April 9 (Bloomberg) -- UBS AG was ordered to pay a former broker at least $5.3 million in damages and fees after he said that the bank misled him about the risks of securities issued by Lehman Brothers Holdings Inc.
A Financial Industry Regulatory Authority arbitration panel found that UBS “deliberately prevented the distribution of material information about Lehman Brothers sinking financial condition and continued to recommend the sale” of its structured notes, according to the award documents. Lehman filed for bankruptcy on Sept. 15, 2008.
Edward Graham Dulin Jr., the broker who filed the claim, said that because he didn’t have a full understanding of Lehman’s deteriorating condition he recommended clients buy securities that eventually soured, hurting his business, according to the documents. The award also recommends the expungement of 39 customer complaints that resulted from the Lehman-issued notes.
Reuters reported the award on Monday. Finra released the documents today.
UBS has had a mixed record with arbitrating Lehman-issued structured notes, winning at least one case where an investor claimed a security was unsuitable. Finra ruled in 2011 that the company had to pay about $2 million to Pat Croce after the former part-owner of the Philadelphia 76ers basketball team bought “principal-protected” Lehman notes less than three months before the bank failed.
“UBS always tried to impress upon the reps their wonderful due diligence and that they looked into this and blessed each of these issuers” whose products they recommended, said Seth Lipner, a lawyer at Deutsch & Lipner in Garden City, New York, who represented Dulin. “What the arbitrators explain in their award is that the senior people at UBS knew that Lehman’s financial position was increasingly precarious and they stifled the information flow to the reps. And the reason they did it was it would have been bad for business.”
Dulin, who’s now a broker for Bank of America Corp., didn’t respond to requests for comment.
“UBS is disappointed with the panel’s decision, and believes it to be legally and factually incorrect,” said Gregg Rosenberg, a spokesman for UBS. “The award is inconsistent with standards of practice and industry rules and regulations. We are currently evaluating all options available to address the award, including but not limited to moving to vacate the award.”
Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money. Derivatives are contracts with values derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.
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