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SEC Slams UBS Over its Sale of Structured Notes

As reported by The Wall Street Journal on October 13, 2015 (“UBS in $19.5 Million Settlement Over Structured Notes”), UBS Group AG has agreed to pay $19.5 million to settle charges from the U.S. Securities and Exchange Commission that the firm had provided false or misleading information to investors in materials related to structured debt securities that were linked to a proprietary foreign exchange trading strategy.

Between $40 billion to $50 billion of structure notes are registered with the SEC per year, with many of those notes sold to relatively unsophisticated retail investors.

The case is reportedly the SEC’s first enforcement action involving misstatements and omissions by an issuer of structured notes, a complex financial product that typically consists of a debt security with a derivative tied to the performance of other securities, commodities, currencies, or proprietary indexes.

UBS, one of the largest issuers of structured notes in the world, agreed to settle the SEC’s charges that it misled U.S. investors in structured notes tied to the V10 Currency Index with Volatility Cap by falsely stating that the investment relied on a “transparent” and “systematic” currency trading strategy using “market prices” to calculate the financial instruments underlying the index, when undisclosed hedging trades by UBS reduced the index price by about five percent.

According to the WSJ article and the SEC’s settlement order, UBS offered and sold about $190 million of medium-term notes linked to the V10 Currency Index to roughly 1,900 individual investors in the U.S. between December 2009 and November of 2010.

According to the SEC’s order instituting a settled administrative proceeding:

  • UBS perceived that investors looking to diversify their portfolios in the wake of the financial crisis were attracted to structured products so long as the underlying trading strategy was transparent.  In registered offerings of the notes in the U.S., UBS depicted the V10 Currency Index as “transparent” and “systematic”;
  • Between December 2009 and November 2010 approximately 1,900 U.S. investors bought approximately $190 million of structured notes linked to the V10 index;
  • UBS lacked an effective policy, procedure, or process to make the individuals with primary responsibility for drafting, reviewing and revising the offering documents for the structured notes in the U.S. aware that UBS employees in Switzerland were engaging in hedging practices that had or could have a negative impact on the price inputs used to calculate the V10 index;
  • UBS did not disclose that it took unjustified markups on hedging trades, engaged in hedging trades with non-systemic spreads, and traded in advance of certain hedging transactions;
  • The unjustified markups on hedging trades resulted in market prices not being used consistently to calculate the V10 index.  In addition, UBS did not disclose that certain of its traders added spreads to the prices of hedging trades largely at their discretion; and
  • As a result of the undisclosed markups and spreads on these hedging transactions, the V10 index was depressed by approximately five percent, causing investor losses of approximately $5.5 million.

The SEC settlement includes a civil penalty of $8 million and a combined $11.5 million of disgorgement and prejudgment interest.

The SEC’s release relating to this enforcement action can be accessed at news/pressrelease/2015-238.html and the SEC’s Order can be accessed at litigation/admin/2015/33-9961.pdf.

If you are an individual or institutional investor who has any concerns about your investment in structured notes, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

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