Ubs Dumped Defective Structured Products on Retirees

The sale of Lehman notes and other structured products by UBS is a classic example of why doing business with a Wall Street firm is hazardous.

These Wall Street firms periodically use their own client base – including many fixed-income retired investors – as a dumping ground for defective products, including structured notes and reverse convertibles, which are also called “return optimization notes.” The brokerage firms cook up these structured products in their home office and then pitch them worldwide to their financial advisors and client base.

Although this has gone on in various forms for decades, my larger concern is that these structured products are now effectively being used by the financial industry to borrow billions of dollars from main street investors with no collateral.

A traditional bank wouldn’t make loans on these terms so why should retired investors take such a risk? Wall Street is borrowing from main street investors and asking retirees to loan them money with no collateral.

Unfortunately, most retired investors don’t understand these products and the deal they are effectively making.

By “structuring” products, Wall Street achieves the dual purpose of getting paid to create the complex product via underwriting fees and then getting paid again to successfully sell the product. Brokerage firms use the complexity of these structured products to obscure the risk of loss of principal.   The complexity, among other things, allowed UBS and other firms to promote these products with little focus on the actual entity borrowing the money – an egregious omission in the case of Lehman as the borrower.

Investors who bought these Lehman principal-protected notes were told just that — that their principal was protected. But when Lehman collapsed, these investors lost virtually all their principal.

When pitching these structured products through the summer of 2008, UBS omitted to tell their own financial advisors and their clients that Lehman was on the brink of insolvency.

To put the enormity of this omission into perspective, imagine your financial advisor suggesting that you buy a corporate bond and adding that the identity of the corporation backing the bond is not really important in deciding which bond to buy.

These structured products create an especially troubling conflict of interest when the money put up by investors for these notes goes to the same brokerage firm selling them. For example, UBS sold “UBS return optimization notes” to its own base of UBS clients in addition to selling Lehman notes and Lehman return optimization notes.

UBS – and other Wall Street firms – are recommending that their own clients loan money to them on an unsecured basis.  In other words, the financial advisor is effectively suggesting that the best possible investment for the client would be to make an unsecured loan to the financial advisor.  It is amazing to us that this is an accepted and widespread practice in the securities industry. Clearly, Wall Street is targeting fixed-income investors, most of whom are retirees seeking a steady source of income who want to guard against any material loss of principal, to sell these investments.  As a result, firms such as UBS have deceptively used the term “principal protected” very effectively to lull fixed income investors into focusing on the enhanced income opportunities provided by structured notes rather than on the true risks of principal loss underlying these products.

Like that quote attributable to Willie Sutton – who robbed banks because “that’s where the money is” – Wall Street targets wealthy retirees who are looking for something safe but that has a return that is more appealing than CDs or Treasury Bonds.  For this reason, the term “Principal Protected” is such an effective and deceptive sales tool to describe structured notes such as the Lehman notes sold by UBS.

Our firm represents investors with more than $10 million in Lehman notes claims, and we have conducted an extensive nationwide investigation that has collected information from financial advisors and investors from around the country.

For more information on whether you have a claim involving a structured product, contact the Vernon Litigation Group law firm at (239) 319-4434  or email

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