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Claimants Continue to Win Arbitration Claims Involving So-Called “Principal Protected” Notes Issued by Lehman Brothers’s founder Christopher J. Gray is presently handling cases against UBS on behalf of investors who sustained losses various purportedly “Principal Protected” debt securities sold by brokerage firm UBS to its customers. These notes, which have various names, are also referred to as guaranteed linked notes, these securities were “structured products” that combined fixed income investments with derivatives. What resulted was a product that supposedly provided the protection of fixed income, with the upside of the stock market.

The claimants have reported won at least seven cases against UBS involving these notes, with only a single loss. Further, the single loss was reportedly in the case of an investor who was not represented by an attorney and only submitted paperwork describing his claim but did not actually appear at an arbitration hearing.

Lehman Principal Protected Notes were marketed by several brokerage firms, including Lehman Brothers, Citigroup, UBS, Merrill Lynch and Wachovia, as conservative investments. Investors looking for income with capital preservation were advised that Lehman Principal Protected Notes would provide preservation of capital, a modest yield, and a slight gain in principal. In a brochure issued by Lehman Brothers, it stated that their “structured notes”, which includes Lehman Principal Protected Notes, had “100 percent principal protection” and “uncapped appreciation potential” based upon the gains in the S&P 500 Index. In reality, however, investors of Lehman Principal Protected Notes were subject to a significant amount of risk.

These risks materialized when Lehman Brothers imploded in a spectacular September 2008 bankruptcy. Once the fourth largest investment bank in the United States, Lehman Brothers filed for bankruptcy on September 15, 2008, marking the largest filing in history. The bankruptcy was caused by heavy investments in the subprime mortgage market, which many individual investors were not aware of when they purchased Lehman notes that were sold as “principal protected” securities.

There were over $8 billion worth of Lehman structured notes outstanding at the time of the bankruptcy, and approximately $2.8 billion of those were sold in 2008. Several investors have filed claims against their brokers alleging that they continued to recommend the Lehman Brothers “principal protected notes” (PPN) during the months leading up to the bankruptcy.

Arbitrations claims claim the brokers knew, or should have known, that they were unsecured obligations of Lehman Brothers, whose financial position was declining. UBS AG, Switzerland’s largest bank, faces hundreds of claims in the United States from clients who bought Lehman Brothers PPN.

The Lehman Brothers products sold by brokerage firms include the following:
UBS Settles FINRA Case for 10.75 Million in Fines and Restitution

In April 2011, the Financial Industry Regulatory Authority ( or “FINRA”) reached a settlement with and fined brokerage firm UBS Financial Services concerning UBS’s sale of so-called “100% Principal-Protection” notes issued by the former Lehman Brothers Holdings.

The settlement resulted in UBS agreeing to pay a fine of $2.5 million, and required UBS to pay $8.25 million in restitution for 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. The FINRA settlement also creates a restitution fund of approximately $8 million that is available to limited class of purchasers of the PPNs from UBS (as further explained below).

FINRA determined that from March to June 2008 as the credit crisis worsened, UBS advertised and some UBS financial advisors described the structured notes as principal-protected investments and failed to emphasize they were unsecured obligations of Lehman Brothers, which eventually filed for bankruptcy in September 2008. FINRA also found that some of UBS’ financial advisors did not understand the product, including the limitations of the “protection” feature.

Consequently, certain financial advisors communicated incorrect information to their customers. FINRA also found that ccertain UBS advertising materials had the effect of misleading customers regarding the characteristics and risks of the PPNs.

Investors should be aware that the restitution provided for in the FINRA settlement is limited to a small subset of investors who purchased the PPNs, including only those who both a) listed their financial risk tolerance as conservative or moderate on UBS account forms; and b) purchased the PPNs during a three and one-half month period between March 2008 and June 2008. Investors who did not list these risk tolerances or who purchased at other times are not eligible for any payment in connection with the settlement. The full terms of the settlement and available restitution are discussed in the FINRA Letter of Acceptance, Waiver & Consent, accessible below.

finra awc.pdf (741.42 kb)

Another UBS Lehman Principal Protected Notes Claimant Victory
More recently in July 2011, a securities arbitration claim made by three clients against Neuberger Berman resulted in another major win for the claimants. FINRA panel ruled on July 15th that Neuberger Berman must pay $5 million in damages, $450,000 in (3 percent annual) interest and $7,500 in legal fees. Investment attorneys stated that the financial award covered the investments of all three clients.

In 2008, the claimants were persuaded by broker Brian Hahn to invest in Lehman Brothers Structured Notes, named comBATS and XLF, despite the customers’ previous insistence to avoid any Lehman investments. The customers were all told that the principal of the structured notes were either fully protected or partially protected.” It was clear, however, once Lehman Brothers filed for bankruptcy and the structured notes became practically worthless, that Lehman was, in fact, the underwriter and they were neither fully nor partially protected. In addition to the structured notes, one of the claimants invested a sum of $1 million in a private-equity hedge fund named Libertyview Credit Select. The assets of this fund were lent to Lehman Brothers.

Although the FINRA panel did not issue a reason for deciding in favor of the claimants, Dr. Craig McCann of SLCG Securities Litigation and Consulting Group did testify that the structured products were “unsuitable,” which would make them a violation of the suitability standard that stock brokers adhere to. Furthermore, because of Lehman’s significant credit risk at the time of the transaction, the products were sold for far more than they were worth, even before Lehman went bankrupt.

Investors who believe that may have been the victim of a sales practice violation involving so-called “Principal Protected” or other Lehman Brothers notes may contact attorneys by filling out the form below or e-mailing

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