Tuesday, October 13, 2015

More Structured Product Claims vs UBS? UBS Will Pay $19.5 Million Settlement

My law firm has been investigating and prosecuting structured product cases  for the last few years, many of them involving UBS. Those cases received a boost today as the SEC announced that UBS AG has agreed to pay $19.5 million to settle charges that it made false or misleading statements and omissions in offering materials provided to U.S. investors in structured notes linked to a proprietary foreign exchange trading strategy.

Three keys logo by Warja Honegger-Lavater.Structured notes are complex financial products that typically consiss of a debt security with a derivative tied to the performance of other securities, commodities, currencies, or proprietary indices. An example is Lehman Principal Protected Notes sold by UBS which were sold as low-risk investments.

The return on the structured note is linked to the performance of the derivative or the underlying security. According to the SEC, 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.

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.

UBS settled the claims without admitting or denying the SEC's allegations, but the Commission claims that the case is " the first-of-its-kind case involving misstatements and omissions by a structured notes issuer"  according to SEC Chair Mary Jo White.  Andrew Ceresney, Director of the SEC's Division of Enforcement.is quoted as saying this “case demonstrates the importance of being truthful in offering materials to be used in the offer and sale of structured notes to retail investors,”

Our firm has been prosecuting claims against UBS and others, for the fraudulent promotion of structured products since 2010 when the issue first came to the forefront. We continue to do so and welcome inquiries from brokers and investors who have been harmed in these products.

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.    
  • 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’s order found that UBS acted negligently by misleading investors through material misstatements or omissions in the offering documents.

Without admitting or denying the SEC’s findings, UBS agreed to cease and desist from committing or causing any similar future violations, to pay disgorgement and prejudgment interest of $11.5 million, to distribute $5.5 million of the disgorgement funds to investors to cover the total amount of investor losses, and to pay a civil monetary penalty of $8 million.  In determining to accept the offer, the SEC considered UBS’s substantial cooperation afforded its staff and certain remedial measures UBS implemented voluntarily.

Investors who have been harmed by this conduct, will need to pursue their claims with their own counsel. For further information, contact us at 212-509-6544 or by email.