PrefBlog

There’s a couple of preferred share lawsuits brewing:

Both client groups allege that throughout 2017 and the first half of 2018, Mr. Liu recommended a new investment strategy that “assured safety” of their principal and provided “reasonable” investment returns.

Shortly after, clients allege they were instead placed in a high-risk strategy that involved short-selling bonds – particularly Canadian government bonds – to purchase long positions in preferred shares, many of which had variable rates or rates that reset based on interest rate movement.

According to court documents, Mr. Liu further advised the clients to begin trading on margin – investing using borrowed money – in order to purchase a larger amount of preferred shares. In some instances, clients allege Mr. Liu engaged in this strategy without informing them or seeking their permission.

None of the clients were told it was “a high-risk, speculative strategy” that was inconsistent with their low-risk investment objectives, the suit alleges.

Shorting governments is similar in investment characteristics to taking a mortgage … see this comment and my answer which refers back to this old comment and my answer. One of the risks I didn’t mention was price risk – the risk that the market values of the two sides of the position could move against you. Unless something else goes wrong, this shouldn’t hurt a long-term investor … but what were the investors in this strategy told?

Eventually, we get down to the same old question: just what the hell does “risk” mean, anyway?

This entry was posted on Monday, September 14th, 2020 at 6:59 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.