Naples, Florida — UBS committed gross misconduct when it compared “principal protected” Lehman Brothers notes to ultra-safe certificates of deposit and assured a Naples investor that Lehman notes had a “guarantee” to repay all of her principal amount according to a claim filed today on behalf of a Naples woman. It now appears that she will suffer a loss well in excess of $100,000 of her principal investment in these structured notes that UBS described as principal protected.
“When an issuer goes bankrupt, as Lehman Brothers did, holders of structured notes are left standing at the back of the line with the other unsecured creditors and may recover little, if anything, of their original investment,” the claim filed today by the Vernon Healy law firm states.
The investor, a single parent and elementary school teacher, sought safety for the limited funds she had received as an inheritance.
Her UBS broker concentrated almost all of her investments — 95 percent of her account — in complex structured products, with all of those from a single industry sector, the financial industry. The broker assured her that her portfolio was diversified because the structured products were tied to various indexes, including the S&P 500.
While the indexes to which the products were tied may have had some diversification, the risk of repayment of the notes was heavily concentrated in a single industry — the financial industry — and much of that concentration was in a single company — Lehman.
“The extreme concentration of this investor’s account in unsuitable, complex loan option products, coupled with the failure to adequately explain the nature of the securities or to disclose their risks to her, was especially egregious,” securities attorney Susan Healy said.
Major brokerage firms, including UBS (UBS), Merrill Lynch (MER), Barclays (BCS) and Wachovia (WB) sold principal protected notes in recent years and pushed their sales forces to dump these products on their own retail customers as they came off the underwriting assembly line, said securities attorney Chris Vernon.
Through formal claims, the Vernon Healy law firm intends to show that conflicts of interest led UBS to misrepresent and inappropriately recommend Lehman notes and other structured notes to a wide variety of its trusting base of retail clients.
According to Bloomberg, investors held more than $8 billion in Lehman structured notes as of September, with $2.8 billion of those sold in 2008.
As early as 2005, industry regulators from the Financial Industry Regulatory Authority (formerly known as the NASD) raised concerns about misrepresentations regarding the safety and complexity of principal protected notes and other “structured products.”