Broker in hot water over leveraged ETFs

Michael Venable of Tyler, Texas, a former employee of Morgan Keegan, has been barred from the industry for exposing clients with conservative investment objectives and risk profiles to unsuitable investments, such as leveraged ETFs.

FINRA determined that he put his clients at great risk by putting them in Direxion ETFs, some of which had short various market segments. To make matters worse, half of those accounts traded Direxion on margin and many of the investors, ranging from 40 to 91, were not made aware.

The Direxion prospectus cautions that “the funds are not suitable for all investors” and that they should only be used by investors who understand the risks of leverage, daily trading and short selling. Venable’s clients, some of whom had low incomes of $25,000, were not suited to these types of investments.

Venable also engaged in excessive trading, FINRA ruled, and collected high commissions. On one client account with an average monthly balance of $17,000, Venable’s trading generated almost $10,000 in commissions.

“As a result, the account had an annualized cost-to-equity ratio of approximately 140%,” the FINRA ruling states. “Thus the [clients’] account investment of $17,000 would have to appreciate 140% to cover the commissions charged to the account.”

Venable also was found to have kept inaccurate and inadequate records.