Published on:

SEC Orders UBS AG to Pay $19.5 Million Settlement Involving Structured Notes

On October 13, 2015, the Securities and Exchange Commission (“SEC”), in its first case against an issuer of retail structured notes, filed an Order Instituting Cease and Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings and Imposing Remedial Sanctions and a Cease and Desist Order (the “Order”) against UBS AG (“UBS”).  UBS is a Swiss corporation that is one of the largest issuers of structured notes in the world.  In 2014 alone, UBS issued and registered $2.7 billion of structured notes with the SEC.

The Order compels UBS to pay a $19 million settlement involving structured notes that were linked to a proprietary foreign exchange trading strategy called the V10 Currency Index with Volatility Cap (“V10”).  Disgorgement and prejudgment interest constitute $11 million of the settlement, of which $5.5 million are to be distributed to investors to cover their losses. In addition, $8 million of the settlement reflects a monetary penalty paid to the SEC.  The Order also requires that “UBS cease and desist from committing or causing any violations and any future violations of Section 17(a)(2) of the Securities Act.”

According to the Order, “UBS offered and sold approximately $190 million of medium term notes linked to the V10 (Notes) in registered offering under the Securities Act to approximately 1,900 retail investors … between December 2009 and November 2010.”  UBS told investors that the V10 was a “‘transparent’ and ‘systematic’ currency trading strategy” and that the V10 “was calculated using ‘market prices’ for the relevant underlying financial instruments,” but failed to disclose that they were “taking unjustified markups, engaging in hedging trades with non-systematic spreads and trading in advance of certain hedging transactions – that negatively impacted or, in the case of trading before hedging transactions, had the potential to negatively impact, pricing inputs used to calculate the V10.”  The Order found that “[i]n reality, the V10 was neither transparent nor systematic, market prices were not consistently used to calculate the Index, and V10 investors were thereby misled as to certain key features of this complex financial instrument.”  Ultimately, the Order found that UBS violated Section 17(a)(2) of the Securities Act, which prohibits “obtaining money or property by means of misstatements and omissions in the offer or sale of securities,” by engaging in negligent conduct and making materially misleading statements and omissions.

Per the SEC’s press release, structured notes are “a complex financial product that typically consists of a debt security with a derivative tied to the performance of other securities, commodities, currencies, or proprietary indices.   The return on the structured note is linked to the performance of the derivative over the life of the note.”  The SEC’s press release further states that “[b]etween $40 billion to $50 billion of structure[d] notes are registered with the SEC per year, with many of those notes sold to relatively unsophisticated retail investors.”

SEC Chair May Jo White stated, “[t]his first-of-its kind case involving misstatements and omissions by a structured notes issuer shows that the SEC continues its commitment to pursue wrongdoing across the securities industry in order to better protect investors … It is critical that large global financial institutions have and implement policies and procedures designed to ensure that all facts relevant to investors are made known to individuals responsible for disclosures.”  Andrew Ceresney, Director of the SEC’s Division of Enforcement, also stated, “[t]his case demonstrates the importance of being truthful in offering materials to be used in the offer and sale of structured notes to retail investors … We will remain focused on protecting investors who are not in a position to protect themselves by virtue of their limited access to information, the complexity of the product, or both.”

The attorneys at Lax & Neville LLP have extensive experience in the financial services industry.  If you are a victim of fraud or manipulative trading, please contact Lax & Neville LLP today at (212) 696-1999 to schedule a consultation.