UBS Principal Protection Notes Not So Protected

Although widely known that broker-dealer UBS duped customers with its <"">“100% Principal Protection Notes,” issued by Lehman Brothers, media sources are saying that the firm misled its brokers, causing catastrophic damage to its investors. According to Seeking Alpha, it has been contacted by a number of former USB financial advisers who say that they were misled, as well.

Soon after Lehman Brothers filed for bankruptcy in September 2009—the largest bankruptcy in United States history—customers nationwide started talking about how they were pitched the notes in what was described to them as a win-win situation, said Seeking Alpha. These investors were considered savvy, classified as conservative, and comfortable with investing in safer financial instruments such as CDs and municipal bonds, noted Seeking Alpha.

The investors were told, said Seeking Alpha, that they could expect some moderate increases during the economic downturn but that, in the worst possible case, they would receive their principal back in its entirety, without realizing a gain. Most customers were not told that Lehman simply issued the notes, which were, in actuality, an unsecured Lehman loan considered very complex financial instruments that offered no protection. Risks were considered significantly greater than expected returns, despite that investors were told the products were guaranteed investments.

Once Lehman went under, original investments were lost, Seeking Alpha explained. Meanwhile, UBS made tens of millions of dollars in underwriting fees on the $1 billion in so-called protected Lehman notes it assisted in issuing. Now, two years after Lehman folded and as UBS continues to experience losses and its legal troubles mount, more information is surfacing, said Seeking Alpha.

It seems executives at UBS told their financial advisors that Lehman was doing well and urged them to sell the notes to key customers; to even hang onto the notes as late as spring/summer 2008, when fears were long being expressed about the financial health of Lehman and its so-called guaranteed notes.

Brokers now say senior management fed them information about rating agencies’ giving Lehman high marks and saying that proper due diligence was conducted. At the very top, however, other facts were emerging, such as that there were credit default swap spreads, which concern insuring against a default of these instruments, explained Seeking Alpha.

TradersHuddle reports that the Financial Industry Regulatory Authority (FINRA) previously issued a censure to UBS and a fine of $2.5 million for making statements and omissions that misled some customers about the make-up and risks of Lehman’s 100% Principal Protection Notes. Since, FINRA has ordered UBS to pay $8.25 million in restitution.

While Lehman was failing, executives minimized issues, advising brokers that UBS felt Lehman was still going strong, even in the midst of the Bear Stearns collapse, a sign that alerted many to similar trouble at Lehman. Worse, when UBS’s investment bank was distancing itself from Lehman, its analysts worked to stop investors from selling Lehman investments as late as September 2008, said Seeking Alpha. Some brokers were wise to the trend and were able to get their customers out; however, many did not and investors suffered dramatic losses.

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