Lehman “Principal Protection Notes” Update: UBS “Defense” Is Crumbling
In a closely watched federal case underway in New York, The Hon. Judge Lewis Kaplan has dealt a devastating blow to UBS. The Court refused to dismiss a class action complaint alleging that UBS misled investors in connection with its sales of so-called “Principal Protection Notes” issued by the now-defunct Lehman Brothers.
In its defense of the hundreds of customer arbitrations from coast to coast, UBS has always taken the position that the offering documents contained adequate risk disclosures. It has tried to persuade arbitrators that even if a customer received faulty information from his or her broker during the sales pitch, the written disclosures should trump any problems with the pitch. That line of defense has so far fallen on deaf ears, and now it appears to have crumbled altogether.
The Court refused to dismiss claims against UBS and others concerning the Lehman structured product offering documents. Plaintiffs allege the statements regarding “100% Principal Protection” and “partial principal protection” were false and misleading because “(1) the PPNs did not protect investors’ principal and were no different than ordinary bonds, and (2) the PPN Offering Materials failed to disclose that repayment of principal depended on Lehman’s solvency.”
The Court ruled that “a misleading statement displayed prominently and in numerous places may not be cured by inconspicuous and scattered warnings.” The Court conceded that some of the disclosures “would have made the nature of these securities clear to a careful and intelligent reader,” but found that “the principal protection statements were displayed more prominently and frequently than the warnings.”
Summarizing his ruling, Judge Kaplan wrote “the Court can not conclude as a matter of law that the repeated and emphasized statements about principal protection were offset sufficiently…by the inconspicuous and scattered warnings–contained in other SEC filings–about Lehman’s solvency. In consequence, these allegations with respect to the PPNs are sufficient to state a claim.”
As regular readers of this blog know, UBS sold over a billion dollars’ worth of these notes to unsuspecting-and often conservative-retail customers. The Swiss bank went “all in” on these risky products, at least for their customers. (For their own account, they ran for the exits as Lehman began to fail.)
With this latest blow, the giant is teetering.
Jacob ("Jake") H. Zamansky is one of the country’s foremost authorities on securities arbitration law, the legal recourse for investors claiming broker wrongdoing, or for brokers claiming wrongful termination or other misconduct by their employer. Zamansky & Associates, the New York-based law firm he founded, represents both individuals and institutions in complex securities, hedge fund, and employment arbitrations.
COMMENT ON THIS BLOG POST
Or contact Jake Zamansky privately