UBS and other brokerage firms took advantage of conservative investors by misrepresenting so-called “100% principal protected” notes as safe investments when they were not. See New York Times article, “‘100% Protected’ Isn’t as Safe as It Sounds,” by Gretchen Morgenson. Investors who purchased these notes have suffered billions in losses, she added.
As the article points out, these products are essentially zero-coupon notes linked, in part, to the performance of an equity index, like the Standard & Poor’s 500 or the Russell 2000. There is a trap door in the linkage, however. If the index falls 25.5 percent or more, or rises more than 27.5 percent, the investors receive only their principal back, according to the article.
Brokers targeted conservative investors with maturing certificates of deposit. Many of these investors were principal-protected notes issued by now-bankrupt Lehman Brothers. They are now worth pennies on the dollar.
“We questioned him over and over,” said one 67-year-old investor said. “We initially told him we weren’t sure and that we wanted to think it over. Maybe the next day he called us and told us he was putting his father into the same notes and his father is very conservative.” Also, the product was represented as “principal protected.” With such assurances, in January 2008, they bought the Lehman-backed notes. Eight months later, Lehman went bankrupt. These retired investors are now unsecured creditors in the Lehman bankruptcy.
Their first notice these investors received of any problem came in mid-October, when they received a form letter from UBS saying the value of their investment was “unavailable.” “As I read it and we were wondering if it in fact did pertain to us, my heart sank. I almost fell on the floor.”
UBS sold $1 billion of these notes to investors, according to the article. Why? The commissions were 1.75 percent, far higher than those generated on sales of certificates of deposit.
Yet UBS knew or should have known that Lehman was in trouble when it sold the notes. According to the Lehman bankruptcy examiner’s report, UBS actually helped Lehman hide its problems by cooking the books ? i.e., by conducting now-infamous Repo 105 transactions.
As Lehman’s problems grew in the spring of 2008, and one UBS analyst wrote that the “harsh reality that some investors will think of Lehman as next on the list for the confidence/liquidity crisis,” did UBS stop selling Lehman-backed notes? No. Overall, UBS increased its sales of these notes ? continuing to market them as “100% Principal Protected” ? although some UBS brokers stopped selling them, according to the article.
UBS is facing many arbitration claims across the country relating to these products. A Financial Industry Regulatory Authority (FINRA) arbitration panel recently awarded one investor $432,000.00 in compensatory damages, which was 100% of the amount of compensatory damages claimed, plus an additional $53,000.00 in attorney’s fees, plus another $5,610.00 as reimbursement for expert witness fees.
The Claimants in that case were represented by Seth E. Lipner. According to Mr. Lipner, the documents introduced into evidence at the hearing showed that UBS knew that there were huge problems at Lehman in early 2008 when it sold the products to investors, but that UBS representatives failed to disclose how Lehman’s problems could affect the structured product investments sold to those investors. “Senior executives of UBS tried to explain away the failures that took place at UBS,” Mr. Lipner said, “but the arbitrators obviously did not buy it.”
“We continue to receive inquiries from investors who acquired Lehman structured notes as a result of UBS’s misrepresentation of it as a ‘principal protected’ investment,” said J. Boyd Page, a senior partner at Page Perry in Atlanta. “Our legal team continues to investigate and pursue arbitrations on behalf of investors who purchased these products,” he added. ??The brokers who sold the Lehman structured notes are not targets of investor claims.
Page Perry, a law firm based in Atlanta, Georgia, is co-counsel with Mr. Lipner and his Garden City, New York law firm, Deutsch & Lipner, in representing a number of investors in Lehman structured note cases.