It seems as though another legal battle with investors in the works for Swiss-based investment bank UBS AG – this time over sales of Lehman Brothers Principal Protected Notes, which are now deemed essentially worthless.
Structured notes are financial instruments that combine derivatives – including a single security, a pool of securities, options, indices, commodities, debt issuances, foreign currencies, and credit swaps – with equity or fixed income investments. In the case of UBS, attorneys representing dozens of clients of the firm say the investment banking giant touted the structured notes, also known as guaranteed linked notes, as a low-risk, conservative investment designed to preserve capital with the potential for uncapped appreciation.
What UBS failed to tell investors was the fact that the notes in question actually were unsecured obligations of Lehman Brothers, leaving investors vulnerable to a considerable amount of risk. Apparently Lehman’s structured notes were sold just weeks before the firm declared bankruptcy on September 15, 2008 Moreover, the notes reportedly were being used by Lehman to help finance its own financial shortfalls from losses stemming to bad bets on subprime-related investments. That means investors unknowingly put themselves at the mercy of the credit of the issuer: If the issuer defaults, as in Lehman’s case, the investment becomes worthless.
UBS, the fifth-largest brokerage firm in the United States, sold about $1 billion of Lehman’s structured notes to investors. Many of them were retirees. Now, despite the fact investors were told that the Lehman Principal Protected Notes had “100 percent principal protection,” they can expect to receive pennies on the dollar for their investment. According to SecondMarket, a New York-based firm that provides a market for securities that are illiquid or barely trade, notes with full principal protection are trading at 10 cents to 14 cents on the dollar.
The latest revelation of UBS’ handling of the Lehman Brothers Principal Protected Notes adds to what has become a growing list of legal issues this year. Earlier in the summer, the company had to pay out nearly $1 billion related to charges over auction-rate securities sales. It also is being investigated by the Securities and Exchange Commission (SEC) for the sale of derivatives and investment contracts to state and local governments.
The trouble train for the investment bank doesn’t stop there as the Internal Revenue Service has also jumped on the UBS bandwagon and is looking into whether the firm improperly helped various U.S. clients evade taxes. Now state regulators are considering forming a task force to investigate brokerage firms that marketed and sold structured notes to investors.