A Financial Industry Regulatory Authority panel ordered UBS Financial Services to pay just under $1.2 million to settle an arbitration involving its “Yield Enhancement Strategy” options program, according to an award filing.
This is the second time in a month that UBS has lost an arbitration concerning the YES program. The last award was for $3.9 million, and it was granted on the grounds that the strategy was speculative and unsuitable for the investors, John and Elise Oren, to whom it was marketed.
The claimants, Rick McCormick, Pamela McCormick and the Lindsay McCormick 2013 Gift Trust, had accused UBS of breach of fiduciary duty, negligence, negligent supervision, fraud, breach of contract, violation of sections 10(b) of the Securities Exchange Act and Rule 10b-5 of the Securities & Exchange Commission, and violation of the Texas Securities Act.
When contacted, a UBS spokesperson declined to comment.
According one of the McCormicks’ attorneys, Jeffrey Erez of Erez Law, UBS was aware the YES program was troubled as an investment strategy given the way it was marketed.
“They brought on a team that had been at Credit Suisse, the team was heavily promoted and involved in the marketing, and the program was represented as being lower risk than it actually was,” Erez said. “And UBS knows that. The program has been closed to new investment for some time, at least 12 months.”
Erez said he is representing another 20 claimants who lost money through YES, and credited his recent wins before Finra, including the $3.9 million Oren case, on a very methodical strategy that he and lead trial attorney Stefan Apotheker have dialed in.
“We take the defense head-on. UBS’ defense is that there had been disclosure. We bring in a lot of witnesses so the panel has a 360-degree view,” he said, adding that in this case he had nine witnesses plus his clients. “We spend a lot of time cross-examining the advisors and show that the product was too complicated and too hard to understand. When it comes out that the broker didn’t understand it, how are the clients supposed to?”
According to the filing, UBS will pay $900,000 in compensatory damages, which included $450,000 to the two McCormicks and $450,000 to the trust. In addition, UBS will pay $56,718 in costs, as well as $225,000 for the claimants’ attorneys’ fees. And should UBS take more than two months to make full payment, the award also gives the claimants a 5% interest rate on all they are entitled to until payment is made in full.
According to previously published reports, the YES program was marketed to wealthy clients who supposedly could afford a portfolio hit if the strategy fails. That strategy relied on using four options simultaneously: a long and short put, and a long and short call, all with the same expiration dates.
However, investors have claimed the UBS program's market movements were not symmetrical.
The YES program was launched around 2015, and while it was successful in attracting investors, multiple lawsuits alleged the program started suffering losses by December 2018 that tallied $1.2 billion. An attorney who represented one of those plaintiffs told Financial Advisor that UBS’s YES program lost 25% of an $8.5 million investment when the expectation was a 2% to 3% positive return.