On April 11, 2011, the Financial Industry Regulatory Authority (FINRA) announced that it fined UBS Financial Services, Inc. $2.5 million and required UBS to pay $8.25 million in restitution for conduct associated with UBS’s sales of Lehman Brothers principal protected notes. Among other things, UBS was fined for misleading investors about the “principal protection” feature of 100% Principal-Protection Notes (PPNs) issued by Lehman Brothers Holdings Inc. FINRA’s fine of UBS follows similar charges levied against UBS by New Hampshire securities regulators.

PPNs are fixed-income, structured products that typically have a bond and an option component that promise to protect investors’ initial principal investment. UBS sold Lehman Brothers principal protection notes as a security that would protect investors’ money, but UBS failed to emphasize or even disclose that the Lehman principal protection notes were nothing more than unsecured debt of the financially troubled Lehman Brothers, and that the securities actually subjected investors’ money to significant risk of loss.

FINRA found that UBS:

a. failed to emphasize adequately to some investors that the principal protection feature of the Lehman-issued PPNs was subject to issuer credit risk;

b. did not properly advise UBS brokers of the potential effect of the widening of credit default swap spreads on Lehman’s financial strength, or provide UBS brokers with proper guidance on how to advise clients concerning that issue;

c. failed to establish an adequate supervisory system for the sale of the Lehman-issued principal protection notes, and failed to provide sufficient training and written supervisory policies and procedures;

d. did not adequately analyze the suitability of sales of the Lehman-issued principal protection notes to certain UBS customers; and

e. created and used advertising materials that had the effect of misleading some customers about specific characteristics of PPNs

Investors throughout the United States and Latin America have filed FINRA arbitration claims accusing UBS of the above misconduct. UBS has denied any wrongdoing and even claimed that all proper and necessary disclosures were made to investors. But FINRA appears to disagree with UBS. Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “This matter underscores a firm’s need to be clear and comprehensive in disclosing risks of the structured products it sells to retail investors. In cases, UBS’s 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.”

FINRA found that some of UBS’s brokers did not understand the Lehman Brothers principal protection notes, including the limitations of the “protection” feature, causing certain brokers to communicate incorrect information to UBS customers. In truth, the “principal protection” feature of the Lehman Brothers PPNs provided investors with absolutely no protection of principal when Lehman Brothers filed for bankruptcy protection. Also, certain advertising materials had the effect of misleading customers regarding the characteristics and risks of the PPNs, including the nature, scope and limitations of the 100% Principal-Protection Notes. The materials suggested that a return of principal was guaranteed if customers held the product to maturity. FINRA found that UBS did not adequately address the vitally important fact that the credit risk of the financially unsound Lehman Brothers could result in a total loss of principal.

FINRA also found UBS’s suitability procedures were also lacking. UBS did not have risk profile requirements for certain PPNs; therefore, the PPNs were sold to some investors for whom the product was not suitable, including investors with “moderate” and “conservative” risk profiles. Moreover, these particular investors were more likely to rely on UBS’s representations about the “100% principal protection” feature of Lehman PPNs because of their risk-averse investment objectives.

While UBS neither admitted nor denied the charges when it consented to the entry of FINRA’s findings, the evidence in support of investor claims against UBS appears to be overwhelmingly against UBS. Indeed, arbitrators have awarded money to a number of investors already.

If UBS sold you a Lehman Brothers principal protection note or a Lehman Brothers structured product, please call a securities lawyer at Dimond Kaplan & Rothstein, P.A. for a free consultation. Our law firm represents numerous investors throughout the United States and Latin America who have lost money in these investments. Through our representation of these clients, we have reviewed hundreds of thousands of UBS’s internal documents and are well-versed on the facts and information that we believe can help our clients recover Lehman PPN investment losses from UBS.

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