An arbitration panel has ordered UBS Wealth Management Americas to pay one of its former brokers $5.4 million for representing structured products from Lehman Brothers Holdings Inc. as being suitable for clients even as Lehman began to falter.
The firm was liable for nearly $4.4 million in damages and attorney's fees, in addition to a rare award of $1 million in punitive damages, for misleading investors, according to the award, which was filed with the Financial Industry Regulatory Authority Inc. last Friday.
“[UBS] deliberately prevented the distribution of material information about Lehman Brothers' sinking financial condition and continued to recommend the sale of Lehman Brothers structured products despite clear evidence of the company's rapid decline,” the panel wrote in the award.
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The broker, Edward Dulin, had 39 complaints on his record related to Lehman structured notes he had sold to clients in the run-up to the financial crisis. Those notes dropped in value after Lehman Brothers declared bankruptcy in September 2008.
Customer complaints must remain on a broker's public BrokerCheck report even if the broker was not named in the case and the client settled with the firm, according to a Finra rule from 2009. Many brokers racked up black marks after investments crashed during the financial crisis
Last year, a Wedbush Securities Inc. broker won $4.2 million from his firm in a similar case dating back to sales of complicated mortgage products prior to the credit crisis.
In both cases, the brokers said that the firm had prevented them from fully understanding the risks of the products.
Mr. Dulin argued that he had done reasonable due diligence, including reading the prospectuses to identify the risk, and so he should not have to bear responsibility for the decline in the value of the investments.
The firm's prospectus and marketing materials claimed that the 100% Principal Protected Notes, which are a fixed-income security with options to protect the underlying investment, would return the full amount of the original investment even if the market declined, according to Mr. Dulin's attorney, Rosemary Shockman of Shockman Law Office PC.
“He had every reason to believe when he was being told by UBS that there would be money to back this up,” Ms. Shockman said.
In the end, the panel ordered the references to the 39 settlements expunged. Mr. Dulin left UBS in 2008 and is currently with Bank of America Merrill Lynch, according to registration records.
The case lasted almost a year and a half, and took place over 42 hearing sessions, according to the award.
Richard Weinroth, one of two public arbitrators on the panel, disagreed with the decision to award Mr. Dulin $1 million in punitive damages, although he said he found the firm liable and agreed with the rest of the award, as well as expungement.
“The weight of the evidence was that respondent's conduct was not sufficiently egregious with respect to the claimant to support an award of punitive damages,” he wrote.
A spokesman for UBS, Gregg Rosenberg, said the firm disagrees with the award and is considering its options, including whether to ask a court to vacate the decision.
"UBS is disappointed with the panel's decision, and believes it to be legally and factually incorrect,” he said. “The award is inconsistent with standards of practice, and industry rules and regulations. We are currently evaluating all options available to address the award, including, but not limited to, moving to vacate the award."
