Chase Ordered to Reimburse Customers $1.9 Million for Selling Unsuitable Unit Investment Trusts

by Wall Street Fraud on November 30, 2011

Securities fraud attorneyThe Financial Industry Regulatory Authority (FINRA) recently announced that it has ordered Chase Investment Services Corporation to reimburse customers more than $1.9 million for losses incurred from recommending of unit investment trusts (UITs) and floating rate loan funds. FINRA also fined Chase $1.7 million.

Specifically, FINRA's investigation found that Chase brokers recommended the purchase of UITs and floating rate loan funds to unsophisticated customers with little or no investment experience and conservative risk tolerances, without having reasonable grounds to believe that those products were suitable for the customers. FINRA also found that Chase failed to implement supervisory procedures to reasonably supervise its sales of UITs and floating rate loan funds.

What Are UITs and Floating Rate Loan Funds?

Many investors are likely unfamiliar with these complex investment products. A UIT is an investment product that consists of a diversified basket of securities, which can include risky, speculative investments such as high-yield/below investment-grade or "junk" bonds.

Floating-rate loan funds are mutual funds that generally invest in a portfolio of secured senior loans made to entities whose credit quality is rated below investment-grade, or "junk."

Investment Losses by Chase Customers

Overall, FINRA found that Chase did not provide its brokers with sufficient training and guidance regarding the risks and suitability of UITs and floating-rate loan funds.

Two of the UITs on Chase's list of approved products held a large percentage of assets in closed-end funds that contained a significant percentage of high-yield or junk bonds. Due to their composition, these particular UITs were not suitable investments for customers who had little or no investment experience and a conservative risk tolerance.

Chase brokers made almost 260 unsuitable recommendations to purchase these UITs to customers with little or no investment experience and a conservative risk tolerance. The customers suffered losses of approximately $1.4 million as a result of investing in these unsuitable transactions.

Similarly, the floating-rate loan funds sold by Chase were subject to significant credit risks and certain of the funds could also be illiquid. Accordingly, concentrated positions in the funds were not suitable for certain investors with conservative risk tolerances or those seeking preservation of principal.

Despite this, Chase brokers recommended the purchase of floating-rate loan funds to customers who had conservative risk tolerances, were seeking preservation of principal or were seeking a highly liquid investment. These customers suffered unreimbursed losses of nearly $500,000 as a result of these unsuitable recommendations.

Investment Losses by Washington Mutual Customers

FINRA also determined that WaMu Investments, Inc., which merged with Chase in July 2009, made recommendations to customers to purchase floating-rate loan funds that were not suitable for them, and that WaMu failed to provide adequate training and failed to reasonably supervise the sale of floating-rate loan funds to customers.

 How We Can Help

This case highlights a growing problem—brokerage firms and brokers recommending complex products to average investors without fully explaining the risks. To make matters worse, these products are unsuitable for investors with little or no investment experience and a conservative risk tolerance.

If you have been sold an unsuitable investment, we may be able to help you recover your losses. Contact us today at 215-839-3953 for a free consultation.

At Wall Street Fraud, we are dedicated to offering assistance to those who have been hurt by improper corporate or investment practices.

If you have been the victim of stock brokerage fraud, securities fraud, mutual fund fraud, stockbroker fraud, annuities fraud, or any other type of investment fraud, please contact us today for a free case evaluation. Our talented and aggressive legal and professional staff is eager to help you recover your losses.

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