Broker-dealer First Trust Portfolios faces a proposed class-action lawsuit alleging that it assisted another firm in a more than $89 million fraud involving the unlawful sale of risky structured notes to Arizona investors — mostly retirees who relied on the investment income.
In a complaint filed Oct. 16 in U.S. District Court for the Northern District of Illinois, Ty Rudd, an Arizona investor, contends that First Trust, in its role as a financial product wholesaler, made “fraudulent, misleading, and deceitful facilitation and promotion of a high-risk financial product: what is known as an autocallable worst-of-basket structured note.”
The lawsuit accuses First Trust of assisting Vora Wealth Management and Dharmesh Virendra Vora in selling the high-risk structured notes to Rudd and other investors.
“First Trust worked with Vora to create and sell the Structured Notes in large quantities, financially benefiting both First Trust and Vora, while misleading and financially harming hundreds of investors to the tune of $89 million,” the lawsuit alleges.
First Trust had no comment, a firm representative told ThinkAdvisor by email Monday.
The Securities and Exchange Commission last year barred Vora, the eponymous firm’s sole owner, from acting as an investment advisor and broker, according to his BrokerCheck record.
A September 2024 press release announced that the SEC had settled charges against Vora and the firm for investing client assets in the notes, contrary to their investment objectives and without adequate risk disclosures.
The SEC settlement order found that from November 2020 to November 2021, Vora Wealth and Vora invested most client accounts in structured notes tied to four stocks traded on Nasdaq and downplayed the possibility that they could lose most or all their principal.
The agency also found that Vora and his firm received undisclosed benefits from one of the brokers through which they purchased the notes, including a wine tasting and payments to subsidize a Vora Wealth client event.
Without admitting or denying the SEC findings, Vora and his firm agreed to a cease-and-desist order and to pay $1.1 million in disgorgement, more than $231,000 in prejudgment interest and a $300,000 civil penalty. The order also established a Fair Fund to return money to affected investors.
The Arizona Corporation Commission also took action against Vora's firm last year.
Rudd’s lawsuit alleges that First Trust “actively facilitated and amplified Vora's deception of hundreds of Arizona retirees” by, among other steps, creating promotional materials and hosting events that falsely portrayed the high-risk investments as offering "protection" and "downside mitigation."
First Trust also provided “undisclosed kickbacks and benefits to Vora in exchange for concentrating nearly 89% of clients' life savings — $124 million — into First Trust's toxic structured products, resulting in $89 million in losses when the scheme inevitably collapsed,” the complaint alleges.
The structured notes that First Trust created for Vora were tied to a basket of four underlying stocks — Amazon, Zoom, Netflix and Tesla — the suit alleges. The notes “represent extraordinarily risky investments that no informed investor would ever purchase. The mathematical structure of these investments virtually guaranteed failure for investors,” it contends.
First Trust Portfolios is affiliated with First Trust Advisors, which had about $290 billion in assets under management or supervision on Aug. 31.
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