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Archive for October, 2015


UBS to Pay $19.5 Million Settlement Involving Notes Linked to Currency Index

Case Is Agency’s First Against an Issuer of Retail Structured Notes

The Securities and Exchange Commission today 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.

The case is the agency’s first 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 indices.  The return on the structured note is linked to the performance of the derivative over the life of the note.   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.

“This first-of-its-kind case involving misstatements and omissions by a structured notes issuer shows that the SEC continues its commitment to pursue wrongdoing across the securities industry in order to better protect investors,” said SEC Chair Mary Jo White. “It is critical that large global financial institutions have and implement policies and procedures designed to ensure that all facts relevant to investors are made known to individuals responsible for disclosures.”

“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,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement. “We will remain focused on protecting investors who are not in a position to protect themselves by virtue of their limited access to information, the complexity of the product, or both.”

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 V10 investors to cover the total amount of investor losses, and to pay a civil monetary penalty of $8 millionIn determining to accept the offer, the SEC considered UBS’s substantial cooperation afforded its staff and certain remedial measures UBS implemented voluntarily.

Spruce Alpha Fund Decimates its Investors

As reported by the New York Times on September 30, 2015 (“Risky Strategy Sinks Small Hedge Fund”), the Spruce Alpha LP Fund, a Stamford, Connecticut based hedge fund which had been pitched to investors as offering large returns in periods of market turbulence, lost 48% of its value during the month of August 2015.

Spruce Alpha, managed by Spruce Investment Advisors, was launched about a year ago and reportedly used a complex and controversial trading strategy that involved derivatives to amplify returns from trading in exchange-traded funds, or E.T.F.s, of various strategies.

“To sell the fledgling fund to investors, Spruce emphasized not only an outsize hypothetical performance going back as far as 2006,” but according to documents reviewed by the New York Times, the fund’s back-testing projections in documents provided to potential investors indicated that “at the height of the 2008 financial crisis, investors would have had a gain of more than 600 percent.”

As noted by the New York Times, “for the investors who have lost nearly half of their investment, however, it is a cautionary tale of relying on glowing, but backdated, performance data. Back-tested results in hedge fund marketing materials have long drawn scorn from some in the hedge fund world. The results are typically recreated with the benefit of hindsight, making it easier for a fund to post hypothetical good results.”

If you are an individual or institutional investor who has any concerns about your investment in the Spruce Alpha LP Fund, 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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