Sour notes from Lehman haunt UBS

UBS Financial Services Inc. is still feeling the pinch from lawsuits over its sale of structured notes issued by Lehman Brothers Holdings Inc. before it filed for bankruptcy protection in September 2008.

Continuing a string of arbitration losses that began about a year ago, UBS recently was stung by two of the biggest arbitration losses yet: awards of $530,000 in November and $2.2 million in December.

In both cases, the plaintiffs got the exact amount they were seeking — a sign that arbitrators were persuaded by plaintiffs’ claims of wrongdoing by UBS.

So far, investor plaintiffs have won seven of the eight Lehman note cases that have gone through an arbitration hearing — an unusually high win rate. The overall win rate for investor arbitrations between 2006 and 2010 was 43%, according to the Securities Arbitration Commentator Inc.

Many of the Lehman products were “principal protected” notes sold under a unique open-architecture platform that UBS rolled out in 2006. Lehman was one of the company’s four outside partners.

Almost $1 billion of Lehman notes were sold by UBS.

A former UBS broker was not surprised by the volume of Lehman notes sold by UBS. “The Lehman notes had the sexiest pitch [and] the best returns,” said the broker, who recently left UBS and asked not to be identified.

Plaintiff’s attorneys think UBS will be paying out on more cases as claims work their way through the arbitration system and as more cases are filed. “I spoke with a new client just this morning,” said Christopher Vernon, founding partner at Vernon Healy PLLC, a plaintiff’s law firm. All told, Mr. Vernon said, he has about 30 cases pending against UBS.

“Every time UBS loses one of these cases, the phones light up again,” said Seth Lipner, a plaintiff’s attorney at Deutsch & Lipner, which has filed 55 Lehman note cases for investors.

Given its losing record, UBS has been settling many of the disputes before an arbitration hearing, Mr. Lipner added. He declined to reveal how many of his clients have settled.

UBS spokeswoman Karina Byrne said that the firm hasn’t disclosed how many cases it faces or has settled, nor has it given an estimate of its legal costs.

But another attorney actively pursuing Lehman note cases, Jake Zamansky, founder of Zamansky & Associates LLC, said he, too, has about 30 pending cases against UBS. Hearings on the raft of lawsuits are scheduled between April and November.

In the latest case, which was decided last month, UBS was ordered to pay investor Thomas Motamed the entire $2.2 million he claimed he lost by investing in Lehman-issued notes.

He is chief executive of property-and-casualty insurer CNA Financial Inc. Plaintiff’s lawyers said the Motamed case shows that even a seemingly sophisticated investor — at a disadvantage — can win back his or her money.

His attorney, G. Trenholm Walker, with Pratt-Thomas Walker PA, did not return calls.

“UBS disagrees with and is disappointed in the panel’s decision,” Ms. Byrne said in a statement.

In an interview, she disputed the general claim that UBS should have known Lehman was in trouble.

“All three of the rating agencies had an investment-grade rating on Lehman up to the bankruptcy,” she said. Client losses were due to the “unexpected and unprecedented failure” of the firm.

To date, the only regulatory action UBS faces over the Lehman notes is a pending 2009 complaint by the state of New Hampshire.

Officials there claimed that New Hampshire investors were told by UBS brokers that their principal was protected. It alleges that the firm sold Lehman notes even after the failure of The Bear Stearns Cos. Inc. made it clear that Lehman was next in line to fail from exposure to securitized subprime mortgages.

After delays, the state’s case is moving toward an administrative hearing, said Kevin Moquin, a staff attorney at the New Hampshire Bureau of Securities Regulation.

Arbitrators seem to be “recognizing that there was a problem” at UBS, Mr. Moquin said.

UBS brokers themselves are pointing a finger at the firm for misleading them, say plaintiff’s attorneys.

“I’ve been doing this 20 years and chased [faulty] product cases plenty of times,” Mr. Vernon said. “But I’ve never seen anything close to this where former [UBS] brokers call up and say, “How can I help my clients?’”

Unless they sue UBS, investors will have to wait until the lengthy Lehman bankruptcy proceeding concludes before finding out how much — if anything — they will collect on the structured notes they hold.

E-mail Dan Jamieson at [email protected].

Related Topics: Lehman Brothers, Structured Products, UBS AG