UBS Investor Arbitration Claim Results in $81M Damages Award

Financial industry regulators have ordered UBS Financial Services, Inc. to pay $81 million to Kajeet, Inc. following an investor arbitration claim over auction-rate securities. 

Kajeet, Inc., which markets cell phones to children, allegedly suffered at least $110 million in consequential damages when cash it had in UBS auction rate securities froze. Kajeet filed an investor arbitration claim against UBS with the Financial Industry Regulatory Authority (FINRA), which ruled in the Maryland company’s favor against UBS on Tuesday.

Auction-rate securities are bonds that are bid on by investors and sold to those who will accept the lowest interest rate during auctions regularly held to determine the bonds’ rates. However, the auction-rate securities market froze in February 2008, when banks withdrew their support for auction-rate securities. As a result, investors were unable to sell the bonds, freezing their assets.

In 2008, UBS reached a settlement with the SEC over its complaints about the firm’s handling of auction rate securities, agreeing to purchase all auction-rate securities from clients who lost less than $10 million in the market crash. At that time, FINRA set up a special arbitration procedure to allow auction rate securities holders to recover consequential damages, which goes beyond the loss of the securities to include product, profit and revenue losses.

Kajeet officials said the FINRA decision this week resulted from details and evidence from the SEC settlement. However, the FINRA panel did not, and usually does not, publish an explanation for its ruling.

UBS has indicated they intend to appeal the decision, but analysts say the odds of overturning the FINRA ruling are slim.