UBS Settlement Over Lehman Brothers Notes Results in $8M Payment

UBS Financial Services Inc. has been ordered to pay $8.25 million in restitution for misleading investors on the security of Lehman Brothers principal protected notes (PPNs) by the Financial Industry Regulatory Authority (FINRA). 

In addition to the restitution, an additional fine of $2.5 million was leveled against UBS by FINRA, which is a non-governmental regulatory body that oversees more than 5,000 brokerage firms throughout the United States.

FINRA issued a press release detailing the sanctions FINRA assessed in the UBS Lehman-issued PPN case which was investigated by FINRA’s enforcement team. UBS was penalized for leading its investors to believe that the Lehman Brothers notes carried 100% principal protection. However, the notes were only protected to the extent Lehman Brothers was capable of paying.

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Lehman Brothers filed for bankruptcy in September 2008, causing the notes to become virtually worthless. FINRA accused UBS of omissions and statements that failed to emphasize that the PPNs were unsecured obligations of Lehman Brothers. FINRA officials said some of UBS’s mistakes came from trying to sell a product that was so complex even they did not understand it.

“This matter underscore’s a firm’s need to be clear and comprehensive in disclosing risks of the structured products it sells to retail investors,” said FINRA Executive Vice President and Chief of Enforcement Brad Bennett in the press release. “In cases, UBS financial advisors did not even understand the complex products they were selling, and as a result, they neglected to disclose necessary information to customers about the issuer’s credit risk so investors would understand the magnitude of the potential losses.”

A number of arbitration claims and lawsuits over Lehman Brothers structured notes have been filed on behalf of investors who were sold the products by UBS and other brokerage firms. Lehman notes were a hybrid financial instrument, constructed from a combination of stocks, bonds, currencies, commodities and derivatives, which were promoted by many brokers as low-risk investments, even as Lehman Brothers faced substantial financial troubles.

A UBS class action lawsuit over Lehman structured notes was filed in 2008 in the U.S. District Court for the Southern District of New York, on behalf of all investors who were sold the investment by the brokerage firm. The complaint alleges that UBS brokers made false and misleading statements about Lehman Brothers Principal Protection Notes that omitted material facts about the risk associated with investing.

Individual investors are also able to resolve disputes against brokerage firms through FINRA for claims involving breach of fiduciary duty, negligence, misrepresentation, breach of contract, unauthorized trading and other claims that investments were improperly handled. Many financial fraud lawyers investigating Lehman Brothers claims on behalf of investors have suggested that most individuals are in a better position to recover their losses through FINRA arbitration.


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