UBS Faces Lehman Principal Protected Note Arbitration Claims

UBS, Switzerland's largest bank, faces dozens of claims in the US from clients who bought ‘100 per cent principal protected notes’ issued by Lehman Brothers Holdings that are now almost worthless. UBS brokers touted the so-called structured notes as low-risk investments and failed to emphasize they were unsecured obligations of Lehman, which filed for bankruptcy in September.

‘State regulators are fielding so many calls about Lehman's notes they're considering a task force to investigate the sales’, said Mr Rex Staples, general counsel for the North American Securities Administrators Association. Regulators have been concerned about structured notes for some time. A state task force on structured notes would be similar to the one convened earlier this year that investigated the auction-rate market.

UBS Woes

UBS is also being investigated by the SEC for the sale of derivatives and investment contracts to state and local governments, and the Internal Revenue Service is looking into whether it improperly helped US clients evade taxes.

The business took another blow in early October when the FDIC said it plans to exclude ‘derivative-linked products’ and ‘debt paired with any other security’ from the bank-debt guarantees offered as part of the government's plan to stabilize financial markets. Structured Notes

Structured notes, sometimes marketed as ‘structured equities’ or ‘hybrid financial instruments’, are constructed by banks and Wall Street firms from a combination of bonds, stocks, commodities, currencies and derivatives. The banks sold more structured notes to retail clients as the credit crisis made plain-vanilla bonds more expensive to issue in institutional debt markets. About a third of the $114 billion sold last year in the US promised full or partial principal protection.

Worth 14 Cents

Lehman's Sept 15 bankruptcy leaves holders of the notes waiting in line with other senior unsecured creditors for what's left of their money. Notes with full principal protection are trading at 10 cents to 14 cents on the dollar, according to New York-based SecondMarket. The Lehman bankruptcy also put a damper on the structured-notes market, with new issuance in the US slowing to about $98 million a day compared with about $263 million a day in the year through Sept 15, according to mtn-i.

Hong Kong Protests

The growing number of irate investors in the US adds to those from Hong Kong, Singapore and Taiwan who have demanded refunds from banks that sold structured notes linked to Lehman. About 200 protesters marched through Hong Kong's financial district on Oct 31, stopping at banks that sold Lehman notes, the Associated Press reported. They held signs that read: ‘Major bank fraud’ and ‘My money gone, I don't want to live’.

Finra Claims

Investor arbitration claims filed with the Financial Industry Regulatory Authority in Washington have increased this year for the first time since they peaked in 2003 after the Internet-led stock-market bubble burst. Almost 3,470 arbitration cases were filed with Finra this year through September, exceeding the 3,238 during all of 2007.

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