Lehman “Principal Protection Notes” Update: UBS “Defense” Is Crumbling

In a closely watched federal case underway in New York, The Hon. Judge Lewis Kaplan has dealt a devastating blow to UBS.  The Court refused to dismiss a class action complaint alleging that UBS misled investors in connection with its sales of so-called “Principal Protection Notes” issued by the now-defunct Lehman Brothers.

In its defense of the hundreds of customer arbitrations from coast to coast, UBS has always taken the position that the offering documents contained adequate risk disclosures.  It has tried to persuade arbitrators that even if a customer received faulty information from his or her broker during the sales pitch, the written disclosures should trump any problems with the pitch.  That line of defense has so far fallen on deaf ears, and now it appears to have crumbled altogether.

The Court refused to dismiss claims against UBS and others concerning the Lehman structured product offering documents.  Plaintiffs allege the statements regarding “100% Principal Protection” and “partial principal protection” were false and misleading because “(1) the PPNs did not protect investors’ principal and were no different than ordinary bonds,  and (2) the PPN Offering Materials failed to disclose that repayment of principal depended on Lehman’s solvency.”

The Court ruled that “a misleading statement displayed prominently and in numerous places may not be cured by inconspicuous and scattered warnings.”  The Court conceded that some of the disclosures “would have made the nature of these securities clear to a careful and intelligent reader,” but found that “the principal protection statements were displayed more prominently and frequently than the warnings.”

Summarizing his ruling, Judge Kaplan wrote “the Court can not conclude as a matter of law that the repeated and emphasized statements about principal protection were offset sufficiently…by the inconspicuous and scattered warnings–contained in other SEC filings–about Lehman’s solvency. In consequence, these allegations with respect to the PPNs are sufficient to state a claim.”

As regular readers of this blog know, UBS sold over a billion dollars’ worth of these notes to unsuspecting-and often conservative-retail customers.  The Swiss bank went “all in” on these risky products, at least for their customers.  (For their own account, they ran for the exits as Lehman began to fail.)

With this latest blow, the giant is teetering.

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About Jacob H. Zamansky 58 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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