Investment Fraud Attorneys for Claims Related to “Yield Enhancement Strategies,” Including UBS “Iron Condor” Losses
When you invest through a brokerage or advisory firm such as UBS Financial Services, Credit Suisse, Merrill Lynch or Morgan Stanley, there is no shortage of investment options available. When you seek advice from your broker or advisor, he or she may reel off a seemingly-endless list of investment products and strategies that bear little resemblance, if any, to the standard stocks and bonds with which most individual investors are familiar.
One type of investment strategy that has been rising in popularity among large investment firms is the “yield enhancement strategy,” or “YES” strategy. The yield enhancement strategy definition is a form of investing where a broker sells call or put options to enhance returns in relatively stable or flat markets. While the YES strategy is often pitched as a “safe” or “stable” option for investors seeking consistent returns, the reality is that the investment products bought and sold under YES strategies are extremely complex and risky, and unexpected market turbulence can quickly lead to substantial losses.
The Risks of “Yield Enhancement Strategy” or “YES” Strategy Investing
Yield enhancement strategies are risky because they rely on consistent stability in the marketplace – something which is virtually non-existent over the long term. The goal of these strategies is to earn a profit when a stock index, most commonly the S&P 500, remains within a certain range which is established by the “strike prices” of options purchased at either end of the range. When the options expire without reaching their strike prices (one option is purchased with a strike price at the top of the range and the other is purchased with a strike price at the bottom), then the investor – theoretically – earns a profitable return from the option premiums.
Setting aside the catchy “yield enhancement” or “YES” title, this investment strategy involves the purchase of multiple uncovered, or “naked” options. With a “covered” option, the investor holds an offsetting position in the asset (such a corporate stock) underlying the option. This is known as a “long” position, and the long position helps offset the risk of the “short” position of the option. With an “uncovered” option, the investor does not hold this long position; so, if the price of the underlying asset moves substantially, the “short” position (the uncovered option) is essentially an unmitigated risk.
With a yield enhancement strategy, the investor holds an uncovered short position if the underlying asset drops in value and an uncovered position if the underlying asset increases in value. While the investor can exercise one of the options to purchase the underlying stock for value if either strike price is met, this inherently means purchasing at a time and as a result of an unexpected market swing. This is inherently risky, and it means that investors who find themselves in undesirable positions with YES strategies essentially have two options: (i) to let the options expire and collect nothing, or (ii) to buy a stock when most people would consider it to be ill-advised.
The “Iron Condor”: An Even More Expensive Type of Yield Enhancement Strategy
Some investment firms, including UBS Financial Services, have been selling an even more-complex version of the yield enhancement strategy known as the “iron condor.” With the iron condor, the investor purchases not two options, but four. The investor buys options with strike prices at either end of the anticipated range of fluctuation of the underlying asset as with the YES strategy described above; then, the investor also buys options further out on either end, creating a wider strike range. The idea is that these secondary purchases help to mitigate the risk of relying on market stability involved with a “standard” yield enhancement strategy. However, as with all investments, there remains a risk that things will not go as planned, in which case investors can lose all of the money they put into the iron condor. Those who invested in the UBS iron condor were among the investors who suffered the greatest losses.
Importantly, even these explanations only describe the simplest versions of yield enhancement, or YES strategies. In reality, it is not uncommon for investment firms to recommend that individual investors purchase numerous options, derivatives and other little-known investment products – each carrying the potential for sizable investment losses.
How Options Work in Investing
Yield enhancement strategies and the iron condor rely heavily on the investment product known as an “option.” So, what is an “option,” exactly?
An option is an asset that can disappear into thin air. Unlike a corporate stock, which represents an ownership interest in a company that you own until you sell, an option is a time-limited asset that only exists on paper. When you buy an option, you are buying the right to buy a stock (or other security) if it reaches a certain price. If the stock reaches this “strike price,” this does not mean that you own it – you still have to buy the stock in a subsequent transaction. Conversely, if the stock does not reach its strike price, then the option expires, or simply goes away.
Options trading can be a sound investment strategy for sophisticated investors who are attuned to the market and have a deep and comprehensive understanding of the relevant financial principles. For most casual investors, investing in options is a task best left to the professionals. However, this does not mean that investors can blindly trust their brokers and advisors to execute sound yield enhancement strategies for them. Our firm is currently investigating several cases in which individual investors have reported substantial losses from iron condor and other YES strategy investments.
Investment Firms Offering Yield Enhancement Strategies to Individual Investors
Several investment firms have offered yield enhancement strategies to individual investors in recent years, and most, if not all, are continuing to offer these risky investments. Currently, we are aware of the following firms offering YES strategies through managed accounts, structured notes, funds and other broader investment strategies and products:
- Credit Suisse
- Merrill Lynch
- Morgan Stanley
- UBS Financial Services
Recovery Options for Investors Who Lost Money in Yield Enhancement Strategies
For individual investors who have lost money in yield enhancement strategy investments, financial compensation may be available through the process of FINRA arbitration. The Financial Industry Regulatory Authority (FINRA) has oversight over all major brokerage firms operating in the United States (including UBS Financial Services, Credit Suisse, Merrill Lynch and Morgan Stanley), and these firms are required to arbitrate loss claims filed by individual investors.
In order to recover investment losses in FINRA arbitration, investors must be able to prove that their losses are the result of investment fraud. All investments carry risk, and losing money in a yield enhancement strategy – or any other investment – is not necessarily indicative of fraud. That said, due to the extraordinary complexity and unique risks associated with iron condors and other YES strategies, we believe that individual investors who have lost money in these types of investments will be entitled to recover their losses in many cases.
What is Investment Fraud?
The definition of “investment fraud” is much broader than many individual investors realize. While many people picture boiler room scams from the movies (and these certainly exist in real life), most cases of investment fraud involve practices that are much more mundane.
For purposes of FINRA arbitration, investment fraud involves a broad range of improper brokerage and advisory practices that lead to investors unknowingly making poor investment decisions. While this includes brokers’ and advisors’ intentional attempts to profit at investors’ expense, it also includes circumstances in which investors receive unsuitable recommendations or are not provided with the information they need to protect themselves.
Forms of investment fraud that can lead to losses with yield enhancement strategies include:
- Self-Interested Investment Advice – The option purchases involved with yield enhancement strategies provide direct profits to brokers and advisors regardless of whether or not they actually yield enhanced (or any) returns. In some cases, brokers and advisors may be recommending yield enhancement strategies based simply on their ability to generate commissions and fees.
- Unsuitable Investment Advice – Due to their complexity and the fact that they can result in investment losses in multiple different ways, yield enhancement strategies are unsuitable investments for many individual investors. Providing unsuitable investment advice is a form of investment fraud.
- Overconcentration of Portfolio Assets – There have been some cases in which brokers and advisors have recommended that investors pour a significant portion of their portfolio into yield enhancement strategies. This includes one case (likely among many others) in which advisors at Credit Suisse reportedly advised an individual investor to, “allocate a significant portion of his retirement funds in a high-fee proprietary [yield enhancement] strategy.”
- Omission of Material Information – As an individual investor, when you work with an investment firm, you are entitled to the information you need in order to make informed investment decisions. If you were pushed into investing into an iron condor or other yield enhancement strategy that you did not fully understand, you may have a claim for investment fraud.
What is FINRA Arbitration?
FINRA arbitration is an alternative dispute resolution (ADR) procedure that exists solely to help individual investors recover fraudulent losses from their investment firms and brokers. In FINRA arbitration, both parties (the investor and the investment firm or broker) present evidence to an arbitrator, and the arbitrator renders a binding decision similar to a judge in court. However, the process is much more streamlined than courtroom litigation, and the process is both less-expensive and less-time consuming than litigation. At Zamansky, LLC, we represent individual investors in FINRA arbitration on a contingency-fee basis, so recovering compensation costs nothing out of pocket for our clients.
For more information about what to expect in FINRA arbitration, you can read:
- Are You Eligible to File for FINRA Arbitration?
- Unexpected Investment Losses? 6 Key Facts About Securities Arbitration
- Common Causes of Action in FINRA Arbitration
- The Basics of FINRA Dispute Resolution – What Investors Should Know
- What to Expect When You File for Securities Arbitration
Legal Representation for Investors with Yield Enhancement Strategy Losses Nationwide
Zamansky, LLC is a leading securities fraud law firm located in the heart of Wall Street. Our attorneys represent individual investors nationwide in FINRA arbitration, and we are actively pursuing claims based upon fraudulent investment advice related to yield enhancement strategies, including iron condors sold by UBS Financial Services and other large firms. Together, our attorneys have decades of experience fighting for the rights of individual investors, and we have secured millions of dollars in compensation for our clients’ fraudulent investment losses.
If you lost money in an iron condor or other YES strategy investment, it is important that you speak with an attorney promptly. While investors technically have up to six years to file a claim with FINRA, there is no reason to wait, and delays can potentially make it more difficult to secure a financial recovery. Our attorneys are available to meet with investors in person in New York City or over the phone nationwide, and we can use our experience as well as the results of our recent investigations to assess whether you have grounds to pursue a financial recovery through FINRA.
When you choose our firm to represent you, you will pay nothing out of pocket during the course of your FINRA arbitration claim. We advance all costs associated with seeking compensation for yield enhancement strategy investment fraud, and we do not seek reimbursement of these costs or charge any legal fees unless we secure a financial recovery. Whether your investment firm is willing to settle or we need to take your claim all the way through arbitration, we will work diligently to ensure that you receive full compensation for your investment losses.
Schedule a Free Initial Consultation About Your Yield Enhancement Strategy Losses
If you would like more information about how our attorneys may be able to help you recover your losses from a failed yield enhancement strategy, we encourage you to contact us promptly for a free, no-obligation consultation. To speak with one of our highly-experienced investment fraud attorneys in confidence, please call 212-742-1414 or tell us how to reach you online now.