SEC Order Against UBS Further Establishes Why Investors Should Not Trust UBS

Oct 14, 2015 / Author Vernon Litigation Group
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SEC Order Against UBS Related to V10 Tracks Pending Claim Being Pursued by The Vernon Litigation Group and Further Establishes Why Investors Should Not Trust UBS

Yesterday,  UBS and the SEC came to terms on a cease and desist order relating to the improprieties by UBS in selling a product called V10.   Last year, Vernon Litigation Group filed claims against UBS on behalf of a UBS customer related to this very product.  That case is currently pending.  

V10 is a structured note, much like the principal protected notes peddled by UBS that cost investors billions less than 10 years ago.   This UBS version of structured notes was linked to a foreign exchange trading strategy called the V10 Currency Index with Volatility Cap.   This was a proprietary index, so the market did not exist for this product other than what was artificially created by UBS.   

As is now typical of UBS, it heavily sold this V10 UBS designed product to its own client base.  In total, almost 2,000 investors bought V10 and invested almost $200 million.   And although the SEC is allowing UBS to entered into this agreement without admitting or denying the findings herein –  which the SEC sadly does in most cases –  UBS consents to sanctions.  

As a result of its investigation, the SEC found that in the wake of the financial crisis, “UBS perceived that investors interested in diversifying their stock and bond portfolios were attracted to these types of structured products so long as the underlying trading strategy was transparent. UBS stated to investors that the V10 was a “transparent” and “systematic” currency trading strategy.  UBS further stated that the V10 was calculated using “market prices” for the relevant underlying financial instruments.”

The SEC then found that the representations by UBS to investors were lies.   Specifically,  the SEC found that UBS engaged in the following conduct that was undisclosed to investors:

Taking unjustified markups, engaging in hedging trades with non-systematic spreads and trading in advance of certain hedging transactions — that negatively impacted or, in the case of trading before hedging transactions, had the potential to negatively impact, pricing inputs used to calculate the V10.   

As it turns out, UBS’s V10 was neither transparent nor systematic; market prices were not consistently used to calculate the Index; and V10 Investors were thereby misled as to certain key features of this complex financial instrument.  As a result of the markups and spreads, the Index was depressed by approximately five percent, causing investor losses of approximately $5.5 million.

It is incredible that UBS has not been shut down or prosecuted as a criminal enterprise.  Three years ago, before V10 and a number of other situations in which UBS misled its own clients or engaged in numerous wrongs (including the Puerto Rican bond fund debacle), the New York Times made the following comments about UBS:

But in many ways, UBS is in a league of its own given its track record for scandals….The bank’s recidivism seems rivaled only by its ability to escape prosecution..  Our law firm alone has represented many, many investors in last few years that have been ripped off by UBS.   

Unfortunately, the SEC decision will only cost UBS a little over $10 million.  This amount is so small in connection with UBS’s revenues that it equates to a speeding ticket for one the many UBS victims.  Clearly, judging by UBS’s ongoing behavior, regulatory fines are not deterring UBS’s desire and willingness to take advantage of the investing public in any way that it can.  As a result, UBS just keeps on profiting off of its own client base through the sale of almost $3 billion in structured notes just last year.   

What UBS downplays and even regulators fail to focus on is that by selling structured notes to its clients,  UBS is in effect borrowing money from its own client base on terms that a professional lender would never offer UBS.  If a UBS advisor were to borrow money from one of UBS’s clients,  UBS would fire that advisor on the spot.  Yet UBS sees no problem in borrowing $3 billion a year from its own clients without collateral and on very favorable terms for UBS.  

UBS seems to have no qualms about repeatedly misleading the investing public to increase its own profits.   For instance, while promoting  the troubled V10 structured product,  a senior UBS employee was quoted as saying, “[i]n the current market, investors are looking for uncorrelated and highly transparent products and since the algorithmic model is pre-defined and the rules are made available, it is a glass box rather than a black box.”   As is now evident by the SEC investigation,  UBS’s statements that the V10 was “transparent” and “systematic” and that “market prices” were used to calculate the Index were lies.  

According to the SEC with respect to V10,  UBS employees in Switzerland added markups to certain hedge transactions, which led to prices being used to calculate the Index that were not consistent with market prices (despite the fact that there was no legitimate business justification for the amount of these markups).  The SEC also revealed that the FX spot desk at UBS added spreads (that were not adequately disclosed) to internal transactions undertaken to hedge UBS’s exposure to V10 instruments on certain days.  Finally, the SEC explained that UBS engaged in trades in management trading books shortly before executing potentially market-moving, internal V10 hedging transactions, which were directionally consistent with those hedging transactions.

Although investors may have a trustworthy UBS financial advisor, the type of wrongdoing regularly engaged in by UBS –  as evidenced by the V10 transaction –  is hidden not only from investors but also from UBS advisors.   As a result, UBS also deceives its own financial advisors when pushing proprietary products on them to sell to their own customers.

Vernon Litigation Group’s investigations and advocacy on behalf of investors have been featured in AARP magazine, Forbes and Barron’s.   The law firm  handles the litigation and arbitration of complex business and financial disputes, with an emphasis on securities fraud and securities arbitration, throughout the United States.  Chris Vernon,  the founding partner of Vernon Litigation Group, has also testified as an expert on investment matters as well as matters relating to FINRA arbitration.   

The Vernon Litigation Group has been repeatedly recognized in U.S. News and World Report’s  Best Law Firms in America (2009-2015),  and its lawyers are consistently receiving accolades such as Martindale-Hubbell AV rating (which is the highest peer review rating available to an attorney), Super Lawyers and the Best Lawyers in America publications.  In addition to its investigation into UBS’s V10 and Puerto Rico activities, the Vernon Litigation Group currently represents clients against other international institutions such as Banco Popular.