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Erez Law Files Claim for CYES Losses by Merrill Lynch Broker Gordon Harper

Posted on Wednesday, December 11th, 2019 at 1:57 pm    

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Erez Law recently filed a FINRA arbitration against Merrill Lynch for Collateral Yield Enhancement Strategy (CYES) losses.

Their customer alleges that Gordon Harper (CRD #5460504), who has been a registered representative of Merrill Lynch, Pierce, Fenner & Smith Incorporated in Houston, Texas since 2016.

The Erez Law clients, who were an elderly married couple, alleges the following in the newly filed FINRA claim:

In or about late 2016, Harper recommended that the client open a new Merrill Lynch account to invest in the Harvest Volatility Management, LLC CYES. Harvest is a registered investment advisor (RIA) that manages an options overlay strategy it calls CYES. CYES is high risk and was an unsuitable investment strategy for the customers. Merrill Lynch and Harper were targeting their marketing of this fatally flawed strategy to high net worth investors such as the Erez Law clients, according to the claim.

Erez Law alleges that the CYES program was falsely represented to investors, including the clients, as a low risk strategy that allows investors to generate enhanced yield while reducing risk, all without requiring investors to deposit any material additional funds into their new Merrill Lynch account to participate in CYES. The CYES program involves using the equity in an investor’s Merrill Lynch account(s) to pursue a purportedly low risk options strategy involving a combination of put and call options on the S&P 500 index and the VIX index. Merrill Lynch touted the CYES program as having “no direction bias,” being “directionally agnostic” and able to “deliver uncorrelated absolute returns” through an options strategy known as an “iron condor,” named for the strategy’s profit/loss diagram.

An iron condor strategy purports to generate income through the sale of “out-of-the-money” put and call options contracts, while providing hedging against losses through the purchase of further out-of-the-money put and call options on the same asset to limit the investor’s downside risk. Merrill Lynch claimed its iron condor strategy was a market neutral strategy, which means that is not a directional wager that the price of the underlying asset will increase or decrease in value, but rather the strategy seeks to profit from a relative lack of volatility in the price of the underlying asset. In other words, the investor is betting that the underlying asset’s price will remain within a specified trading range, allowing all of the options to expire worthless, at which point the investor retains the premiums received from the sale of the options (minus the cost of purchasing the options that were used to limit the downside exposure.) In the event the price of the underlying asset increases or decreases significantly, the purchased put or call options would provide a maximum limit to the investor’s downside risk. In the case of the CYES program, the investor’s profits would also be reduced by the attendant fees and commissions.

According to the claim, Merrill Lynch’s marketing materials emphasized that the CYES program purportedly “mitigated” risk of loss. Consistent with Merrill Lynch’s marketing materials, Erez Law alleges that Harper represented to the client that the CYES program that would generate “incremental income” all while requiring no additional investment of capital.

It is alleged that Merrill Lynch represented to investors such as the clients that the central premise of the CYES program is that it would “Seek to generate returns by “harvesting” the time decay of option premium” and that it “seeks to benefit from the spread of implied volatility over subsequent realized volatility.” This was not in fact the case.

Furthermore, contrary to Merrill Lynch’s representations, the CYES program was not “directionally agnostic” or free of “direction bias.” The CYES strategy did actively engage in market timing and taking directional positions on the market and suffered significant losses as a result. Harper’s representations minimized the risk of loss and he assured the clients that any loss would merely be a temporary “paper loss” and quickly covered by gains. Harper never disclosed to the clients that the clients could lose hundreds of thousands of dollars in CYES. In fact, Harper’s representations led the clients to believe that his realistic downside was not earning income as opposed to losing capital. Merrill Lynch and Harper failed to provide a balanced presentation of the benefits and risks of CYES as required. Merrill Lynch failed to adequately disclose the significant risks associated with the CYES program.

It is alleged that Harvest managed the assets in the clients’ account which was enrolled in the CYES program on a discretionary basis. The clients were not contacted prior to any transactions nor did he authorize any specific transactions. This was far from an isolated case. It is alleged that Merrill Lynch and Harper recommended CYES to numerous other customers.

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.