Finra fines UBS on ‘safe’ Lehman notes

April 11, 2011, 9:30 PM UTC

Regulators slapped UBS with a $2.5 million fine for pushing some Lehman Brothers debt as safe just months before the brokerage collapsed.

The Swiss-based financial services giant also agreed to restore more than $8 million to customers who bought the structured notes, whose returns were tied to stock market indexes but were billed as “principal protected,” between March and June 2008.

Lehman: principal unprotected

Finra said UBS literature played up the notion of principal protection without sufficiently emphasizing that there were limits to that protection – specifically, the thing where the issuer had to stay in business till the notes matured. Otherwise, the notes were nothing more than unsecured liabilities of Lehman Brothers.

Investors soon realized that there is not a lot to be said for having your principal protected by someone who no longer exists. Lehman’s Sept. 15, 2008, bankruptcy filing wiped out the firm and left the notes trading as low as 6 cents on the dollar.

Under the settlement, UBS note purchasers who deemed their investing goals “conservative” will get their money back, while those who deemed themselves “moderate” in their financial wants will get back half. UBS sold $16 million worth of the notes to the two groups during the spring of 2008, Finra said.

“This matter underscores a firm’s need to be clear and comprehensive in disclosing risks of the structured products it sells to retail investors,” Finra said. “In cases, UBS’ financial advisors did not even understand the complex products they were selling, and as a result, they neglected to disclose necessary information to customers about the issuer’s credit risk so investors would understand the magnitude of the potential losses.”

Update: Here is what UBS says:

UBS is pleased to have resolved this FINRA matter, under which UBS is required to reimburse a limited number of investors who purchased certain Lehman principal protection notes during a discrete 3 1/2 month period of time. The significant majority of UBS’s Lehman structured product sales were conducted properly and any client losses were the direct result of the unprecedented and unexpected failure of Lehman Brothers in 2008, which affected all Lehman investors.

With Monday’s settlement, UBS will have spent $25 million settling or arbitrating cases tied to the structured notes. Every once in a while, playing fast and loose isn’t safe even for Wall Street.

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