Douglas Elstun failed his clients in two ways. He over charged them and he put them into inappropriate investments.
Mr. Elstun invested some of his clients’ money in daily leveraged ETFs, which deliver multiples of short-term performance of a stock index. He also invested some clients in inverse ETFs which are designed to deliver the opposite performance of a market index in the short term. If these sound complex, you’re right. A FINRA regulatory notice said:
“[The ETFs] are highly complex financial instruments that are typically designed to achieve their stated objectives on a daily basis.” … “[The ETFs] are typically unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.”
Mr. Elstun used a buy and hold strategy for his clients with these complex ETFs, resulting in millions of dollars in losses. He either didn’t understand the ETFs because he portrayed them as hedges against a market downturn, or he was making misleading statements to his clients.
Mr. Elstun also overcharged his clients. Even though several advisory agreements stated that he was only entitled to a fee of 1%, he started charging 1.25%. The SEC charged him with falsifying revised agreements.
In addition to wrongfully increasing the rate, Mr. Elstun also wrongfully expanded the base of assets to apply the rate. For certain clients he included equity in houses, other real estate and vehicles that the clients purchased.
Mr. Elstun is still contesting the charges so we only have the SEC’s side to rely upon.
Making sure investment advice is appropriate for a particular client is a key compliance role. Any good compliance review should have shown that a long term hold in those ETFs was bad advice. As you might expect, Mr. Elstun was also the CCO of the firm.
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