utilize swaps, futures contracts and other derivatives to return a multiple and/or inverse of the performance of an underlying index.
Their value can quickly diverge from the performance of the benchmark, especially amid volatile markets, and regulators have fined firms for selling such investments as at times they are deemed not suitable for conservative investors.
All broker-dealers are required to file a public audited financial statement two to three months after the close of their fiscal year. The reports are a window into the financial workings and health of each firm, and include potential liabilities for legal and regulatory issues.
Millions or hundreds of thousands of dollars of legal costs can eat into profit margins at some independent broker-dealers, many of which operate on notoriously thin margins in the mid-to-low single digits.
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