UBS AG (UBS) has hit the headlines again, this time for a wrong reason. Its wealth management services unit has been fined by the Financial Industry Regulatory Authority (FINRA) for misleading investors about the risks associated with certain notes of Lehman Brothers Holdings it sold.
FINRA has fined UBS AG with $2.5 million and further imposed a $8.25 million payment in restitution for omissions and statements it had made that culminated in investors being misled regarding “principal protection” feature of 100% Principal-Protection Notes Lehman issued prior to its bankruptcy filing in September 2008.
Principal-Protection Notes are fixed-income security structured products having a bond and an option component that promise a minimum return equal to an investor’s initial investment.
During the period between March and June 2008, UBS AG promoted those structured notes as principal-protected without emphasizing that they were unsecured obligations of Lehman Brothers. Ultimately, Lehman went bankrupt in September that year.
UBS AG failed to advise brokers effectively about the potential impact of the credit default swap spreads widening on Lehman’s financial strength. Sufficient supervisory system for the sale of those notes was not established and the company failed to provide adequate training or written supervisory policies and procedures. While UBS AG settled the matter, it neither admitted nor denied the charges.
Post the financial crisis, the regulators went in for rigorous investigations on all fraudulent practices of the Wall Street companies. Recently, Wells Fargo & Co. (WFC) agreed to settle charges related to the sale of two collateralized debt obligations (CDOs) with the Securities and Exchange Commission (SEC). The CDOs were sold by Wachovia Capital Markets LLC, a company that Wells Fargo acquired in 2008.
According to the SEC, Wachovia has been found guilty of misconduct with regard to the sale of the CDOs, which were linked with the performance of residential mortgage-backed securities in late 2006 and early 2007.
Wells Fargo will pay over $11 million to the SEC for the settlement, which includes a disgorgement of $6.75 million and a penalty of $4.45 million. Of the total amount, around $7.4 million will be returned to investors pursuant to Fair Fund provisions of the Sarbanes-Oxley Act of 2002.
Besides Wells Fargo, last year, the SEC and Goldman Sachs Group Inc. (GS) settled a $550 million claim over CDOs. Goldman was charged for its failure to provide key information in marketing material to its investors for a CDO.
While stepping up of investigations by the regulators is good news for investors who suffered significant losses due to misleading and misrepresentation activities of companies related to the investment risks. However, such fines tarnish a company’s reputation and put its financials at stake.
UBS AG currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
GOLDMAN SACHS (GS): Free Stock Analysis Report
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