UBS Financial is on the hook for $1.875 million to a couple of family trusts after an arbitration panel ruled yesterday that the firm was liable for damages, interest and attorney’s fees related to a controversial investment product designed for wealthy investors.
UBS owes $1,875,636.98 to two trusts named for the late Irving Siegel, including a generation-skipping transfer trust and a QTIP trust. The trusts, represented by trustee Joel Zychick in Miami, said UBS had committed fraud, negligence and misrepresentation related to an investment strategy called “Yield Enhancement Strategy” or “YES.” Twenty-six arbitration claims have been filed against the product with Finra, and another investor has also filed a class action suit against UBS for damages related to the product.
Jeffrey Kaplan, an attorney with Dimond Kaplan and Rothstein in Miami, was the lawyer representing the Siegel trusts. He has filed seven arbitration cases against the product in total, winning four, and he said yesterday’s award was the largest so far (the original claim was for $2.2 million in compensatory damages). UBS has won the majority of the arbitration cases so far, 14 out of 26, and in some cases where there were awards, they were only at 25 cents on the dollar, Kaplan said. But he said that his wins for investors have been bigger and more frequent recently, with the Siegel trust being the biggest.
“The big picture is that UBS promised an option strategy and they delivered something wholly different,” Kaplan said. “Specifically, they recommended what was supposed to be a market neutral or non-directional options strategy, which was supposed to have limited upside and limited downside. But based on the evidence, instead it was an options strategy that made directional bets on the stock market that exposed investors to significant downside that was far greater than the potential upside—in contradiction to the manner in which it was marketed.”
He said his clients were told to expect only 2% to 3% market upside per year based on an Iron Condor strategy (which uses use four options: a long and short put and a long and short call). But instead the YES product lost 25%, Kaplan said, which in the case of the Siegel trusts was a quarter of an $8.5 million investment.
“No rational investor who is told to expect 2% to 3% upside should expect a 25% downside, which is 10 to 15 times greater than the upside,” Kaplan said.
On December 5 of last year, investor Christian Dumontet filed a class action suit against UBS over the YES product in the U.S. District Court for the Southern District of New York. The suit claimed that 1,500 investors pledging some $5.7 billion had invested in the YES accounts at the height of the program. The program started to suffer big losses in December 2018, the suit says, and eventually $1.2 billion was wiped out.
The Dumontet suit said that UBS hid the magnitude of the product’s possible downside and used the product as a way to create new fees on assets.
The Siegel QTIP trust won $1.171 million in the Finra award, while the generation-skipping trust won $517,020. The rest of the amount was pre-judgment interest, filing and witness fees. The two trusts were named for Irving Siegel, an entrepreneur who died in 2013 and who left the trusts for the benefit of his family.
UBS declined to comment on the arbitration panel ruling.