UBS Client Claims Losses On Currency Product Probed By U.S.

Walter Michaelson’s career on Wall Street ended 19 years ago when he injured his neck in an auto accident in New York. Now he lives near the Gulf Coast in Naples, Florida, where he cares for his quadriplegic mother.

In July, he filed a lawsuit in federal court in Florida against UBS Group AG, Switzerland’s largest bank, for selling him a complex financial product that he claims he didn’t ask for, wasn’t explained properly and lost him more than $100,000.

UBS’s V10 Enhanced FX Carry Strategy was sold to individual investors like Michaelson, as well as to businesses and fund managers. It was pitched as a high-yielding foreign-exchange investment that used computer algorithms to minimize the risk of losses in periods of volatility, according to a document on the bank’s website. When the European debt crisis hit in mid-2010, the index to which the notes were tied lost 26 percent in two years, data compiled by Bloomberg show.

Now investigators at the Department of Justice are examining whether UBS traders shortchanged investors such as Michaelson by overcharging them when they carried out the currency trades needed to execute the strategy, according to people with knowledge of the matter. The probe of the lucrative and opaque world of so-called structured products sold by banks including UBS marks a widening of an investigation by regulators into the $5.3 trillion-a-day foreign-exchange market.

‘Full Control’

“The banks hold all the cards: They create these products, sell them and have full control over what they disclose about them,” said Stephen Elam, a London-based lawyer at Cooke, Young & Keidan LLP. “In this environment, when interest rates are low and consumers are looking for improved investment returns, these products are inherently prone to mis-selling.”

UBS said in a statement that the bank plans to defend itself “vigorously” against Michaelson’s claims. A spokesman for Zurich-based UBS declined to comment about the Justice Department investigation.

As European bank stocks climbed last week, UBS slid 1.3 percent after news of the probe and as the firm warned that a surge in the Swiss franc and negative interest rates in the region may hurt profitability if they persist. UBS shares dropped 0.6 percent at 16.12 francs at 10:03 a.m. in Zurich trading. They have decreased about 5.6 percent this year.

The currency product not only generated sales commissions for the bank but also presented an opportunity to profit from the buying and selling of the underlying currencies. V10 was particularly profitable for UBS, according to two people with knowledge of the matter who said returns were circulated and discussed within the firm. The people asked not to be identified because they weren’t authorized to speak publicly.