Massachusetts Secretary of State William Galvin is suing RBC Capital over sales of leveraged and inverse exchange-traded funds (ETFs), accusing the firm of selling the products to clients who didn’t understand what they were buying.
As reported July 20 by Bloomberg, Galvin contends that RBC Capital and Michael D. Zukowski, a former RBC agent, used “dishonest practices” in selling the investments. The lawsuit seeks restitution to Massachusetts investors, a cease and desist order, and an administrative fine.
“The point of the complaint is not that the investors lost money,” Galvin said in a statement. “The dishonesty here is that the investors, and indeed the agent soliciting their investment, did not understand the workings of these funds.”
Galvin’s probe into leveraged and inverse ETFs began in July 2009, shortly after the Financial Industry Regulatory Authority (FINRA) issued a warning about the products and their suitability for long-term investors. Leveraged ETFs use swaps or derivatives to amplify daily index returns; inverse funds are the reverse – they move in the opposite direction of their benchmark.
Galvin alleges that RBC’s Zukowski sold clients “non-traditional” ETFs without proper training or supervision and that RBC failed to have practices in place to prevent unsuitable sales until Dec. 22, 2009, six months after FINRA’s warning.