Individual investor's $45K loss on volatile bets incites SEC probe

56-year-old civil engineer Jeff Steckbeck, like many other individual investors, opted to trust banks like Credit Suisse Group AG when he invested in volatile trades, Blomberg reported. Over the phone, he admitted that he wished he was more practical and reviewed the investment prospectus and understand the risks associated with such investment.

"In theory, everybody's supposed to read everything right to the bottom line and you take all the risks associated with it if you don't. But in reality, you gotta trust that these people are operating within what they generally say, you know?" Steckbeck said.

Steckbeck reportedly lost $45,000, or 89% of his investment, by being on the wrong end of a volatility bet. He posted the lost following a Credit Suisse note known as TVIX had crashed a week after he had purchased the security in March 2012. Bloomberg said the security has never recovered.

Other investors are left unfazed despite the stories like Steckbeck's. According to the news agency's compiled data, investors have increased its holdings to over 50% at $24 billion since the end of 2012.

This has prompted US regulators like the US Securities and Exchange Commission to add pressure on banks to provide a clearer explanation on the risks involved in investing in bank securities known as exchange-traded notes. These ETNs, as explained by Bloomberg, use derivatives that act like assets like natural gas to stocks. According to people who had knowledge on the matter, SEC has been negotiating with the banks to beef up their disclosures on securities.

Finance professor Robert Whaley at Vanderbilt University in Nashville, Tennessee said that the investors who have increased their bets on such volatile securities are still not savvy about how the ETNs work.

Whaley said over the telephone, "They're treating this market much the same way as they treat going to Las Vegas and playing blackjack. I don't agree that these people are particularly informed."

Meanwhile, Steckbeck has joined a group of investors who has sought arbitration over the losses they incurred from the TVIX from regulators.

Tags

Credit Suisse Group AG, TVIX, exchange-traded notes, volatile securities, US Securities and Exchange Commission

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