UBS recommended and sold approximately $1 billion in Lehman Brothers principal protected notes. The protected notes were sold with representations that the investments were safe, but the principal protected notes actually subjected investors to far more risk than they were originally led to believe. When Lehman Brothers filed for bankruptcy those investors lost all of their money.
Although widely known that broker-dealer UBS duped customers with its “100% Principal Protection Notes,” (PPNs) issued by Lehman Brothers, media sources say the firm misled its brokers, causing catastrophic damage to its investors.
Soon after Lehman Brothers filed for bankruptcy in September 2009—the largest bankruptcy in United States history—customers began reporting that they were pitched the notes in what was described to them as a win-win situation. Targeted investors were savvy, classified as conservative, and comfortable investing in safer financial instruments such as CDs and municipal bonds.
The sales pitches led investors to believe that they could expect moderate profits during the economic downturn and that, even if catastrophe struck, the principal would be safe. For the most part, investors were told that the products were guaranteed investments and were never advised that Lehman simply issued notes, which were, in actuality, unsecured Lehman loans—complex, high-risk financial instruments. When Lehman went under, the investments were lost.
And, while investors suffered losses, UBS made tens of millions of dollars underwriting fees on the $1 billion PPNs. Worse, executives at UBS told their financial advisors that Lehman’s financial outlook was healthy and urged brokers to sell PPNs to key customers; to even hang onto notes even after questions were being raised in the industry as to the financial health of Lehman and its so-called guaranteed notes.
Now, brokers say senior management told them rating agencies’ gave Lehman high marks and that proper due diligence had been conducted. But, at the very top there talk was different and had to do with credit default swap spreads—insuring against the instruments’ default. Although some brokers were wise to the trend, many were not, and countless investors suffered dramatic losses.
The Financial Industry Regulatory Authority (FINRA) previously issued a censure to UBS and a fine of $2.5 million. Since, FINRA ordered UBS to pay $8.25 million in restitution over its “omissions and statements made that effectively misled some investors regarding the ‘principal protection’ feature of 100% Principal-Protection Notes (PPNs) Lehman Brothers Holdings Inc. issued prior to its September 2008 bankruptcy filing,” said FINRA. According to FINRA, many UBS advisers were unclear about these products, but sold the PPNs vigorously and irresponsibly, omitting critical information about Lehman’s credit and potential loss risks.