Articles Posted in Lehman/UBS

Lehman Brothers filed for bankruptcy three years ago, leaving investors in Lehman Brothers structured notes with essentially worthless notes. In the last three years, arbitration panels, courts and securities regulators have all recognized that UBS down played the risks associated with Lehman structured notes, including principals protected notes sold to its customers.

In 2009, the New Hampshire Bureau of Securities Regulation filed a cease and desist and order and sought other relief against UBS, alleging unfair sales practice relating to its sale and recommendation of Lehman structured products to New Hampshire investors. Last month UBS settled this matter with the State of New Hampshire, agreeing to pay a fine, investigation costs and an administrative payment.

In 2011, the Financial Industry Regulatory Authority (FINRA) fined UBS $2.5 million and ordered $8.25 million in restitution for UBS’s misconduct in selling Lehman so-called Principal Protected notes. FINRA’s settlement with UBS reveals UBS’ improper sales tactics relating to Lehman structured products. Although sanctioning UBS almost $11 million, it provides restitution for only a limited number of customers and specifically holds that investors are free to pursue their claims directly against UBS.

Most recently, a federal judge in New York ruled in a UBS-Lehman class action case that the offering documents that described Lehman’s purported “principal protection” notes were false and misleading. The Court did not accept UBS’s defense that the offering materials contained risk disclosures. The Court ruled that “a misleading statement displayed prominently and in numerous places may not be cured by inconspicuous and scattered warnings.” The court found that the principal protection statements were displayed more prominently and frequently than the warning statements.
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The Financial Regulatory Authority (FINRA) announced today that it has fined UBS Financial Services, Inc. $2.5 million, and ordered UBS to pay $8.25 million in restitution for omissions and statements regarding the “principal protection” feature of the 100% Principal-Protected Notes (PPNs) issued by Lehman Brothers Holdings Inc. prior to its September 2008 bankruptcy filing. FINRA is a self-regulatory organization that regulates all broker-dealers doing business in the United States, including UBS.

According to the papers filed by FINRA, during the period between March 17, 2008 to June 2008, in connection with the Lehman PPNs that UBS marketed and sold, UBS made statements and omitted certain facts through communications through some of its financial advisors, which had the effect of misleading certain customers regarding characteristics and risks associated with investing in Lehman PPNs, including material information regarding the product’s “100% Principal Protection” features.

FINRA further alleged that UBS failed to disseminate adequately to its financial advisors certain market information relating to Lehman’s financial conditions and UBS failed to establish an adequate supervisory system for its financial advisors training, marketing and sale of PPNs. FINRA also alleged that UBS did not adequately analyze the suitability of sales of Leman PPNs to certain UBS customers. As a result of the foregoing, FINRA alleged that UBS violated numerous FINRA rules and sanctioned it accordingly.
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The Lehman Brothers bankruptcy, which was filed in September of 2008, is the largest bankruptcy in U.S. history. It has also been an unadulterated feeding frenzy for Lehman’s lawyers, consultants and others. Indeed, Reuters reported in an article on October 18, 2010 that “Lehman’s record-breaking bankruptcy has produced a staggering $1 billion dollars in fees – doled out the legions of lawyers, advisers, and bankers over the past two years.” You heard it right – $ 1 billion in fees. If that number sounds familiar, it is because it is roughly the amount of money that UBS raised for Lehman through the sale of principal protected notes (PPNs) as Lehman was circling the drain. So that leaves an interesting question – what happens to the UBS clients who purchased the billion dollars worth of PPNs?
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The Securities and Exchange Commission (SEC) is reviewing how financial companies market principal protected notes (PPNs), according to Bloomberg news. The SEC’s inquiry is focused on how companies describe the products’ risks and whether the term “principal protected” is misleading and implies that the investment is guaranteed not to fall in value.

UBS had sold more than $1 billion of PPNs, described as safe investments backed by Lehman Brothers that were “guaranteed” against loss of principal. Au contraire, following Lehman Brothers’ bankruptcy filing on September 15, 2008, the PPNs are now in default causing the holders of these PPNs to become senior unsecured creditors in the Lehman bankruptcy proceeding. Practically speaking, these investors are left with virtually worthless investments.

PPNs have reemerged after losing much of their appeal during the time of the Lehman Brother collapse. The SEC’s delve into the sales and marketing practices of PPNs is a likely an attempt to ensure that investors are not lulled again with a false sense of security associated with these products.
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FINRA issued a regulatory notice this month to remind brokerage firms of their sales practice obligations relating to the sale of principal protected notes. The executive summary provides:

The retail market for principal-protected notes (PPNs) has grown in recent years, in part because they are often marketed as combining the relative safety of bonds with a potential for growth not available with traditional fixed income products. However, these products are not risk-free, and their terms and structures can be complex. Firms must ensure that their promotional materials or communications to the public regarding these products are fair and balanced, and do not overstate either the level of protection offered or an investment’s potential returns. Firms also have a duty to ensure that their registered representatives understand the risks, terms and costs associated with these products, and that they perform an adequate suitability analysis before recommending them to a customer.

Among other things, the FINRA notice reminds brokerage firms that in marketing PPNs, they must ensure their communications accurately and fairly explain how the securities operate. Promotional materials must disclose the level of principal protection offered, the credit-worthiness of the guarantor, the potential returns and pay-out structure, the investor’s ability to access funds and any costs or fees that might affect the return of principal. FINRA also advises representatives to perform an adequate suitability analysis based on the aforementioned aspects and components of the PPN.

The New Hampshire state securities regulator has accused a unit of UBS AG, of recommending unsuitable investments to customers who put their money into complex securities underwritten by Lehman Brothers Holdings, Inc.

According to the New Hampshire Bureau of Securities Regulation, UBS allegedly represented the securities as “safe” investments to clients, guaranteeing them “principal protection.”

The bureau alleges that state investors lost $2.5 million in various structured products backed by Lehman Brothers, which filed for bankruptcy on Sept. 13, 2008. By not adequately disclosing these risks, UBS engaged in “dishonest and unethical business practices,” the bureau charges.

The securities law firms Blum Law Group ( and Sallah & Cox, LLC ( announce that they have been retained to represent investors who suffered losses at UBS as a result of losses in Lehman notes and Lehman preferred shares.

These securities were typically recommended as safe investments. However, many investors allege they were not warned of the risk and suffered extraordinary losses as a result. Blum Law Group and Sallah & Cox, LLC are pursuing arbitration claims before the Financial Industry Regulatory Authority (“FINRA”) on behalf of aggrieved investors, including claims of misrepresentation, omissions of material facts, unsuitability, and negligence.

We believe investors will achieve better results on their claims through individual arbitration claims rather than through the class action process.