Zamansky LLC Investigates Aegis Capital for VRSP Investment Fraud

Zamansky LLC is investigating Aegis Capital Corp. (“Aegis Capital”) in relation to the firm’s sale of variable interest rate structured products (VRSPs) to retail investors. Aegis Capital recently entered into a consent decree with the U.S. Securities and Exchange Commission (SEC) in relation to its sale of VRSPs, and as part of the consent decree, the firm has agreed to stop selling these high-risk investment products.

VRSPs Are High-Risk Investments for Retail Investors

Variable interest rate structured products are unique in that they offer guaranteed fixed interest rate payments for a period of time. This guarantee is, understandably, attractive to retail investors, and it appears that Aegis Capital’s brokers played up this guarantee when recommending VRSPs to the firm’s customers.

However, VRSPs’ guaranteed interest payments are short-lived. While VRSPs can have maturity periods of 15 years or more, investors typically only receive guaranteed payments for one to three years. After this initial period, not only is there no guarantee of a return, but investors are at risk of losing their principal as well. As the SEC explains:

“After the fixed-interest rate periods end, however, the VRSPs make periodic variable interest rate payments, but only if a spread exists in which the long-term Constant Maturity Swap (“CMS”) rate is greater than the short-term CMS rate and certain reference securities indexes, such as the S&P 500 and/or the Russell 2000 stock indexes, do not decline by more than a specified percentage. Consequently, once the fixed-interest rate payment periods end, the Customers are not guaranteed to receive any further interest payments from the VRSPs.”

Furthermore, due to the unique and high-risk nature of VRSPs, these securities are illiquid—meaning that investors cannot get out by selling on the open market. These are known as “principal-at-risk” securities, and they generally are not suitable investments for retail investors.

Aegis Capital Brokers Recommended High-Risk VRSPs Without Disclosing the Risks Involved

Investment fraud attorney Jake Zamansky’s team’s investigation has uncovered evidence suggesting that Aegis Capital’s brokers failed to adequately disclose the risks associated with VRSPs to their customers. According to the SEC, Aegis Capital’s brokers made unsuitable investment recommendations to at least 48 customers while omitting material information about the inherent and substantial risks associated with VRSPs. These brokers were located in the firm’s Melville, New York and Boca Raton, Florida offices.

Specifically, the SEC found that Aegis Capital’s brokers in Melville and Boca Raton “made material misstatements and omissions about the VRSPs to Customers, falsely stating, in substance, that the Customers were guaranteed to receive their full invested principal at maturity from investing in VRSPs that, in fact, did not guarantee principal protection.”

This was true even though the firm’s preliminary prospectus for the VRSPs contained warnings such as, “[I]nvestors may lose up to their entire initial investment in the securities,” and “The securities will not be listed on any securities exchange. . . . [and] there may be little or no secondary market for the securities. . . . Accordingly, you should be willing to hold your securities to maturity.”

Aegis Capital Accused of Additional Forms of Investment Fraud Related to Its Sale of VRSPs

In addition to finding that Aegis Capital’s brokers misled investors into unsuitable and high-risk investments, the SEC has made several other notable findings as well. For example, the SEC’s Cease-and-Desist Order entered against Aegis Capital states:

• Aegis Capital’s Managing Director in Boca Raton made “at least 1,000” unauthorized trades involving VRSPs in customers’ non-discretionary brokerage accounts between September 2015 and May 2019.
• Aegis Capital failed to reasonably implement its own policies and procedures designed to prevent misleading disclosures regarding structured products and unauthorized trading from January 2015 through May 2019.
• Aegis Capital failed to keep adequate books and records documenting the information disclosed to investors, in violation of Rules 17a-3(a)(17)(i)(B)(1) and 17a-3(a)(17)(i)(B)(3) under the Securities Exchange Act of 1934.

What To Do if You Invested in VRSPs Through Aegis Capital

While Aegis Capital has entered into a consent decree with the SEC regarding its sale of VRSPs, investors who purchased these high-risk structured products can still take legal action to recover their investment losses. Along with the information released by the SEC, our firm is continuing to gather additional information to support investors’ claims in FINRA arbitration. If you lost money investing in VRSPs with Aegis Capital, you may have a claim for fraud, and we encourage you to speak with an investment fraud attorney at Zamansky LLC promptly.

Speak With an Investment Fraud Attorney About Your VRSP Fraud Claim Against Aegis Capital

Are you entitled to recover your VRSP investment losses in FINRA arbitration? Contact us to find out. Call 212-742-1414 or inquire online to schedule a free and confidential consultation with an investment fraud attorney today.