The Financial Industry Regulatory Authority Inc. has filed a complaint against a former broker for telling his clients to invest in risky exchanged-traded funds as a hedge against impending financial and economic doom.
From at least March 2011 through July 2015, Richard William Lunn Martin recommended that his customers hold non-traditional ETFs in their accounts because of his prediction that the monetary and financial system was going to collapse, according to a Finra
complaint signed Monday. During that time period, he was a registered broker at GF Investment Services.
The ETFs that Mr. Martin was recommending, including leveraged and inverse funds, are risky and complex, making them unsuitable for the typical retail investors who plan to hold them for more than one trading session, particularly in volatile markets, according to Finra. They're generally not intended as a long-term hedge against market forces.
Mr. Martin “believed that there was an ongoing United States monetary crisis and that the debt burden of the United States would cause an imminent depression in the world economy and a catastrophic collapse and reset in the financial markets,” Finra said in the document.
In recommending non-traditional ETFs as hedge against a stock market drop, he showed a lack of knowledge regarding several of their fundamental aspects, according to the complaint. Finra listed ProShares UltraPro Short QQQ (SQQQ), ProShares UltraPro Short Russe112000 (SRTY) and Direxion Daily Gold Miners Bear 2X Shares (DUST) among his recommendations.
Reached on his cell phone in Johor, Malaysia, Mr. Martin said he didn't violate any Finra rules.
“These are allegations,” he said. “They have been unable to pin anything on me that allows them to proceed with their case against me.”
By around March 2011, virtually all of his customers were heavily concentrated in non-traditional ETFs, which made up 75% to 99% of their accounts, according to the Finra complaint.
Mr. Martin said there was no wrongdoing on his part.
“Every single client had signed an account opening form indicating his desire to engage in speculative trading,” he said, adding that “clients, very simply, lost money” in ETF trades and short selling.
Mr. Martin's investment strategy from 2009 through early 2011 was primarily based upon recommending and shorting positions in stocks, according to Finra. In late 2010 he shifted his strategy, liquidating his customers' short positions to purchase leveraged and inverse ETFs, Finra said in the complaint.
Mr. Martin was registered with GF Investment Services from July 2009 to July 2015, according to Finra's BrokerCheck. Finra recommended in its complaint that Mr. Martin disgorge any ill-gotten gains and make full restitution to his customers who suffered losses because of his alleged misconduct.
Mr. Martin was permitted to resign from GF Investment in July 2015, according to BrokerCheck, which cited allegations that appear centered around ETF trades. In May, he was involved in a $290,000 settlement tied to alleged damages for unsuitable equity and ETF recommendations, the document shows. And in May 2015, there was $62,500 settlement because of allegations about unsuitable trades made through shorts and leveraged ETFs.
Daniel Hushek, chief compliance officer of GF Investment Services, didn't immediately return a phone call seeking comment about Finra's complaint against Mr. Martin.
