Lehman Structured Notes Sold by UBS Gets a Regulator’s Attention

“We believe ‘principal protection’ meant one thing to investors, but something entirely different to UBS”- Kevin Moquin, Staff Attorney, New Hampshire Bureau of Securities Regulation

In a big win for investors of Lehman Structured Notes, New Hampshire’s securities regulator will seek an undisclosed penalty as well as restitution for New Hampshire investors. The move is a clear win for investors in New Hampshire but also bodes well for all investors in Lehman Structured Notes.

When the New Hampshire regulator begins to probe UBS’ selling practices of Lehman Structured Notes, it will likely uncover a wealth of evidence such as e-mail records, telephone conversations, etcetera, that might be used by other investors in their individual securities arbitration cases.

The New Hampshire regulator alleges that UBS sold structured products, such as the Lehman Principal Protected Notes, to investors without sufficiently explaining the risks involved. Investors in Lehman Structured Notes (aka Lehman Principal Protected Notes) were largely risk adverse and only looking for moderate returns on their investments. The standard pitch by brokers at UBS and several other large financial institutions was that investors’ principal was “100 percent protected.” Of course, left out of the pitch was that the investments were only protected so long as Lehman Brother’s did not fail.

Brokers earned substantial commissions on the sale of Lehman Structured Notes. In fact, according to the New Hampshire complaint, the average commission on structured products was often higher than for other similar securities offered by UBS.

This isn’t the first time UBS has been investigated by New Hampshire. During the Auction Rate Securities scandal last year, the New Hampshire regulator filed a complaint against UBS on behalf of the New Hampshire Higher Education Loan Corporation (NHHELCO). UBS allegedly advised the NHHELCO to remain in the ARS market while at the same time removing its assets before the market froze. The NHHELCO lost millions and was unable to front scholarships for thousands of students. UBS eventually was part of a global settlement and paid a hefty fine.

Perhaps UBS will begin to see the error of its ways and begin reforming how it does business. New Hampshire’s Director of Securities regulation isn’t so optimistic. He said, “UBS has not been proactive at addressing regulatory issues at either the state or federal level…[and] that other regulators have experienced similar inflexibility”.

I’m hopeful after this latest spat with the New Hampshire regulator, UBS will become more transparent with investors but I won’t hold my breath.