UBS AG, 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 Inc that are now almost worthless.
Six attorneys hired to represent clients in the cases say UBS brokers touted the so-called structured notes as low-risk investments and failed to emphasise 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 Rex Staples, general counsel for the North American Securities Administrators Association Inc, a group of 67 state and provincial regulators based in Washington.
“The sales pitches were that it’s good for retirement accounts, and good for the safe, fixed-income part of people's portfolios as an alternative to owning stocks, because it's less risky,” said Seth Lipner, a lawyer in Garden City, New York, hired by two holders of Lehman notes sold by UBS, including a 65-year-old accountant who says he lost $1.4 million in retirement savings. “Of course, it turned out to be more risky.”
Any awards for investors would add to the financial industry's burgeoning costs for compensating individuals who bought supposedly safe investments that crumbled in the credit crunch. Banks and securities firms, including Zurich-based UBS, Citigroup Inc. and Merrill Lynch & Co, already have had to swallow more than $3.6 billion in fines and market losses on auction-rate securities they had to buy back from clients under orders from the US Securities and Exchange Commission and regulators in New York, Massachusetts and other states.
UBS woes: UBS had to take a charge of $900 million related to the auction-rate probe. It is also being investigated by the SEC for the sale of derivatives and investment contracts to state and local govern-ments, and the Internal Revenue Service is looking into whether it improperly helped US clients evade taxes.
Kristopher Kagel, a UBS spokesman in New York, said the bank “properly sold” Lehman's structured notes to its clients.
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“The offering materials clearly identified Lehman as the issuer and discussed all the relevant risks and features of the product,” Kagel said.
A state task force on structured notes would be similar to the one convened earlier this year that investigated the auction- rate market. Regulators have been concerned about structured notes for some time and “now the complaints are beginning to come in at a fairly rapid clip,'' Staples said.
He declined to say whether UBS was a target of complaints.
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. About a third of the $114 billion sold last year in the US promised full or partial principal protection.
The banks, which rely on market borrowings to finance their loans, trades and investments, sold more structured notes to retail clients as the credit crisis made plain-vanilla bonds more expensive to issue in institutional debt markets. Sales of the notes quadrupled in the US during the past four years, according to data compiled by London-based research firm mtn-i.
About $8 billion of Lehman structured notes were outstanding as of September, including $2.8 billion sold this year, mtn-i reported. The New York-based firm was selling the notes as late as August, while it was racing to find capital weeks before being swept away by what Chief Executive Officer Richard Fuld, 62, called a “financial tsunami”.