Kirby McInerney | Collateral Yield Enhancement ("CYES") Options Investigation
This links to the home page
Cases
PRACTICE AREAS

Collateral Yield Enhancement ("CYES") Options Investigation


Investors injured by overly risky account "overlay" may have meritorious arbitration claims.

Adequacy of disclosures and level portfolio margining and diversification are investigated.

Investor rights attorneys at the law firm of Kirby McInerney LLP are investigating potential securities arbitration claims against Merrill Lynch (NYSE: BAC), Morgan Stanley (NYSE: MS) and other financial advisory firms in connection with a risky options trading strategy - dubbed the Collateral Yield Enhancement Strategy or CYES - which caused substantial losses to numerous high net worth clients.

Injured investors may have meritorious securities arbitration claims and are urged to contact Kirby McInerney partner Mark A. Strauss at 212-371-6600 or by email at mstrauss@kmllp.com for a free consultation.

Iron-Condor options trading strategy causes steep investor losses

The Collateral Yield Enhancement Strategy involved borrowing against or "margining" investors' conservative stock or bond portfolios to invest in "Iron Condor" options trading structures managed by a third-party investment advisory firm, Harvest Volatility Management. An Iron Condor is a well-known trading strategy that involves a pair of options "spreads."

Harvest's Iron Condors involved selling or "writing" short-dated "out of the money" call and put options on the S&P 500 Index, while simultaneously buying call and put options on that Index which were further "out of the money". The objective was to generate income through the premiums received on the options that were sold, while containing risk and minimizing losses through the options that were purchased.

Financial advisors and private wealth managers promoted the CYES strategy to high net worth and ultra-high net worth clients as a safe account "overlay" which would boost returns with minimal risk, and which would perform best in periods of low stock market volatility.

In December 2018, however, the stock markets experienced large price swings and surging volatility, resulting in massive losses for investors in the CYES options trading strategy.

In the aftermath, on April 22, 2019, investment management firm Victory Capital announced that it was withdrawing from a deal to acquire Harvest for roughly $300 million. Apparently, due to the substantial account drawdowns that CYES investors suffered, Harvest's revenues (which are based on the amount of assets under management) had declined by more than 20%, thus triggering the termination clause of Victory's acquisition agreement. Indeed, Victory Capital cited "recent adverse market conditions affecting [Harvest]'s largest investment strategy" - which was CYES - as the reason for nixing the deal.

In addition, numerous investors reportedly filed arbitration complaints with the Financial Industry Regulatory Authority (FINRA) to recoup their losses.

Adequacy of risk disclosures investigated

Attorneys at Kirby McInerney with substantial experience litigating complex securities matters are investigating whether investors in the Collateral Yield Enhancement Strategy options trading strategy were misled by their financial advisors or private wealth managers as to the strategy's risks - both before investing and on a continuing basis as market volatility showed signs of increasing.

Also being investigated is whether, as a result of their CYES options trading positions, client accounts were overleveraged through excessive use of portfolio margin or were inadequately diversified, and whether the Iron Condor options structures utilized were appropriately staggered and laddered to minimize risk and avoid excessive losses.

It is believed that investors injured by the CYES options trading strategy include high net worth and ultra-high net worth clients of Merrill Lynch, Morgan Stanley, Charles Schwab (NYSE: SCHW), and Fidelity, as well as of independent Registered Investment Advisors (RIAs) affiliated with the investment clearinghouse BNY Mellon Pershing (NYSE: BK). All are firms which reportedly partnered with Harvest to offer the CYES account "overlay", according to a March 2017 article on FINalternatives.com.

If you suffered losses investing in the CYES options trading strategy and would like to discuss your legal rights - including the possibility of filing an arbitration complaint with FINRA - please contact attorney Mark A. Strauss of Kirby McInerney at 212-371-6600 or by email at mstrauss@kmllp.com. The consultation is free; there is no cost to you.