SEC fines UBS – Investigation of UBS’ sale of reverse convertible notes

The law firm of Sonn Law Group is investigating UBS financial advisors’ sale of complex derivative investments known as “reverse convertible notes.” The Securities and Exchange Commission (“SEC”) recently sanctioned UBS for failing to adequately supervise its employees in connection with the sale of reverse convertible notes.

The SEC’s order finds that UBS failed reasonably to supervise its financial advisors within the meaning of Securities Exchange Act Section 15(b)(4)(E), which resulted in violations of Section 17(a)(3) in the offer and sale of reverse convertible notes.  UBS entered into a settlement with the SEC in order to resolve these charges without admitting or denying the SEC’s findings. The SEC’s order censured UBS and required UBS to pay in excess of $8 million in disgorgement and a $6 million penalty.

From 2011 though 2014, UBS sold more than $10 billion worth of reverse convertibles to approximately 44,000 customers. These reverse convertible notes were offered to retail investors as a way to enhance their portfolio’s yield. Of the more than $10 billion worth of reverse convertible notes sold by UBS during this time period, approximately $548 million worth of reverse convertible notes were sold to more than 8,700 investors who had little or no investment experience, modest net worth and moderate or conservative investment objectives and risk tolerance. Many of these investors were retired, and therefore unable to replace their principle lost in high risk and unsuitable investment.

Reverse convertible notes come in many different varieties, but a common type of reverse convertible note is a fixed term unsecured debt obligation that is linked to the performance of a single underlying stock. These so-called single stock linked reverse convertible notes are structured to pay investors a higher rate of interest than a traditional debt instrument such as a bond, and are therefore often sold to income seeking investors such as retirees and investors on a fixed income. These notes were sold under a variety of different names, including but not limited to:

• Trigger Yield Optimization Notes;
• Trigger Autocall Optimization Securities;
• Trigger Phoenix Autocall Optimization Securities;
• Airbag Yield Optimization Securities; and
• Airbag Autocallable Yield Optimization Notes

Single stock linked reverse convertibles often provide investors with some limited downside protection, provided that the underlying stock does not close below a certain price. In exchange for the heightened income payments and limited downside protection, investors are exposed to the significant and often undisclosed risk that they will not receive their full principal upon maturity, depending on the price of the underlying stock.

SEC investigators concluded that UBS’ failure to adequately train and educate its own employees about these investments, resulted in the recommendation and sale of these reverse convertible notes by UBS financial advisors who did not adequately understand the features and terms of the reverse convertible notes they were recommending to their customers.

In June 2016, Sonn Law Group filed a claim on behalf of one such investor who suffered significant losses in connection with UBS reverse convertible notes linked to stocks from the high risk and volatile energy sector. According to the Statement of Claim, UBS financial advisor, Margaret Lech-Loubet, recommended that the investor invest in:

• UBS Trigger PAOS liked to Cree stock;
• UBS Trigger PAOS linked to US Steel stock; and
• UBS Trigger PAOS linked to Peabody Energy stock

In that case, the investors’ UBS financial advisor, Margaret Lech-Loubet, was employed with UBS’ branch office located in Beverly Hills, California. However, the SEC’s order against UBS reveals that UBS’ supervisory and training failures regarding reverse convertible notes was far more widespread and systemic.

The law firm of Sonn Law Group represents investors throughout the country who have been the victims of fraud, misrepresentations and other brokerage firm misconduct. If you have suffered losses in reverse convertible notes purchased from UBS, contact the law firm of Sonn Law Group today at 844-689-5754 or complete our online contact form to schedule a free consultation. Sonn Law Group is a nationally recognized law firm representing individuals, trusts, corporations, and institutions in claims against brokerage firms, banks, and insurance companies.