UBS Loses Finra Arbitration Case Over Lehman Notes
UBS AG, Switzerland’s biggest bank, lost an arbitration ruling that will force it to pay $529,688 to a pair of U.S. clients who bought structured products backed by Lehman Brothers Holdings Inc.
A Financial Industry Regulatory Authority arbitration panel ruled yesterday that UBS must buy back the notes, some of which were called principal protected, at their original cost from Steven and Ellen Edelson, a retired couple. Brett Coltman, a UBS broker, sold Lehman notes to the couple as late as August 2008, a month before the bank failed, said Seth Lipner, their attorney.
The Zurich-based bank sold $1 billion of the Lehman products to U.S. investors, according to spokesman Kris Kagel. It has been ordered to repay investors some or all of their losses in six of the seven cases involving the securities that have been decided by Finra panels, Kagel said.
The Edelsons, former owners of a plumbing supply company, bought about $3.5 million of structured products from 2006 to 2008, of which $529,688 were issued by Lehman, Lipner said. Some of the Lehman securities were called “100% Principal Protection Notes” and others were named “Return Optimization Securities with Partial Protection,” according to Lipner. The notes are now worth pennies on the dollar, he said.
‘Unprecedented’ Failure
By using the phrase “principal protected,” UBS obscured the risks of the products, said Lipner, a partner at Deutsch & Lipner in Garden City, New York. The bank also concealed its concerns about Lehman’s creditworthiness, said Lipner, who won two earlier cases over the products and filed more than 30 others that are pending.
UBS’s sales of Lehman notes followed “regulatory requirements” and the failure of Lehman was “unexpected and unprecedented,” Kagel said. Coltman, based in Stamford, Connecticut, declined to comment. The panel didn’t provide a reason for its decision.
Some structured-product providers have decided to stop describing products as “principal protected” amid concerns expressed by regulators that investors may find the phrase misleading, said Alice Yurke, a New York-based partner at law firm Ashurst LLP. Earlier this year, the U.S. Securities and Exchange Commission contacted several financial firms to discuss the term, according to people familiar with the matter. John Heine, an SEC spokesman, declined to comment.
Banks create structured products by bundling debt with derivatives and offer them to individual investors as an alternative to traditional investments. Derivatives are contracts whose value is derived from stocks, bonds, currencies and commodities.
To contact the reporter on this story: Zeke Faux in New York at zfaux@bloomberg.net.
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.
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