Charles Schwab Sues Customers Over XIV Debit Balance

cause of action relates to Respondents' allegedly self-directed decision to utilize margin and accumulate a long position in VelocityShares Daily Inverse VIX Short-Term ETN ("XIV"), and Respondents' alleged contractual obligation to remit full payment of the debit to Claimant, after the collapse of XIV.

On August 1,2018, FINRA notified [Claimant] that it had been unable to effect service on [Mrs.] Chen. [Claimant] participated in the IPHC on August 16 under the impression that [Mr.] Chen had been properly served. On the basis that Mr. Chen had been served, the Panel determined during the IPHC that Mrs. Chen had notice of the arbitration and was therefore constructively served. The Panel then set forth in its IPHC Order that service was complete and sufficient upon the unresponsive party. 

In an abundance of caution, [Claimant] nevertheless tried to personally serve Mrs. Chen after the IPHC. [Claimant] effected service on Mrs. Chen on August 20, 2018 and filed a certificate of service on the Portal. Attached is a copy of the certificate of service on Mrs. Chen. 

On August 17, FINRA conveyed that it had also been unable to serve Mr. Chen. [Claimant has] since unsuccessfully tried to effect service on Mr. Chen. Our process server has been to Mr. and Mrs. Chen's home on nine occasions -- at all times of the day and on weekdays and weekends -- and no one has responded. [Claimant], therefore, respectfully requests the Panel to amend its IPHC Order (or in the alternative issue a new Order) and find that Mr. Chen has been constructively served and that service is sufficient and complete on the Respondents in this case. 

On January 17, 2019, the FINRA Senior Helpline received a call from Respondents' son, Mr. Chiein Chen. Mr. Chiein Chen requested that FINRA advise the Panel and Claimant of certain information, including that his father, Mr. Chen, is deceased. 

By letter dated January 22, 2019, FINRA advised the Panel and Claimant of the information provided by Mr. Chiein Chen. After due deliberation, the Panel considered the information by Mr. Chiein Chen and has rendered its award. 

"Credit Suisse was actively manipulating the Inverse VIX Short ETNs by liquidating its holdings in various financial products to avoid a loss," Chahal's attorneys wrote in the complaint. The filing mainly draws on public information, while noting Chahal aims to turn up more evidence to bolster the case .

Credit Suisse disputed the claims.

"The publicly available prospectus accurately and fully disclosed the risks of an investment in XIV, which is only intended for sophisticated institutional clients," the Zurich-based bank said. "Credit Suisse did not engage in any conduct designed to mislead investors regarding XIV's value or cause the February 5, 2018, decline in XIV's price."

The fund's market value topped $2 billion in late January before losing most of its value in early February. Credit Suisse announced it would buy back shares in the product because there was no prospect of price recovery.

Of course, most investors were informed of the risks in the trade. Charles Schwab Corp. delivers a pop-up warning to those trying to buy a leveraged or inverse ETP that requires the investor to acknowledge the risks. And TD Ameritrade Holding Corp. puts a yellow banner at the top of the screen that outlines increased margin requirements and cautions that such products are not suitable for all investors.

But some fund managers privately wish brokerages would do more to keep their products away from the naive or ignorant. Their thinking is that what they might lose in assets, they'd recoup in minimizing the reputational risk that now casts a pall over their products.

Exchange-traded funds (ETFs) that offer leverage or that are designed to perform inversely to the index or benchmark they track-or both-are growing in number and popularity. While such products may be useful in some sophisticated trading strategies, they are highly complex financial instruments that are typically designed to achieve their stated objectives on a daily basis. Due to the effects of compounding, their performance over longer periods of time can differ significantly from their stated daily objective. Therefore, inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets. 

This Notice reminds firms of their sales practice obligations in connection with leveraged and inverse ETFs. In particular, recommendations to customers must be suitable and based on a full understanding of the terms and features of the product recommended; sales materials related to leveraged and inverse ETFs must be fair and accurate; and firms must have adequate supervisory procedures in place to ensure that these obligations are met. . .

• FINRA
• Arbitration
• XIV
• VIX
• Debit Balance
• Charles Schwab
• Deceased
• BrokeAndBroker
• Bill Singer