Was FINRA’s Recent Settlement with UBS Concerning Lehman 100% Principal Protected Notes a “Whitewash?”


On Monday, April 11, 2011, the Financial Industry Regulatory Authority (FINRA) announced that UBS had accepted and consented to a settlement deal in which UBS would pay a fine of $2.5 million and restitution in the amount of $8.25 million to certain investors for its misconduct regarding Lehman Brothers 100% Principal-Protection Notes sold by UBS. Notwithstanding these sanctions, many investor attorneys believe it falls short of dealing with the real problems.

The settlement does not address or provide any compensation for many other structured products sold by UBS, including other varieties of Lehman Brothers principal protected notes that were improperly sold by UBS. FINRA’s sanction only addresses the so-called “100% Principal Protected Notes” issued by Lehman and sold by UBS.

In addition, the settlement leaves out investors who purchased these notes before March 17, 2008 or after June 30, 2008. UBS issued extremely critical and highly negative reports on Lehman Brothers as early as the Fall of 2007 but continued selling the Lehman-backed notes as “100% Principal Protected.” Lehman declared bankruptcy on September 15, 2008.

The amount of restitution is further limited to investors who were coded by UBS as having conservative or moderate risk tolerances, even though UBS miscoded many investors to make it appear that they had a higher risk tolerance than they actually had. Those investors whom UBS coded as moderate will only receive 50% of the purchase price paid for a product that was completely unsuitable for all but the most aggressive and speculative investors, and despite UBS’s misrepresentation of the product as “100% Principal Protected.”

Despite these and other flaws, FINRA agreed not to bring any future actions against UBS or its affiliates based on “the same factual findings” described in the settlement, which arguably apply to the investors and other structured products that were carved out of the settlement.

Attempting to answer why the settlement only covers sales between March 17, 2008 and June 30, 2008, Brad Bennett, FINRA’s current enforcement chief, told InvestmentNews: “We focused on this period because this is the timeframe when doubts about Lehman’s creditworthiness skyrocketed. (See “UBS not out of the woods after latest Lehman settlement,” by Dan Jamieson.)

What FINRA did ignored the fact that UBS itself had meticulously detailed the growing disaster at Lehman beginning in the Fall of 2007 then tried to suppress that information. Was FINRA unaware of UBS’ negative views as far back as the Fall of 2007, and the way that UBS suppressed those views? Or did FINRA disregard them?

Even purchases before the Fall of 2007 are a problem for UBS. In the Spring and Summer of 2007, the free writing prospectuses used to sell Lehman structured products omitted any disclosure of credit risk.

One of the lawyers who signed the settlement on behalf of UBS, Barry R. Goldsmith, is the former Executive Vice-President of NASD (now FINRA) enforcement. This reinforces the perception of revolving doors and mutual back-scratching by FINRA and its member firms. As the securities industry’s “self-regulatory organization,” FINRA is supposed to protect investors and police sales practice violations by its member firms.

Seth E. Lipner, Esq., a partner of Deutsch & Lipner in New York, commented: “FINRA settlement is a complete whitewash. The evidence of clear violations goes back to the beginning of UBS’ sales of Lehman products (in 2007), not just March 2008. Anyone who bought these products, whether 100% Principal Protected or the partially-protected version deserves full restitution. This settlement proves that FINRA is totally incompetent, that it does not protect investors, and that it is business as usual on Wall Street. Unlike the so-called regulators, we will continue to battle with UBS to obtain a just result for aggrieved investors.”

As Mr. Jamieson’s InvestmentNews article states, the settlement does not put an end to arbitrations against UBS involving the Lehman-backed “principal protected” notes. Those cases are ongoing and new cases will undoubtedly be filed.

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.

Page Perry has over 125 years collective experience representing institutional and individual investors in securities-related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions.