Three Strikes and You’re Out for UBS

Regardless of risk, Wall Street will sell whatever products to whomever it wants whenever it likes.

That’s the lesson learned from this week’s sanction of UBS Financial Services (UBS) by Finra, the brokerage industry’s regulatory body. On Monday, Finra whacked UBS, one of the nation’s largest securities firms, ordering it to pay a $2.5 million fine and restitution to some clients. According to Finra, the firm misled investors who bought something called “100% Principal-Protection Notes” issued by Lehman Brothers.

Such notes are known on Wall Street as structured products. These products are usually an investment strategy linked to derivatives. Until 10 years ago or so, typically only sophisticated institutional investors bought structured products, but then Wall Street began selling them to retail customers. And that’s when the carnage began.

UBS repeatedly disregarded Lehman’s dire financial condition when it sold the notes, according to Finra. Remember, Lehman Bros. declared bankruptcy in September 2008, and it was evident to many in the investment business for months before then that the firm could be heading right for the ash heap.

That March, Bear Stearns collapsed, and the Fed engineered its sale to J.P. Morgan. That sent off the alarm bells about Lehman, whose business model most closely resembled that of Bear Stearns. Was it next to fail, the Street wondered? Accordingly, UBS reviewed its structured products closely, “especially Lehman,” Finra said. Then, it resumed selling the “Principal Protection Notes.”

A few months later, the news got worse.

In June 2008 alone, Lehman said it was posting a $2.8 billion loss for its second quarter, seeking another $6 billion in new capital and firing its chief financial officer and president.

Did this prevent UBS and its brokers from selling the “Principal-Protection Notes?” Did it cause UBS to warn the thousands of customers to whom it had already sold these notes in the prior months?  Of course not.

Along with its lousy due diligence, UBS sold the notes to many investors regardless of how much risk they wanted to carry. All customers, even those with conservative risk profiles, could buy the Lehman notes that were linked to broad stock indexes such as the S&P 500.

And not only did UBS clients get shafted, but UBS brokers were never trained to understand the way the Lehman notes worked.

“The aforementioned inadequacies in (UBS’) educational and marketing material may have resulted in some financial advisers having misunderstood the product,” Finra said. “Further, based on these (advisers’) misunderstanding of the product, certain (advisers) in turn may have communicated inadequate and/or incorrect information to some firm customers.”

So that’s three strikes for UBS. First, it disregarded the signs of imminent danger around Lehman.  Then, it sold them to investors with absolutely no desire to take on such risk.  And finally, it failed to train its brokers to comprehend how the product worked.

In baseball, it’s three strikes and yer out. Maybe it’s time for Wall Street to follow the same rule and have UBS take a seat on the bench.

About Jacob H. Zamansky 57 Articles

Jacob (”Jake”) H. Zamansky is one of the country’s foremost authorities on securities arbitration law, the legal recourse for investors claiming broker wrongdoing, or for brokers claiming wrongful termination or other misconduct by their employer. Zamansky & Associates, the New York-based law firm he founded, represents both individuals and institutions in complex securities, hedge fund, and employment arbitrations.

Mr. Zamansky was at the forefront of recent efforts to “clean up” Wall Street. In 2001, he successfully sued former Merrill Lynch analyst Henry Blodget on behalf of a New York pediatrician misled by Blodget’s stock research. The case’s successful resolution was the catalyst for New York Attorney General Elliot Spitzer to investigate the conflicts of interest on Wall Street and resulted in the well-reported $1.4 billion Global Settlement, which included many of the biggest names on Wall Street.

More recently, Mr. Zamansky is one of the leading litigators and opinion leaders of the subprime mortgage crisis and the related hedge fund collapses, representing both investors and mortgage borrowers who were defrauded by Wall Street firms and mortgage lenders. Among Mr. Zamansky’s early actions is filing the first arbitration case on behalf of institutional and high net worth investors against Bear Stearns Asset Management with regard to the two hedge funds which collapsed as a result of exposure to subprime mortgage backed securities. He also has filed claims on behalf of individual investors victimized by brokers that steered their portfolios into unsuitable subprime stocks and mortgage borrowers who were fraudulently coerced into inappropriate mortgage and investment transactions.

Earlier in his career, Mr. Zamansky worked for more than 30 years as a litigator, including positions at Skadden Arps, Slate, Meagher and Flom LLP. His tenure also included serving as a federal prosecutor with the Federal Trade Commission.

A native of Philadelphia, Mr. Zamansky has been a frequent expert commentator on CNBC, CNN, and FOX News and has published opinion pieces in The Wall Street Journal, Financial Times and USA Today. He is regularly quoted and his cases have been chronicled in major financial and news publications including The New York Times, USA Today, The Washington Post, BusinessWeek, Fortune and Forbes. He is a frequent lecturer for industry and legal groups around the country. He also writes a blog that can be viewed here.

Visit: Zamansky & Associates

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