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Category Archives: UBS Financial Services

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).

Update: UBS, Puerto Rico Muni Bonds

A unit of UBS AG has offered to repurchase shares of closed-end municipal bond funds invested in Puerto Rico muni securities from certain clients. The story was first reported Nov. 25 by Investment News.

During this past summer, the market for Puerto Rico’s $70 billion muni debt went south after Detroit filed for bankruptcy in July. UBS Financial Services of Puerto Rico is a huge player in the muni debt market in Puerto Rico, packaging and selling $10 billion in proprietary closed-end bond funds through the end of 2012.

Meanwhile, the net asset value (NAV) of the 14 UBS closed-end funds have plummeted.

Investors purchased the proprietary bond funds for $10 a share. According to the Investment News story, the NAV for the $375 million Puerto Rico Fixed Income Fund was $3.63 at the end of October, down 85% since the end of June. The NAV for the $449 million Puerto Rico Fixed Income Fund III was $4.08 at the end of last month, a decrease in value of 68% since June.

So far, investors who’ve been contacted by brokers have not been told a set price – or given a guarantee – for their shares.

FINRA Fines UBS Over Lehman-Issued 100% Principal-Protected Notes

Principal-Protected Notes (PPNs) – and the misrepresentation of them – are back in the news. The Financial Industry Regulatory Authority (FINRA) has fined UBS Financial Services $2.5 million over PPNs, requiring the brokerage firm to pay $8.25 million in restitution for omissions and statements made to investors about the products.

According to FINRA, UBS’s statements about the products effectively misled some investors about the “principal protection” feature of 100% Principal-Protection Notes issued by Lehman Brothers Holdings prior to its September 2008 bankruptcy filing.

Principal-protected notes are considered fixed-income security structured products with a bond and an option component that promise a minimum return equal to an investor’s initial investment.

According to FINRA, as the credit crisis worsened during March to June 2008, UBS advertised – and some UBS financial advisors described – the structured notes as principal-protected investments while failing to emphasize they were actually unsecured obligations of Lehman Brothers.

In making its decision against UBS, FINRA found that the firm:

  • Failed to adequately disclose to some investors that the principal-protection feature of the Lehman-issued PPNs was subject to the credit risks of Lehman Brothers Holdings;
  • Did not properly advise UBS financial advisors of the potential effect of the widening of credit default swap spreads on Lehman’s financial strength or provide them with proper guidance on using that information with clients;
  • Failed to establish an adequate supervisory system for the sale of Lehman-issued PPNs;
  • Failed to provide sufficient training and written supervisory policies and procedures;
  • Did not adequately analyze the suitability of sales of the Lehman-issued PPNs to certain UBS customers; and
  • Created and used advertising materials that essentially misled some customers about specific characteristics of PPNs.

UBS neither admitted nor denied the charges levied by FINRA, but consented to the entry of the findings.

FINRA Cites Broker Francisco P. Esparza

Francisco P. Esparza, a broker whose employment history include stints with J.P. Turner & Company, LPL Financial, UBS, Citicorp Investment Services and Morgan Stanley, has been fined $10,000 and suspended from association with any member of the Financial Industry Regulatory Authority (FINRA) for 15 business days.

FINRA’s actions were related to findings that allege Esparza made unsuitable recommendations to customers to buy closed-end funds without fully understanding the pricing of the products or the risks associated with the investments.

FINRA noted its actions against Esparza in its March 2010 Disciplinary Report.

Esparza, who didn’t deny or admit to the findings, nonetheless consented to the regulator’s sanctions. According to FINRA, Esparza’s recommendations accounted for customer losses totaling approximately $73,290.

Broker Bambi Holzer Facing Complaints Over Provident Royalties Offerings

Bambi Holzer has a tainted track record filled with investor complaints. Now, Holzer is facing new complaints over risky private placements in Provident Royalties. The story was first reported March 29 by Investment News.

Last summer, the Securities and Exchange Commission (SEC) charged Provident with securities fraud involving $485 million in private securities sales. In March 2010, the Financial Industry Regulatory Authority (FINRA) expelled Provident Asset Management LLC, the broker-dealer arm of Provident.

According to the SEC’s complaint, Provident marketed a series of fraudulent private placements through Provident Royalties in an alleged Ponzi scheme.

An April 12, 2009, article by Forbes initially brought to light the fact that Holzer’s “advice” to clients while employed at UBS had resulted in $12 million in settlements.

After resigning from UBS in 2001, Holzer went to A.G. Edwards, which fired her two years later for “business practices inconsistent with the firm’s policies,” according to the Forbes article.

Holzer’s next job was with Brookstreet Securities, where she worked between 2003 and 2007. While at Brookstreet, Holzer was fined $100,000 and suspended for 21 days for “negligent misrepresentations to customers regarding certain product features in connection with the purchase and sale of variable annuities.”

In total, Holzer has worked with seven investment firms since 1983, according to FINRA’s BrokerCheck.

Holzer currently is a registered representative affiliated with two firms: Wedbush Morgan Securities and Sequoia Equities Securities Corp.

Inland American Real Estate Trust: Buyer Beware

Inland American Real Estate Trust is among several unlisted real estate investment trusts (REITs) to face a wave of backlash from investors lately. Why? Because many independent broker/dealers and their financial advisers misrepresented the risks and characteristics of unlisted REITs like the Inland American Real Estate Trust. Only now are many retail investors coming to terms with the collateral damage that has taken place in their portfolios.

To be sure, sales of unlisted (also known as non-traded) REITs are booming. Unlisted REITs raised more than $10 billion in 2008.

Sold through broker/dealers, shares in unlisted REITs do not trade on national stock exchanges. Redemptions are limited and usually include a minimum holding period. If an investor does decide to get out of the trust entirely, he or she can usually only do so on a specified date.

There are several other caveats associated with unlisted REITs, not the least of which is an exorbitant fee of up to 15% to get in. And that’s in addition to ongoing management fees and other expenses. Even more important: Unlisted REITs often offer no independent source of performance data. They also fail to offer investors a guarantee that their dividend payments will continue throughout their planned investment period in the REIT. 

Non-Traded REITs: Considerations for Hotel Investors by John B. Corgel and Scott Gibson provides an in-depth look at unlisted REITs and the unintended consequences that the products may create for individual investors who do not conduct their own due diligence.

Specifically, the study – which claims to be the first professional and academic report to analyze the structure of non-traded REITs – shows that investors who purchased hospitality REITs early in the investment cycle saw a diminished return as a result of subsequent sales. In other words, the early investors subsidize the commissions paid to the dealers who sell to late-term investors, the report says. 

One of the criticisms cited in the report – and one which has been touted in general by critics of unlisted REITs – is the vague prospectus language regarding exit strategies.

The fixed share prices of non-traded REITs are another bone of contention with naysayers of the products. Often marketed to investors as a selling point, the fixed share price can actually become an unwanted feature. Says Non-Traded REITs: Considerations for Hotel Investors

“ . . . this policy of maintaining fixed share prices in companies that continually offer shares at the same or similar fixed prices throughout the investment cycle will have adverse consequences to investors who buy into programs early in the cycle.” 

To their detriment, investors throughout the country may have purchased shares in non-traded REITs like the Inland American Real Estate Trust based on misrepresentations by their brokerage firm. That advice has now proven to financially disastrous. Instead of access to their cash, investors are finding themselves left out in the cold – their money locked up for an undetermined period of time in these illiquid, high-commission products. 

Maddox Hargett & Caruso continues to investigate the selling practices of brokerage firms such as UBS, Merrill Lynch, Citigroup, LPL Linsco, Morgan Keegan & Company, as well as others that may have recommended unsuitable investments in non-traded REITs to their clients. If you have a story to tell about your investment losses in non-traded REITs, contact us. 


FINRA Rules In Favor Of Investor In Lehman Principal Protected Notes Case

UBS AG faces dozens of arbitration claims from U.S. clients who bought 100 percent principal protected notes issued by Lehman Brothers Holdings that turned out to be virtually worthless after the company filed for bankruptcy in September. Now, in one of the first cases to be heard by the Financial Industry Regulatory Authority (FINRA), an arbitration panel has awarded an investor $200,000, ruling that her UBS broker inappropriately sold her the risky investments.

As reported Dec. 5 by the Wall Street Journal, the case serves as one of the first that FINRA has ruled upon concerning Lehman principal protected notes and could be a sign of how future cases may unfold.

Steven Caruso, an attorney with Maddox Hargett & Caruso, said in the article that hundreds or thousands of additional arbitration cases are expected to be filed in connection with Lehman principal protected notes. Caruso’s firm alone will represent roughly 100, according to the Wall Street Journal.

Lehman principal protected notes were structured notes that many banks and securities firms represented as low-risk investments. What they failed to emphasize to investors was the fact that the notes were unsecured obligations of Lehman Brothers. When Lehman filed for bankruptcy on Sept. 15, holders of the notes found themselves with investments that traded for pennies on the dollar.

If you have suffered losses in Lehman principal protected notes and wish to discuss filing an individual arbitration claim with FINRA or have questions about these investments, please contact us.

ETF Lawsuits Begin, As More Brokerages Distance Themselves From Leveraged, Inverse ETFs

In the face of regulatory inquiries and pronouncements by the Financial Industry Regulatory Authority (FINRA) on the inherent risks they pose to retail investors, more brokerages are curtailing their activity in leveraged and inverse exchange traded funds (ETFs).

FINRA initially raised questions about inverse and leveraged ETFs when it issued a notice to brokers/dealers on June 11, cautioning them that the instruments may not be suitable investments for retail investors who plan to hold onto the instruments for more than one trading session.

Shortly after FINRA’s edict, Saint-Louis based Edward D. Jones announced its intent to halt sales of leveraged ETFs. UBS and Ameriprise soon followed. Other brokerages, including Charles Schwab, Raymond James Financial and LPL Financial are reviewing their policies concerning ETFs, with some firms posting information on their respective Web sites that inverse and leveraged ETFs “are not right for everyone.”

Leveraged ETFs allow investors to amplify bets on a wide range of markets, while inverse ETFs make profits when prices fall.

Many investors, however, are unaware about the complexities and underlying risks of inverse and leveraged ETFs. Leveraged ETFs, for example, are designed to deliver their stated leverage on a daily basis. If an investor holds the ETF longer than one trading session, it potentially could lead to financial disaster. Leveraged ETFs also employ, as their name implies, leverage. This, in turn, increases the level of financial risk for investors.

On August 5, a lawsuit involving ETFs was filed in New York, accusing ProShare Advisors LLC and others of violating a securities act by failing to disclose the risks of its ProShares UltraShort Real Estate fund (SRS). Among the risks that the complaint contends the inverse leveraged exchange traded fund failed to cite: “Spectacular tracking error.”

Specifically, the lawsuit alleges that the fund’s index fell 39.2% from January 2008 to December 2008, but the fund fell 48.2%, which was not in accordance with ProShares’ stated objective that UltraShort ETFs go up when markets go down.

The complaint is seeking class-action status, according to an Aug. 6 article in the Wall Street Journal.

The dramatic losses of the SRS fund reiterate the inherent risks posed by inverse and leveraged ETFs, especially in times of a volatile market. In the 12 months through July 23, the Dow Jones U.S. Real Estate Index shed 38%, but the ProShares UltraShort Real Estate fund lost 82%, according to the Wall Street Journal article. This year through July 23, the index is down 3.5%, but the fund has slipped 67%.

FINRA Fines Merrill Lynch, UBS Over Closed-End Fund Sales

The Financial Industry Regulatory Authority (FINRA) has fined Merrill Lynch and UBS Financial Services $250,000 for supervisory failures that led to unsuitable sales of closed-end funds. FINRA also suspended five Merrill Lynch brokers for 15 days and fined them $10,000 for making unsuitable recommendations to clients. 

The five Merrill Lynch brokers sanctioned by FINRA include:  

  • Kenneth C. Iwelumo of the Newark, New Jersey, branch, whose customers suffered losses totaling approximately $563,000.
  • Ronald Kemp of the Denver branch, whose customers suffered losses totaling approximately $411,000.
  • Joseph Miller of the Springfield, Massachusetts, branch, whose customers suffered losses totaling approximately $130,000.
  • John Ong of the New York City branch, whose customers’ suffered losses totaling approximately $350,000.
  • Michael Kizman of the Schaumburg, Illinois, branch, whose customers suffered losses totaling approximately $221,000.

UBS was fined $100,000 for similar supervisory failures.  

On Jan. 1, 2009, Merrill Lynch was acquired by Bank of America Corp. for $29 billion.

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