Archive for the ‘UBS’ Category

The Financial Industry Regulatory Authority imposed a $2.5 million fine on UBS AG’s (UBS) wealth-management services unit and ordered $8.25 million in restitution in settlement of charges that it had misled investors about the risk of default in certain Lehman Brothers Holdings Inc. notes.

In the months leading up to Lehman’s collapse, UBS Financial Services Inc. advertised the investment bank’s so-called principal-protection notes without emphasizing that the debt was still unsecured, Finra said. Lehman eventually filed for bankruptcy in September 2008.

PPNs are fixed-income securities with a bond and an option component that promise a minimum return equal to the investor’s initial investment. They don’t guarantee the principal in the event of a default.

“This matter underscores a firm’s need to be clear and comprehensive in disclosing risks of the structured products it sells to retail investors,” Finra enforcement chief Brad Bennett said. “In cases, UBS’s financial advisers did not even understand the complex products they were selling, and as a result, they neglected to disclose necessary information to customers about the issuer’s credit risk so investors would understand the magnitude of the potential losses.”

A FINRA arbitration panel ordered UBS AG on Tuesday to pay $81 million in damages to a Bethesda, Maryland-based cellphone marketer that purchased auction-rate securities through the U.S. brokerage.

FINRA documents posted online showed a panel comprised of three public arbitrators ordered to pay the damages to Kajeet Inc, which purchased student-loan auction-rate securities that lost value during the credit crisis.

Kajeet, which sells pay-as-you-go cell phones aimed at children, had claimed $110 million in losses.

State and federal regulators have forced UBS to repurchase $22.7 billion of auction rates from individual investors. The Securities and Exchange Commission continues to investigate the role of individual executives at the firm.

In March, UBS agreed with a coalition of state securities regulators to purchase up to $200 million in auction-rates from investors not covered by the initial agreement.

UBS is re-filing its lawsuit against distressed hedge fund firm Highland Capital claiming the firm did the Swiss bank out of $686 million in a CDO deal.

The new case, filed Monday in New York State court, is reminiscent of the SEC’s case against Goldman Sachs over a CDO deal gone bad. However, in the UBS case, it is the bank that is claiming to be the wronged party.

UBS is alleging that Highland didn’t tell it about some of its counterparties’ weaknesses when the bank consented to restructure the CDO deal after losses started piling up 2007.

David Shulman, the former UBS executive who was suspended by UBS in July 2008, has agreed to pay a $2.75 million fine over insider trading charges connected to auction-rate securities sales and be suspended from employment by a broker or dealer until next January.

“While thousands of UBS customers received no warning about the auction-rate securities market’s serious distress, David Shulman – one of the company’s top executives – used insider information to take the money and run,” said New York Attorney General Cuomo in a press statement. “From the start, our prime goal has been to get investors their money back. But let there be no mistake – when corporate executives unlawfully take advantage of their positions, we will hold them accountable.”

Cuomo announced the settlement with Shulman on Feb. 18, 2010 Shulman is the second UBS executive to settle with Cuomo’s office thus far. To date, Cuomo’s investigation into auction-rate securities has reached agreements with 13 broker/dealers and produced more than $60 billion in repurchases of investors’ ARS holdings.

Shulman was accused of selling off $1.45 million of his personal investments in auction-rate securities in December 2007 after he learned that UBS’ own auctions were hitting a snag. On Dec. 11, 2009 one of Shulman’s employees emailed him that the group was “very concerned” about certain issues related to UBS’ student loan auction-rate program and its continuing support for that program. In that e-mail, the employee stated that “the auction product is flawed.”

On Dec. 12, 2009 records show that one of Shulman’s employees forwarded an email to Shulman with a subject line of “stud loans,” and warned Shulman that “the auction product does not work … our options are to resign as remarketing agent or fail or ?” In another e-mail that same day, the employee advised Shulman in no uncertain terms that with respect to UBS’ student loan auctionrate securities, “the entire book needs to be restructured out of auctions.” Finally, on Dec. 13, Shulman instructed his broker to immediately sell his holdings in student loan auction-rate securities, before the upcoming auctions could occur. Later that day, Shulman’s ARS holdings were sold via inter-auction directly to the UBS Short Term Trading desk.

Coincidentally, the Short Term Trading desk was under Shulman’s supervision. Shulman’s broker mentioned Shulman by name when he called the desk to place the trades. This was the first and only time Shulman sold auction rate securities inter- auction.

According to the WSJ today:

In what will likely be a closely studied ruling, a retail investor was awarded $200,000 after a Financial Industry Regulation Authority arbitration panel decided the investor’s UBS AG (UBS) broker inappropriately sold her risky Lehman Brothers principal protected notes.

The case is one of the first involving the Lehman notes to be heard by a Finra arbitration panel. While the arbitration ruling won’t set a precedent, it could be an indicator of how future rulings on similar cases will play out.

There are “many pending similar cases,” said Jacob Zamansky, of Zamansky & Associates, who represented the investor in the arbitration case. Zamansky stated he is representing a dozen clients in a similar situations around the country.

As in most arbitration awards, the three-person arbitration panel didn’t give reasons for its findings. Other panels that hear similar cases don’t have to follow precedent so they could rule in different ways on nearly identical cases. Still, the case will likely be cited by other plaintiff lawyers.

The case, submitted for arbitration a year ago, was brought against UBS Financial Services, a unit of UBS, which is also being investigated by numerous regulators for alleged issues around its selling of these notes. Zamansky’s client was seeking $300,000 in compensatory damages because the broker recommended structured products. Zamansky argued that the notes were “speculative derivative securities” and were “unsuitable” for unsophisticated investors, according to the Finra claim statement.

The broker purchased two notes for his client: a $225,000 guaranteed principal protection note and a $75,000 return optimization note. The panel ruled that the client should be compensated $150,000 plus interest and attorney fees on the principal protected note; there was no compensation for the $75,000 note.

UBS said in a statement it “is disappointed the arbitration panel in this case awarded the claimant any damages, even if it was the only half the compensatory losses she was seeking. UBS maintains that any client losses were the direct result of the unexpected and unprecedented failure of Lehman Brothers, which affected all Lehman bondholders.”

If you own a Lehman Brothers structured product issued in Europe, the basic components you are ultimately invested in are a bond and an option. The bond is a zero coupon, which means it is issued at a price well below par. The value you have in the bond is whatever price you have bought it at, minus a bit more if the issue is newly launched and minus a bit less if it is nearing maturity. The bond will have been issued by and in the name of Lehman Brothers.

In addition, there is an option that will have been bought from a counterparty. That counterparty may have been the options desk at Lehman, or it may be the same desk at another bank. If that option – based on the performance of an underlying, typically an equity index, such as the FTSE – is in the money, ie it is performing better than anticipated, then the counterparty will owe money to the investor.

Valuing the option that is closed out as a result of the Lehmans bankruptcy is based on the probability of that option being at an expected level at expiry. This is hi-tech mathematics, but the important element for the investor is that these proceeds will have been put to one side by the counterparty, either in cash or liquid securities like US Treasuries. As the money is specifically put to one side it ranks as a secured obligation of the counterparty.

Once the zero coupon bond and the option have been valued, they are then packaged into a total amount that is then multiplied by the market value of Lehman bonds. Taking Lehman bonds at 50 – the level they were quoted at earlier this week – and the zero coupon at 68 and the option at 10: the bond plus option equals 78, multiplied by 50% leaves the investor with a return of 39.

One oddity of the structured product is that the money from the option – if there is any – is secured, and the money from the bond is unsecured. As a result, the option proceeds rank further up the creditor priority chain on bankruptcy.

This is all conditioned by any steps taken by the regulators in Europe. Apparently, the Nordic, German and Swiss regulators, as well as the UK Financial Services Authority are looking into ways to ensure that retail investors may be protected against the worst of the losses. They will try and look after the ‘mom and pop’ investor as well as they can.

In Asia, the Hong Kong Securities and Futures Commission and the Monetary Authority of Singapore have told investors owning Lehman Minibond paper that they could receive substantially less than their initial investment and that the separately kept collateral and the swap agreements that back the notes are subject to security in favour of the trustee, who is required to act in the best interests of the investors.

UBS AG, Switzerland’s biggest bank, sued Highland Capital Management LP in New York, claiming losses of at least $745 million in a failed collateralized debt obligation transaction.

Highland Capital, the investment firm founded by James Dondero and Mark Okada, failed to fulfill terms of the deal reached in April 2007, UBS said in a breach-of-contract lawsuit filed today in state court in Manhattan. UBS Securities LLC, a UBS unit, agreed to arrange the transaction and serve as placement agent, according to the complaint.

After the original transaction expired in early 2008, the parties restructured the agreement in March 2008, UBS said. UBS and Dallas-based Highland Capital agreed that the fund and a special holding company would bear 100 percent of the risk of losses, according to the lawsuit.

“UBS has suffered losses of no less than $745 million as a result of the depreciation in value of the warehoused collateral obligations and credit default swap obligations that it assumed in connection with the failed CDO transaction,” Zurich-based UBS said in the complaint.

Because of declining market values for the portfolios and collateral in September and October 2008, UBS said it required Highland to produce additional collateral. Highland offered “certain securities” that UBS rejected, according to the complaint.

Mark Rufo said he thought he had found a “good conservative investment” for his 88-year-old mother when, in 2007, he put $26,000 of her money with UBS Financial Services in Concord.

The Nashua lawyer bought Asian Currency Basket Principal Protected Notes. Asian currencies appeared stable at the time, especially compared with the debacle of a decade earlier. In addition, Rufo said, he was assured by both the name of the investment and his broker that the principal would be protected.

Last Sept. 10, as the stock market started heading south, he checked with his broker, who he said assured him that he wasn’t exposed. Two days later, he learned about Lehman Brothers was facing bankruptcy.

“Boy, I’m glad I’m not tied up with Lehman Brothers,” Rufo said he told to himself. Minutes later, his broker told him that actually he was – or at least his mother was – because it was Lehman that was backing the principal.

Rufo said he asked the broker how much was left in the currency basket that he had purchased, and he said he was told, “There aren’t really any Asian currencies in the basket. There are derivatives.”

When the broker couldn’t adequately explain to Rufo the nature of these derivatives, Rufo said he replied, “If a year ago, if you said, ‘Mark, I want you go buy something I don’t understand, I wouldn’t have bought it.”

Multiply the Rufo case – which is in Merrimack County Superior Court – by 42, and you have the cease and desist order case filed June 4 by New Hampshire Bureau of Securities Regulation against UBS.

The bureau alleges that state investors lost $2.5 million in various structured products backed by Lehman Brothers, which filed for bankruptcy on Sept. 13, 2008. By not adequately disclosing these risks, UBS engaged in “dishonest and unethical business practices,” the bureau charges.

“UBS presented these notes as simple, safe investments when in fact they are highly volatile and are subject to shifting market conditions,” said Jeff Spill, the bureau’s deputy director for enforcement. “The safety of these products was exaggerated. We believe UBS engaged in unfair and unlawful sales practices when presenting these investments.”

UBS, however, said in a disclosure that it did point out the risk in the prospectus and “followed all regulatory requirement, well-established sales practices and client disclosure guidelines.”

According to the bureau’s complaint, UBS, through its “structured product working group,” developed the idea behind the products and put them out to bid to companies like Lehman. In addition, UBS acted as an agent for Lehman-issued structured products.

The Northeast consultant for the structured product group acted as a consultant out of the Manchester and Concord offices of UBS, according to the securities bureau.

UBS’ local offices were “pushing” the sale of such products, selling 65 products to 42 investors, according to the complaint. UBS continued to “push” the sale, even after the near failure of Bear Stearns earlier in 2008 made it clear how risky such products were when backed by companies with large subprime loan portfolios.

Lehman went on to report billions of dollars in losses, and e-mails circulated in UBS’ Maine and New Hampshire offices noted in June that “Lehman is smelling a bit to me.”

The bureau said it was told by UBS’ structured sales consultant that agents were told to make clear the risks involved with Lehman Brothers, but a local branch manager in New Hampshire said the office never received such instructions, according to the complaint.

The complaint also says that sales reps were rewarded with bonuses for the sales of such products, and the average commissions were sometimes three times the amount that on regular securities sales.

In addition to a potential cease and desist order, the company faces a $2,500 fine for each violation.‘Pattern’ of investments
This is the second securities action taken by New Hampshire securities regulators against UBS in as many years.

In 2008, the bureau alleged UBS had been advising the New Hampshire Higher Education Loan Corporation – the state’s largest student loan provider — to stay in the failing auction rate securities market at the same time UBS was preparing to extract itself from the market prior to the market’s collapse.

When UBS and other banks decided to stop supporting auctions in February 2008, the market froze and investors were unable to access their money, the bureau alleged. As a result, NHHELCO lost a large sum and was unable to provide loans for thousands of students, according to the bureau.

In April 2008, New Hampshire was part of a global settlement in which UBS paid $22.1 billion to repurchase auction rate securities from damaged investors or provide liquidity to the market. In addition, UBS paid $150 million in fines.

In a letter to the UBS chief executive Oswald Grubel, securities bureau director Mark Connolly charged that both allegations were part of a “pattern” of presenting volatile investments as safer than they actually were to investors. Connolly asked Grubel to intervene and settle the matter.

UBS has until July 3 to formally contest the charges, which could result in a hearing. In its statement, after the allegation, UBS said it would “defend itself vigorously in this matter.”

That’s two days after the July 1 hearing scheduled in Rufo’s case. UBS is arguing that the case go to mediation, Rufo said, but that process was “pretty much a racket controlled by the big brokerage houses.” Rufo said that when he first talked to UBS officials, all he wanted was his mother’s principal back, but in reality it was more a matter of principle.

“The money isn’t going to make any difference to her, because I can take care of her, but maybe there is some other 88-year-old mother out there who doesn’t have a son as a lawyer. I wouldn’t be able to do this if I wasn’t in the profession. If I went to a lawyer who charged by the hour, it wouldn’t be practical.”

Securities regulators in New Hampshire have accused a unit of UBS AG, Switzerland’s largest bank, of recommending unsuitable investments to customers who put their money into complex securities underwritten by Lehman Brothers Holdings, Inc.

According to the New Hampshire Bureau of Securities Regulation, UBS allegedly represented the securities as “safe” investments to clients, guaranteeing them “principal protection.”

As it turns out, following the September 2008 bankruptcy filing of Lehman Brothers – which is the largest in U.S. history at more than $600 billion in debt – many of these same investors will likely lose the majority of their supposed principal-protected investment. Additionally, New Hampshire regulators also contend UBS failed to warn investors about the potential risks of the structured finance products once Lehman itself began to experience financial troubles. As reported June 4 by the Wall Street Journal, New Hampshire regulators filed the civil complaint against UBS on Wednesday, June 3.

In a statement, Jeff Spill, New Hampshire’s deputy director of securities regulation for enforcement, said UBS presented “the structured notes as simple, safe investments when in fact they are highly volatile and are subject to shifting market conditions.

A Spanish investor asked a court to order UBS AG’s Luxembourg unit to release documents to help show alleged wrongdoing by the bank over losses tied to Bernard Madoff.

UBS’s Luxembourg unit, custodian bank of now defunct Luxembourg Investment Fund, should hand over documents including “an operational memorandum” mentioning UBS, the fund and Bernard L. Madoff Investment Securities LLC, Guy Perrot, lawyer for Spanish investment firm Castalia Ahorro Sicav, told a Luxembourg court yesterday.

The lawsuit is one among dozens of similar cases that investors have filed against the local unit of the Swiss bank since Madoff’s arrest on Dec. 11. Rulings involving UBS in similar cases over documents connected to LuxAlpha Sicav- American Selection have been mixed.