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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Monday, April 11, 2011

FINRA Fines UBS Financial $2.5 Million and Orders $8.25 Million in Restitution for Sales of Lehman PPNs

FINRA announced that it fined UBS Financial Services, Inc., $2.5 million, and required UBS to pay $8.25 million in restitution for omissions and statements made that effectively misled investors regarding the "principal protection" feature of 100% Principal-Protection Notes (PPNs) Lehman Brothers Holdings Inc. issued prior to its September 2008 bankruptcy filing.  PPNs are fixed-income security structured products with a bond and an option component that promise a minimum return equal to the investor's initial investment.

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 found that UBS:

  • failed to emphasize adequately to some investors that the principal protection feature of the Lehman-issued PPNs was subject to issuer credit risk;
  • did not properly advise UBS financial advisors of the potential effect of the widening of credit default swap spreads on Lehman's financial strength, or provide them with proper guidance on the use of that information with clients;
  • failed to establish an adequate supervisory system for the sale of the Lehman-issued PPNs, and failed to provide sufficient training and written supervisory policies and procedures;
  • did not adequately analyze the suitability of sales of the Lehman-issued PPNs to certain UBS customers;
  • created and used advertising materials that had the effect of misleading some customers about specific characteristics of PPNs.

In settling this matter, UBS neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

http://lawprofessors.typepad.com/securities/2011/04/finra-fines-ubs-financial-25-million-and-orders-825-million-in-restitution-for-sales-of-lehman-ppns.html

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