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UBS Fined for Lehman Brothers Principal Protected Notes

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New York, NYIn the ongoing battle concerning UBS Lehman Principal Protected Notes, the Financial Industry Regulatory Authority (FINRA) has issued a blow against the UBS Lehman structured notes. FINRA has awarded more than $8 million to investors who alleged that UBS downplayed the risks associated with the Lehman Brothers Principal Protected Notes.

According to The Wall Street Journal (04/11/11), FINRA hit UBS AG with a $2.5 million fine and further ordered the financial firm to pay $8.25 million in restitution to investors to settle charges that the company misled investors about the risks associated with Lehman Brothers Principal Protected Notes.

"This matter underscores a firm's need to be clear and comprehensive in disclosing risks of the structured products it sells to retail investors," Brad Bennett, FINRA enforcement chief, said. "In cases, UBS's financial advisers did not even understand the complex products they were selling, and as a result, they neglected to disclose necessary information to customers about the issuer's credit risk so investors would understand the magnitude of the potential losses."

The lack of understanding on the part of UBS financial advisors reportedly included not fully understanding the limitations of the "protection" feature, which allegedly resulted in incorrect information being given to customers.

A FINRA news release indicates that the regulatory authority found UBS did not adequately inform certain investors that the principal protection feature of the Lehman-issued principal protected notes was subject to issuer credit risk; did not have a proper system for supervising the sale of the Lehman-issued principal protected notes; did not properly analyze the suitability of the principal protected notes for certain UBS customers; and marketed the principal protected notes in a way that misled some customers about the principal protected notes.

That misleading marketing, according to FINRA, included information that suggested a return of the principal was guaranteed if the investment was held to maturity, without informing investors that credit risk could result in losses to the principal. FINRA further found that the principal protected notes were sold to some investors with "moderate" and "conservative" risk profiles, which would have made the protected notes unsuitable investments.

The $8.25 million restitution affects a limited number of investors, who purchased the principal protected notes between March and June 2008. It does not affect other investors.

UBS settled the matter without either admitting or denying the charges. UBS has defended itself saying that client losses were the result of the unexpected failure of Lehman Brothers.


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