Colorado bars advisor over high-risk options trades

A financial advisor who traded in a high-risk options strategy was barred this month from the securities industry by the Colorado Division of Securities after he decimated certain clients' accounts, according to the state's consent order with the financial advisor, James W. McGehee.

In one instance, a 76-year-old retiree had $205,000 in his account in June 2021. He withdrew $25,000 from the account by the end of December 2022, but the account totaled just $18,000 by that time, according to the Colorado Securities Division.

As a result of the options transactions made by McGehee and his firm, McGehee Wealth Management Inc. in suburban Denver, the elderly client lost $160,000, or almost all his retirement savings, in just 18 months, according to Colorado.

McGehee, whose firm managed just $3 million on a discretionary basis for 20 clients, did not return a call Wednesday morning to comment. The consent order barring him from the securities industry is dated June 4.

By failing to disclose the options strategy risks to clients and recommending the strategy without a basis for its suitability to customers, McGehee violated the Colorado Securities Act and engaged in investment advisor fraud, according to the consent order.

"I have no comment," he said during a phone call Wednesday morning.

McGehee recommended the options strategy to half his clients, according to Colorado. From April 2018 to last October, he recommended over 11,000 trades in client accounts, with about 90% of those in options.

"Buying options is fraught with risk for financial advisors," said Andrew Stoltmann, a plaintiff's attorney. "Options are usually not suitable in most instances for clients."

"Options are also a hot button issue right now with" the Financial Industry Regulatory Authority Inc., Stoltmann said. "They pay heavy commission to brokers, from 5% to 50% as a percentage of the option. Brokers jam options down clients' throats at times because of that payout."

Options give holders the right, but not the obligation, to buy or sell underlying shares of stock in return for a premium. Options can be useful for hedging as well as speculating, but can be risky for clients because, depending on the strategy, they can result in 100% loss to the customer, according to Colorado.

The Securities and Exchange Commission this month barred a former Fifth Third advisor who violated his clients’ trust by secretly funneling hundreds of thousands of dollars of their money into failed options trades.

According to the SEC's complaint, David S. Wells transferred client money into personal accounts and used the accounts to engage in risky options trading, where he lost nearly all the funds. The complaint also alleges Wells spent some of his clients’ funds on personal expenses.