Wolper Law Firm, P.A. Investigates the Lyons Wealth Management “Lyons Enhanced Yield Program”

• November 21, 2024
• Lyons Wealth Management

Wolper Law Firm, P.A. is investigating SEC Registered Investment Advisor (“RIA”), Lyons Wealth Management, LLC.  According to its most recent Form ADV, Lyons Wealth Management, LLC, which is based in Winter Park, FL, manages $160 million in assets.  One subset of its business involves options trading through a proprietary options trading program titled, “Lyons Enhanced Yield Program.”  The Wolper Law Firm has heard from clients of Lyons Wealth Management, who have experienced investment losses as a result of this proprietary strategy.

What is the Lyons Enhanced Yield Options Program?

The Lyons Enhanced Yield Program is dubbed by Lyons Wealth Management as an income overlay strategy in which the customer pledges stocks to be used as collateral for a margin loan.  The loan proceeds are then used to purchase additional securities that are designed to generate dividends.  Those dividends are expected to generate a 12%-14% annual cash flow, plus any appreciation of the underlying securities.  Lyons Wealth Management assures clients that they will “hedge” underlying positions to ensure that if the collateral declines in value, the risk of a margin call remains low.  Lyons Wealth Management further represents that the “unlike covered call or other strategies in which the underlying stock is pledged and at risk of assignment or forced sale by the Options Clearing Corporation, clients in the Enhanced Yield Strategy are not exposed to the risk of assignment.”  Pursuant to marketing materials distributed to clients, Lyons Wealth Management represents to clients that the Yield Strategy is designed to “ring the proverbial ‘dividend cash register.’”

As it turned out, the representations made by Lyons Wealth Management did not come to fruition and investors lost substantial sums of money.

Investment Advisors are Bound by a Fiduciary Standard

Lyons Wealth Management is a fiduciary.  The SEC and courts across the country have interpreted the fiduciary duty standard imposed by the Advisers Act and have found that advisers owe both (1) a duty of care and (2) a duty of loyalty.  SEC v. Capital Gains, 375 U.S. 180 (1963).  The duties articulated in Capital Gains have been reaffirmed in the SEC’s most recent pronouncement regarding fiduciary standards.  The fiduciary duty standard is broad and applies to the entire adviser-client relationship.  The duty of care includes a duty to provide investment advice that is in the best interest of the client, including a duty to provide advice that is suitable for the client.  In order to provide such advice, an adviser must have a reasonable understanding of the client’s objectives which is a critical component of the duty of care.  Whether the advice is in the client’s best interest must be evaluated in the context of the portfolio that the adviser manages for the client and the client’s objectives.  The duty of care also encompasses the duty to provide advice and monitoring at a frequency that it in the best interest of the client, taking into account the client relationship.\

The Investment Advisors Act of 1940 also imposes upon Lyons Wealth Management a duty to supervise its employees.  In order to discharge this responsibility, Lyons Wealth Management must have supervisory processes in place to monitor customer accounts and the trading therein.  Failure to properly supervise options trading or the disclosures made by its registered employees may constitute a breach of fiduciary duty.

Options trading is highly complex.  Because of the complex nature of options trading, explanation and illustration of these risks is required in order for the client to have a comprehensive understanding of the investment strategy.   Yield enhancement strategies often involve using equity in the investor’s account to collateralize an options strategy consisting of a combination of call options and put options on an underlying index or basket of securities.  The trading may consist of even more complex options strategies, such as collars, spreads or iron condors.  In some instances, as is the case with the Lyons Yield Enhancement Strategy, the money manager borrows money (i.e., use leverage) to purchase additional securities that are intended to generate additional yield.  The use of leverage magnifies the risk.

It is imperative that the financial professional conduct adequate research regarding the underlying stock to determine whether it is an appropriate candidate for an options strategy.  This includes analysis of volatility, implied volatility and the “Greeks,” which are metrics that options traders use to evaluate the risk of an options trade.  “Volatility” is a measure of the size of price fluctuations in an underlying asset over time, without regard to the direction in which the moves occur. Stocks which have low volatility tend to be relatively stable, with small price moves. Stocks which have a high volatility tend to exhibit large price moves.  “Implied Volatility” is the volatility which can be inferred from option prices. It can be thought of as the marketplace’s consensus of the likely future volatility of the stock.  “Volatility” and “Implied Volatility” are two criteria that every professional options trader can and should analyze so that a framework exists for measuring the statistical probability of success with each trade.

If you invested with Lyons Wealth Management, and have experienced investment loss due to leveraged options trading, you may be entitled to recover those losses.  The Wolper Law Firm represents investors nationwide in securities litigation and arbitration on a contingency fee basis.  Matt Wolper, the Managing Principal of the Wolper Law Firm, is a trial lawyer who has handled more than 1,000 securities cases during his career involving a wide range of products, strategies and securities, including cases involving options strategies.  Prior to representing investors, he was a partner with a national law firm, where he represented some of the largest banks and brokerage firms in the world in securities matters.  We can be reached at 800.931.8452 or by email at mwolper@wolperlawfirm.com.