Erez Law recently filed a $190,000 FINRA arbitration against Lion Street Financial, LLC, Legacy Capital Group California, Inc., and React Investment Solutions, LLC for losses due to investments in LJM Fund.
Their customer alleges that Richard Baer (CRD #848798), who is a registered representative of Lion Street Financial, LLC in Los Gatos, California, recommended he invest in LJM Preservation and Growth Fund, L.P.
According to the filed claim, the customer informed Baer that he was interested in conservative and low risk investments and strategies that would generate a modest income while preserving his irreplaceable retirement savings. The customer repeatedly instructed Baer that he was willing to accept lesser returns in order to avoid risk and preserve his irreplaceable retirement savings. Baer assured his former client that he understood his aversion to high risk investments and would recommend investments and strategies that were consistent with the customer’s need to generate income and preserve his capital.
Baer enrolled the client in a fee-based platform whereby he paid a 1.5% annual fee based on a percentage of the assets in his portfolio. Despite the customer’s advanced age and risk aversion, Baer recommended a speculative and unsuitable strategy of investing approximately 14% of the customer’s portfolio in a single speculative and unsuitable investment PFC-LJM Preservation and Growth Fund, L.P. Unfortunately for the client, these investments lead to unacceptable results.
The claim alleges that Baer led the Erez Law client to believe the LJM Fund was a conservative and low risk investment that would provide capital preservation and would act as a hedge against a downturn in the broader equity markets. Baer knew or should have known that the LJM’S Fund’s investment strategy exposed investors to an extraordinary degree of risk. Baer failed to adequately disclose the enormous risks associated with the LJM Fund he recommended and sold to the client. Baer failed to adequately disclose that a significant increase in volatility could cause the LJM Fund to suffer devastating losses. On the contrary, it is alleged that Baer misrepresented to the customer that the LJM Fund was a low risk investment that provided capital preservation and would act as a hedge against a decline in the broader equity market indices.
It is alleged Baer’s failure to adequately disclose the extraordinary risks associated with the high risk and unsuitable LJM Fund he recommended and sold to the client deprived him of his fundamental right to make an informed decision about his irreplaceable retirement savings. As such, Baer blatantly breached his fiduciary duty. As a result of Baer’s misconduct, the client has suffered estimated losses in excess of $190,000. To make matters worse, the customer no longer receives income from the LJM Fund.
Contrary to Baer’s representations, the LJM Fund was a highly leveraged, speculative and unsuitable hedge fund that employed a reckless investment strategy which caused the fund to lose 80% of its value in just two days in February 2018.
The LJM Fund was a highly leveraged fund that pursued an aggressive “short-volatility” strategy that involved the selling “naked” put options on S&P 500 futures. The LJM Fund’s strategy amounted to a highly leveraged and high risk gamble against volatility in the S&P 500. Specifically, the LJM Fund employed a limited profit/unlimited risk options strategy known as a “short strangle”, which consists of selling “out-of-the-money” put options and “out-of-the-money” call options with the same expiration date on the same underlying asset (in this case, the S&P 500.) The goal of this strategy is to profit from little or no movement in the price of the underlying asset (i.e. the S&P 500.) If the price of the underlying asset does not increase or decrease significantly (i.e. the S&P 500 remains in between the strike prices of the put and call options sold by the fund), then the options expire worthless and the fund profits by retaining the premiums received from the sale of the options. However, if the price of the underlying asset experiences significant volatility (either upward or downward) causing the underlying asset’s price to move above or below the options’ strike prices, then the fund may suffer significant losses, which is exactly what occurred.
On February 5, 2018, the S&P 500 experienced significant downward volatility, and the LJM Mutual Funds lost approximately 55% of their value in a single day. Upon information, the LJM Fund suffered similar losses. On February 6, 2018, the S&P 500 rebounded and experienced significant upward volatility, and the LJM Mutual Funds suffered an additional decline of approximately 54% of its value in just one day. Upon information, the LJM Fund suffered similar losses. On February 7, 2018, the LJM Fund’s manager announced that “LJM strategies have suffered significant losses.” A few weeks later, the LJM Fund’s manager announced that all of the LJM funds were shutting down.
Erez Law alleges that Lion Street had actual knowledge that Baer was dually registered as an investment adviser with Legacy/React. As such, Lion Street had a duty to supervise Baer’s investment advisory activities, including the sale of the LJM Fund. Lion Street failed to satisfy its duty to supervise Baer.
In addition to the case above, Baer has been the subject of two additional customer complaints in 1992 and 1993, according to his CRD report.
Erez Law represents investors in the United States for claims against brokers and brokerage firms for wrongdoing. If and have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.