On November 17, 2015, The Financial Industry Regulatory Authority (“FINRA”) filed a disciplinary action against David Miller, formerly a stockbroker employed by the Huntington Investment Company. FINRA has charged that Miller acted improperly in recommending and selling investments known as Unit Investment Trusts (“UITs”). Specifically, FINRA asserts that Miller failed to perform required due diligence regarding the UITs he recommended. He, also, sold those UITs to customers for whom they were unsuitable. FINRA’s rules require stockbrokers to both understand the investments brokers offer their clients and ensure that the securities they offer are suitable for the particular clients to whom they are offered.
Unit Investment Trusts
A Unit Investment Trust is a type of Investment Company, like a mutual fund or a closed-end fund. UITs are similar to mutual funds or Closed-End Funds (“CEFs”) in some ways. For instance, like a CEF, a UIT will make a fixed number of units available for sale in a public offering. The units are a functional equivalent of a CEF’s or a mutual fund’s shares. Also, like mutual funds or CEFs, the proceeds from the sale of the units are invested by the UIT in a portfolio of securities. Accordingly, an investor in a UIT holds a fractional interest in the UIT’s underlying portfolio — as they would in owning a mutual fund or a CEF.
But there also some significant differences between UITs and mutual funds or CEFs. Unlike the latter two investment structures, UITs do not actively manage their portfolios. Whatever is purchased at the inception of the investment is what the UIT will hold for its duration. The duration of a UIT also differs from a mutual fund or CEF. UITs set a specific termination date on which the entity will dissolve. When the UIT dissolves, any remaining investment portfolio securities are sold and the proceeds are paid to investors. Investors may gain access to their investment before a UIT matures by selling their units on a secondary market. A UIT might also redeem its shares and returns the net asset value of the portfolio underlying the investor’s units.
UITs themselves are neither inherently good nor bad. To decide whether a particular UIT’s units are appropriate investments, one must know what the UIT holds in its underlying investment portfolio.
FINRA has alleged that David Miller did not understand key aspects of certain UITs he sold his clients. FINRA’s complaint focuses upon municipal income UITs offered between August 2012 and May 2013.
Issues Related to Unit Investment Trust (UITs)
- The UITs’ portfolios were typically comprised of closed-end investment companies (commonly called “closed-end funds” or “CEFs”) that invested in tax-exempt municipal bonds;
- The UITs’ termination dates did not match the maturity of the municipal bonds held by the CEFs;
- Certain CEFs held in the UITs used leverage in an attempt to increase portfolio returns; which leverage increased risk and the likelihood of price volatility, with a likely adverse effect on the UITs’ values;
- Certain CEFs invested in what are commonly called junk bonds – which are considered speculative investments;
- The prospectuses of the UITs mentioned certain risks, including that a UIT’s value generally would fall if interest rates rose, that the UITs’ portfolios contained CEFs that employed leverage, and that the CEFs could invest in securities rated below investment grade.
In short, FINRA alleged that the UITs at issue were not considered safe or low-risk investments.
Allegations Against David Miller
FINRA alleges that David Miller failed to conduct appropriate research to ensure that he understood the UITs before recommending them. Specifically, FINRA claimed that Miller did not read the UIT prospectuses; did not know that the underlying CEFs used leverage, nor did he know the effect the leverage would have; did not understand the volatility of CEFs; did not understand that the UITs held CEFs invested in long-term bonds, even though the UITs themselves were shorter term wrappers; did not understand the secondary market for investors who might want to sell their UIT units before maturity; and, did not understand how the UITs were valued. Accordingly, FINRA alleged that Miller could not have honored his obligations under FINRA rules to only sell investments he understood. Taking that logic further, FINRA asserted that if Miller did not understand the UITs, he could not possibly have known whether they were suitable for any particular investors.
FINRA’s complaint is not limited to David Miller’s lack of understanding of the UIT products. FINRA also alleges that Miller misrepresented some aspects of the UITs to certain customers. For example, he allegedly claimed the UITs would only lose value if bond rates rose or municipalities defaulted before the UITs matured. FINRA states that these representations were false. FINRA also alleged that Miller failed to disclose to a number of his customers that the CEFs held in the UITs were highly leveraged and to explain the risk associated with that leverage. FINRA also contends that he failed to explain the fact that the value of the UITs at maturity was dependent on the then-current value of the underlying CEFs and not the value of the yet non-matured municipal bonds held by those CEFs.
Obviously, David Miller is presumed innocent until proven otherwise. However, it is important to know that a number of Miller’s former clients have also lodged complaints against him related to his sale of UITs.
We, along with our colleagues at the law firm of Peiffer, Rosca, Wolf, Abdullah, Carr and Kane, are investigating David Miller’s conduct and are preparing to take action. If you bought UITs from Mr. Miller and lost money in those investments, please call us to discuss your experience. We may be able to help you recover some or all of your losses.
Call Hugh Berkson at McCarthy, Lebit, Crystal & Liffman (866) 932-1295 or call Alan Rosca at (888) 998-0520. Or feel free to contact us through the form on the right-hand side of this page.
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.