UBS loses arbitration battle in fiduciary fight over foundation funds

UBS can’t avoid court in a case where trustees say the firm’s advisor mishandled a foundation’s investment accounts worth hundreds of millions. 

That was the message from the US Court of Appeals for the Second Circuit in a decision issued July 14, affirming a lower court’s ruling that UBS Financial Services and advisor Jay S. Blair waived their right to arbitration by first fighting the case in court. The lawsuit was filed by trustees of the Peter and Elizabeth C. Tower Foundation, a charitable organization based in New York. 

The dispute dates back to 2015, when John N. Blair - then serving as Attorney Trustee of the foundation and one of three voting members of its investment committee - executed an agreement to open brokerage accounts with UBS, where his son Jay worked as part of the Arthurs Malof Group. The trustees claim the move was self-serving and lacked proper oversight. According to the complaint, John Blair signed a client relationship agreement with UBS, which included an arbitration clause, but did not inform the other trustees or provide them with access to account details. 

For years, the trustees say they were kept in the dark. They didn’t receive regular statements and had no visibility into the accounts unless they went through John Blair. In 2020, the investment committee voted to terminate UBS as advisor. A few months later, John Blair was removed as trustee for cause. 

The trustees filed suit in April 2022, accusing UBS and Jay Blair of breaching fiduciary duties under the Investment Advisers Act of 1940 and New York law. UBS responded by joining a motion to dismiss, arguing the federal court should step aside under the Colorado River abstention doctrine. They didn’t mention arbitration at the time. 

That omission proved costly. The court denied the motion to dismiss in January 2023. Two months later, UBS tried to compel arbitration. The district court said no, and on appeal, the Second Circuit backed that decision. Citing the U.S. Supreme Court’s 2022 ruling in Morgan v. Sundance, the court said arbitration rights can be waived through conduct - and UBS had done just that by pursuing litigation first. 

The ruling keeps the lawsuit alive, including claims that UBS “countenanced and indeed sanctioned” a scheme that funneled “hundreds of millions of dollars” from the foundation into accounts managed by a conflicted advisor. The trustees are seeking to rescind the agreement, along with restitution, damages, and fees. 

For insurance and wealth professionals, the decision is a reminder that arbitration clauses can’t be treated as a fallback. If you want to rely on one, you need to act like it from day one. And when family ties and fiduciary roles overlap, the stakes - and the scrutiny - go up fast.