Brokerage Firms Like UBS Who Sold Clients Lehman Principal Protected Notes Appear to Have Ignored Lehman Brothers Warning Signs

Warning signs that Lehman Brothers faced serious trouble became evident within the financial industry prior to the summer of 2007.

That assessment is based on the work of Jim Kaplan, of the company Audit Integrity, a firm that offers “forensic analysis” research.

An acceleration of receivables at Lehman beginning in summer 2006 marked the first warning sign, according to Kaplan.  In February 2007, Lehman announced a repurchase of approximately one-fifth of its shares outstanding — or 100 million shares. By May 2007, key insiders had begun to dump 60 million shares, Kaplan reports.

With those warning signs evident in 2007, the $2.8 billion in Lehman “Principal Protected” Notes sold to investors in 2008 is nothing short of astounding.

To put this $2.8 billion of potentially lost principal into perspective, consider the purchasing power in the economy that it represents: $2.8 billion could pay for 14,000 homes that cost $200,000 each. It could pay for 140,000 Toyota Camrys. It could buy $100 worth of groceries for 28 million families.

Principal Protected Notes are one type of so-called structured product that brokerage firms have hawked to investors in recent years.

On its face, the name “Principal Protected Note” suggests that an investors’ principal is protected. There’s nothing vague about the name.

So it’s no wonder that investors now find themselves dumbfounded that they can’t get back the principal investment they thought was secure.

With Lehman insolvent, investors who want their principal back now find themselves at the back of the line in bankruptcy court as Lehman’s unsecured creditors.

UBS and others misrepresented these and other complex products to investors even though industry regulators put brokers on notice as early as 2005 to make sure that they accurately described the complexities and associated risks of structured products.

At Vernon Litigation Group, we’re investigating misconduct on the part of major brokerage firms including UBS (UBS), Merrill Lynch (MER), Barclays (BCS) and Wachovia (WB) —particularly their failed due diligence in vetting these products or ignoring or concealing the results of any due diligence they did. We’re examining misrepresentations and omissions made by these firms about the true state of affairs at Lehman and the safety and efficacy of these products and the conflicts of interests that drove brokerage firms to dump these products on their retail customers.

Our investigation has revealed that brokerage firms, particularly UBS, continued to hawk Lehman Principal Protected Notes even after the March 2008 collapse of Bear Sterns sent shock waves up and down Wall Street and raised questions about financial firms’ ability to repay their loans.

UBS, it appears, had a vested interest in propping Lehman up with Principal Protected Notes — or loans —from its retail clients: On the day that Lehman collapsed, UBS issued a statement saying it had “no more” than $300 million in Lehman holdings.

UBS retail customers who purchased Lehman Principal Protected Notes appear to be the ones paying for UBS’ conflict of interest.