BROWSE BY TOPIC
- Bad Brokers
- Compliance Concepts
- Investor Protection
- Investments - Unsuitable
- Investments - Strategies
- Wall Street News
- Investments - Private
- Rules & Regulations
- Bad Advisors
- Boiler Rooms
- Terminations/Cost Cutting
- General News
- Donald Trump & Co.
- Regulatory Sanctions
- Big Banks
Stories of Interest
- Sarah ten Siethoff is New Associate Director of SEC Investment Management Rulemaking Office
- Catherine Keating Appointed CEO of BNY Mellon Wealth Management
- Credit Suisse to Pay $47Mn to Resolve DOJ Asia Probe
- SEC Chair Clayton Goes 'Hat in Hand' Before Congress on 2019 Budget Request
- SEC's Opening Remarks to the Elder Justice Coordinating Council
- Massachusetts Jury Convicts CA Attorney of Securities Fraud
- Deutsche Bank Says 3 Senior Investment Bankers to Leave Firm
- World’s Biggest Hedge Fund Reportedly ‘Bearish On Financial Assets’
- SEC Fines Constant Contact, Popular Email Marketer, for Overstating Subscriber Numbers
- SocGen Agrees to Pay $1.3 Billion to End Libya, Libor Probes
- Cryptocurrency Exchange Bitfinex Briefly Halts Trading After Cyber Attack
- SEC Names Valerie Szczepanik Senior Advisor for Digital Assets and Innovation
- SEC Modernizes Delivery of Fund Reports, Seeks Public Feedback on Improving Fund Disclosure
- NYSE Says SEC Plan to Limit Exchange Rebates Would Hurt Investors
- Deutsche Bank faces another challenge with Fed stress test
- Former JPMorgan Broker Files racial discrimination suit against company
- $3.3Mn Winning Bid for Lunch with Warren Buffett
- Julie Erhardt is SEC's New Acting Chief Risk Officer
- Chyhe Becker is SEC's New Acting Chief Economist, Acting Director of Economic and Risk Analysis Division
- Getting a Handle on Virtual Currencies - FINRA
We seek to provide information, insights and direction that may enable the Financial Community to effectively and efficiently operate in a regulatory risk-free environment by curating content from all over the web.
Stay Informed with the latest fanancialish news.
NEWSLETTERS & ALERTS
Private Placement Memorandum: Investing on Blind Faith
by Howard Haykin
According to the Fund’s private placement memorandum (“PPM”), the Fund’s stated investment objective was to maximize capital appreciation. The PPM further represented that:
- the Fund would “seek consistent positive absolute returns primarily through a combination of long-term and short-term investments in order to achieve capital appreciation…”
- the Fund “invests in a diversified portfolio consisting primarily of equity securities that are traded publicly in the U.S. markets.”
- the Fund purportedly used Rossi’s “proprietary algorithm known as MarketDNA which takes advantage of inefficiencies in dissemination of information within the derivatives market to determine equity directional movement.”
- MarketDNA involved a “proprietary system of filters refined over 20 years, proven to bring [investors] substantially higher returns.”
As of May 2016, the Fund had assets of $418,000, raised from 4 initial investors, including Rossi himself. Rossi also told certain advisory clients that the same MarketDNA algorithm would be used to invest their funds in their separately managed accounts.
WHAT WENT WRONG. Contrary to the representations the investors were given, Rossi and SJL Capital engaged in risky, unhedged options trading, which did not comport with the purported MarketDNA strategy and did not include any safety valves or stop loss limits.
- Rossi had generated significant losses through such trading in the years preceding the launch of the Fund.
- While the Fund achieved significant positive returns in June 2016, it lost 88% of its value in August, continued to decline in September and October, and was wiped out completely by November 2016.
- The full extent of the losses from investors in the Fund by creating and distributing phony account statements and tax documents that falsely described the Fund’s assets and the supposed returns generated by the MarketDNA strategy.
- In total, investors in the MarketDNA Hedge Fund lost at least $300,000.
Unaware of the Fund’s massive August 2016 losses and its ultimate collapse in November, SMA Clients invested nearly $1.8 million with Rossi and SJL Capital from August 12, 2016 through February 3, 2017.
- In February 2017, Rossi lost more than 70% of their remaining SMA investment funds through more risky, unhedged options trading.
- When the SMA clients discovered the losses, Rossi falsely told them that they were caused by a rogue trader whom he purportedly allowed to trade for the accounts when he underwent knee surgery in mid-February.
- In March 2017, after having lost over $1.5 million, the SMA Clients revoked Respondents’ discretionary authority over their accounts.
FINANCIALISH TAKE AWAYS. Investment advisors can be pretty persuasive - much like an automobile salesperson. But while many people spent a lot of time researching their next car acquisition, they apparently spend little time on their investments and essentially rely on their BLIND FAITH in the advisor. Due diligence remains an necessary component in the selection process.
Even when an advisor has presented a valid investment strategy, there's the issue of what checks and balances exist over the everyday activities of the advisor and their firm. This element can be tricky - particularly for those who are uninitiated in financial services. However, there's no substitute for there being a solid core infrastructure within which the advisor operates. While these controls won't necessarily provide absolute assurance, a solid line up of multiple checks and balance will provide more safeguards that SJL's investors had.
[For further details on this case, click on SEC Administrative Proceeding File #3-19145]