Articles Posted in UBS

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A UBS Financial Services options trading program marketed as a “Yield Enhancement” strategy to brokerage customers of UBS, reportedly including risk averse investors with substantial bond portfolios, suffered substantial losses approaching 20% of the capital committed in late 2018 and early 2019, although customers to whom the strategy was sold had reportedly been under the impression that the maximum loss they faced in a given month was  1-2%.

Iron Condor Basics
This impression of minimal risk was borne out by UBS’s marketing materials for YES, which at least strongly suggested that the central trading strategy of YES- the Iron Condor– exposed the client to finite or limited risk.  For example, one UBS marketing presentation touted historic returns that featured very few months with losses, and many months with gains.  UBS marketing materials also characterized YES’s central strategy as follows: “selling short term out-of-the-money European style puts and calls on the S&P 500 Index.  To help mitigate downside and upside market exposure, short term below-market and above-market call options are purchased with the same duration as the puts and calls sold.”

Other UBS marketing materials summarize the strategy as follows:

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An options trading program marketed as a “Yield Enhancement” strategy to brokerage customers of UBS, reportedly including risk averse investors with substantial bond portfolios, has suffered a hard landing in November and December as the so-called “Iron Condor” index options spread-based scheme has reportedly delivered losses in excess of 20% of the capital committed.

Iron Condor Basics
UBS’s Yield Enhancement Strategy (“YES”) reportedly has over $5 billion under management and over 1,200 investors.  Investors in YES must agree to commit capital to the program, a so-called “mandate,” which may take the form of securities or cash.  The committed capital provides collateral for options spread trading in each investor’s account.  Although marketed to bond investors, the bonds held by each investor have nothing to do with the YES strategy other than serving as collateral for the options trades.  Some investors pledge other securities or cash as collateral for the YES program.

The YES strategy entails generating option premium income through the strategic sale and purchase of SPX (S&P 500) index option spreads.  This strategy, which is also sometimes referred to as an “Iron Condor” spread, involves writing two vertical options spreads – a bear call spread and a bull put spread.  Thus, this strategy entails four different options contracts, each with the same expiration date and differing exercise prices.  The “Iron Condor” strategy involves writing both a short put and a short call against the SPX, with these naked, or uncovered, options are designed to generate income for the investor via the receipt of premium.  Further, the “Iron Condor” strategy involves writing both a long put and long call against the SPX, with these trades, or options legs, designed to mitigate the risk associated with the uncovered options positions.

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David Zeng was recently barred from working within the securities industry after he failed to respond to inquiries concerning over a dozen customer complaints about his investment activities.  These complaints alleged misrepresenting an investment, unauthorized stock trading, unsuitable investment advice and fraud.

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Prior to starting with Merrill Lynch in 2009, Zeng worked for UBS Financial Services and before that for Morgan Stanley.

If you suffered significant losses as a result of doing business with David Zeng or received an unsuitable recommendation in any of the mentioned investment categories from another stockbroker or financial advisor, you may be able to recover your losses through securities arbitration. To find out more about your legal rights and options, contact a stock fraud lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.

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Investment fraud lawyers continue to investigate claims on behalf of individuals who suffered significant losses in Puerto Rican bonds after the value of these investments plummeted in 2013, causing many investors to suffer significant losses. In addition, securities arbitration lawyers are keeping an eye on recent news that indicates investors may be able to pursue their claims in continental Unites States venues, rather than in Puerto Rico, due to the shortage of FINRA arbitrators on the island.

Recent News Regarding Puerto Rican Bonds

A claim was recently filed on behalf of a former client of Luis Fernandez and Angel Canabal against UBS Financial Services Incorporated of Puerto Rico and UBS Financial Services Inc. According to the claim, the retired client invested the majority of his life savings based on the recommendation of Fernandez in UBS proprietary bond funds, which were primarily invested in Puerto Rican debt.  Allegedly, these investments were risky, illiquid and unsuitable for the investor.

The claim also alleges that the risks of the investments were not explained to the client, and that UBS made a recommendation that he borrow more money to be invested in the proprietary funds from a UBS-related company.  The account was later taken over by Canabal, who allegedly told the investor that the recommendations were sound, the account wasn’t invested aggressively, and no changes were required.

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Securities fraud lawyers continue to investigate claims on behalf of investors who suffered significant losses as a result of the unsuitable recommendation and sale of Puerto Rico bonds and UBS Puerto Rico bond funds in light of the products’ downgrade to “junk bond” status. Reportedly, earlier this month Standard & Poor downgraded most of the Puerto Rico bonds to “high-risk junk bond” status.

Losses Mount as Puerto Rico Bonds Downgraded to Junk Status

This is bad news for a lot of investors, as about 70 percent of U.S. municipal bond funds currently hold some portion of Puerto Rico bonds and those funds that are required to hold investment-grade bonds will be forced to sell the Puerto Rico bonds at significant discounts. According to stock fraud lawyers, this selling pressure may result in bond holders seeing significant price drops. In addition, the downgrade could throw a wrench in Puerto Rico’s plan to borrow $1-2 billion in the near future. Puerto Rico would likely have to agree to a much higher interest rate for investors to accept the risks associated with the bonds.

Puerto Rico bond investors suffered losses of more than 20 percent in 2013, with even higher losses for investors who were exposed to the internal leverage (or borrowing of money to buy additional municipal bonds) in UBS Puerto Rico bond funds.  Investors who were 50 percent leveraged reportedly experienced losses of around 40 percent. In addition, securities fraud attorneys say that many investors were convinced to use a margin account, a second mortgage or a bank loan to borrow more money for larger investments. Both of these recommendations carried significant risk and were unsuitable for many investors.

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New Research Indicates Investors Already Lost Billions in Puerto Rico Bond Funds

Investment fraud lawyers continue to investigate claims on behalf of investors who have suffered significant losses in UBS Puerto Rico closed-end municipal bond funds. Allegedly, UBS Puerto Rico has engaged in questionable sales practices related to certain closed-end bond funds, including leveraged fixed income funds. New research has indicated that investor losses now amount to billions of dollars.

According to InvestmentNews, 19 of these bond funds lost a total of $1.6 billion from January to September of last year alone. Reportedly, the funds that caused the most significant investor losses were the ones underwritten by UBS with large municipal bond holdings. Around $10 billion in closed-end bond funds were sold by the Puerto Rican unit of UBS Financial Services from 2002 to 2012.

The Puerto Rican economic downturn has caused the value of the funds — as well as the value of other funds not underwritten by UBS that purchased Puerto Rican debt — to significantly decline. Municipal market weaknesses and rumors regarding interest rates have led to illiquidity and value declines for these products. In many cases, the risks associated with these investments reportedly were not properly disclosed to clients prior to their sale.  In these circumstances, some UBS Puerto Rico customers may have claims for unsuitable recommendations, over-concentration and/or improper use of leverage.

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Investment fraud lawyers are currently investigating claims on behalf of Wells Fargo customers who suffered significant losses in municipal auction-rate securities. On December 24th, a Financial Industry Regulatory Authority (FINRA) arbitration panel ordered Wells Fargo Advisors to buy back $94 million in securities at face value because the adviser allegedly misrepresented the investments, which would have violated the firm’s obligation to fully disclose all the risks of a given investment when making recommendations.

Wells Fargo Ordered to Buy Back $94 Million in Auction-rate Securities

According to Investment News, the award is related to securities purchased since March 2008 by the now-deceased Robert B. Cohen, his family and Hudson News, Cohen’s affiliated business. Reportedly, Cohen’s family has accused Wells Fargo and one of its advisors of misleading and fraudulent statements regarding municipal auction-rate securities.

Reportedly, when the financial crisis struck and investors found these securities difficult to sell, a Wells Fargo advisor allegedly told the Cohens they could earn back their investment within months with relatively high rates of return. According to investment fraud lawyers, a case is still pending against Timothy P. Shannon, a Wells Fargo adviser based in New Jersey. The FINRA panel also denied Wells Fargo’s request to have the dispute expunged from Shannon’s regulatory records.

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Securities fraud attorneys are currently investigating claims on behalf of the clients of UBS Financial Services Inc. and David Lugo. Lugo allegedly made unsuitable recommendations and misrepresentations of Puerto Rico municipal bonds and UBS proprietary Puerto Rico municipal bond funds.

Clients of UBS David Lugo Could Recover Losses

In one claim already filed by stock fraud lawyers, the claimant, one of Lugo’s clients, seeks to recover approximately $15 million. According to the allegations in this claim and others, Lugo reportedly recommended that his clients invest significant portions of their accounts in UBS proprietary Puerto Rico municipal bond funds and Puerto Rico municipal bonds. In addition, the amount invested frequently represented large concentrations of the total net worth of the client. Reportedly, these investments were marketed and sold as low-risk and clients were told they would be paid high, tax-advantaged dividends.

Lugo’s clients also allege that they were not warned that the UBS bond funds were highly leveraged. Lugo also allegedly recommended a UBS margin account in order to borrow funds to increase his clients’ Puerto Rico municipal bond investments. While this investment strategy was highly speculative and posed a high risk of principal loss, Lugo allegedly did not warn his clients of the risks and made unsuitable recommendations.

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Securities fraud attorneys continue to investigate claims on behalf of investors who suffered significant losses in UBS Willow Fund investments. Despite the fact that many customers were allegedly told the fund was safe and low-risk, it suffered a decline of around 80 percent. In addition, the fund may have deviated from the investment strategy it originally disclosed to investors, and this alleged deviation may have played a significant role in the decline of the fund.

UBS Willow Fund Allegedly Deviated from Strategy, Declined 80 Percent Investors Could Recover Losses

Created as a private hedge fund in 2000, the UBS Willow Fund was sold by UBS Financial Services. Reportedly, an announcement in October 2012 stated that the UBS Willow Fund would be liquidated. On September 6, 2013, the fund’s shareholder report stated, “The fund does not hold investments as of June 30, 2013.”

It’s possible that UBS did not adequately disclose the risks of the fund when making recommendations. Furthermore, many of the investors who received recommendations to invest in the fund reportedly had low risk tolerances and were seeking stable income. According to stock fraud lawyers, firms have an obligation to fully disclose all the risks of a given investment when making recommendations, and those recommendations must be suitable for the individual investor receiving the recommendation given their age, investment objectives and risk tolerance.

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Investment fraud lawyers continue to investigate claims on behalf of investors who suffered significant losses in Puerto Rico municipal bonds and closed-end mutual funds exposed to losses in such bonds,  even as declining credit ratings threaten to drastically increase the losses suffered by many investors.

Declining Credit Ratings More Trouble for UBS Puerto Rico Bond Investors

Both Standard & Poor and Moody had already put Puerto Rico’s general obligation municipal bonds on negative watch when Fitch Ratings joined them on November 14. The Puerto Rico bonds are already rated by all three agencies at just one step above “junk,” or non-investment grade. Currently, Puerto Rico has outstanding debt amounting to around $11 billion in this category, and securities arbitration lawyers say that the negative watch given to the bonds by all three rating agencies is an indication that the debt will likely be downgraded in the coming months to junk-bond status.

If these bonds are downgraded to junk status, the resulting flood of sales could cause another drastic drop in the bonds’ price, and could also result in losses in closed-end mutual funds invested in the bonds. Unfortunately, most buyers are unwilling to accept the risk of purchasing these bonds unless significantly discounted, leaving many investors forced to keep the investment or sell it at a significant loss.