SSEK Investigating Claims Related to Liquidations in XIV

After a tumultuous day on Wall Street, certain complex volatility based financial Exchange Traded Notes (“ETNs”) suffered a complete collapse.  Credit Suisse First Boston, the issuer of one such product, the VelocityShares Daily Inverse VIX Short-Term ETN that trades under the ticker XIV, announced that it will liquidate the XIV and trading of the XIV will cease on February 20, 2018.  Trading was halted in the security after the security traded down 80% in afterhours trading on February 5, 2018. 

ETNs are more exotic than traditional Exchange Traded Funds in large part because they are actually unsecured debt instruments of the issuer, and do not represent ownership in any underlying equity.  Because of this difference, ETNs can be accelerated and liquidated by the issuer, as Credit Suisse is doing with the XIV, a risk that more common Exchange Traded Funds do not have. 

Due to these complexities and risks, these ETNs are especially susceptible to errors in liquidation systems from brokerage firms.  Firms that extend margin use the value of the investments in a customer’s account as collateral for the loan.  Under the terms of those loans, the firm is allowed to liquidate investments if the loan to value ratio reaches levels that the firm considers an unacceptable risk. 

However, firms do not have carte blanche to ignore any and all duties to its customers when liquidating investments to cure margin deficiencies.  Instead, the firm is required to conduct these liquidations in a “commercially reasonable manner.”  What that means, in practice, is that the firm can potentially be legally liable if the liquidations are being conducted in an irrational or unreasonable way that makes the margin problem worse, not better.  For instance, an arbitration panel recently issued an award in favor of clients of SSEK due, at least in part, to the fact that the liquidation of a large volume of option liquidations were executed the clients’ accounts using market orders, instead of limit orders.  Because of that distinction, the liquidation system did not achieve the assumed prices and instead moved the market against its own customers. 

There are a number of different ways that the decisions made by a firm in the course of liquidating all or part of a margin account could be commercially unreasonable, and therefore potentially support a legal claim for losses.  Those could include faulty programming, flawed trade assumptions and failures to achieve best execution. If you believe you lost money as a result of improper treatment and liquidations in a margin account, contact the law firm of Shepherd Smith Edwards & Kantas LLP for an evaluation of your account to determine if you might have a claim to recover some or all of your losses.  All communications will be kept strictly confidential, and you will not be billed in any way for a consultation. 

Shepherd Smith Edwards & Kantas LLP has a team of attorneys, consultants and staff with more than 100 years of combined experience in the securities industry and in securities law. For more than two decades, our firm has represented thousands of investors throughout the United States, Puerto Rico, and internationally to recover losses suffered through brokerage firms and banks. We have represented clients in Federal and state courts and in arbitration through the Financial Industry Regulatory Authority (FINRA), the New York Stock Exchange Inc. (NYSE), the American Arbitration Association (AAA) and in private arbitration actions.

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