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UBS to Pay $15 Million over Unsuitable Reverse Convertible Note Sales to Conservative and Retired Investors

UBS Financial Services and the SEC reached agreement for the firm to pay $15 million to settle charges that it failed to supervise, educate, and train staff regarding complex products known as reverse convertible notes. The SEC maintains that as a result of the supervisory failures, at least 8,700 UBS customers were subjected to unsuitable recommendations of $548 million of the reverse convertible note products.

The relevant products involved certain complex structured securities, including:

> Airbag Autocallable Yield Optimization Notes;

> Airbag Yield Optimization Notes;

> Trigger Autocall Optimization Securities;

> Trigger Phoenix Autocall Optimization Securities;

> Trigger Yield Optimization Notes.

In the 2014 Securities Fraud Blog post, Airbags - Unsafe at Any Speed, we explained the hazards of these tricky investments, which are assembled as a combination of options linked to a promissory note generally issued by a financial institution.

For instance, a Securities Litigation Consulting Group analysis of the Facebook Airbag selling for $1,000-per-unit found that the present value of all future coupons of the $1000 airbag was only $901.14, which meant that from the moment the Facebook Airbag was purchased, investors were already down nearly 10% (or, alternately, an investor could only break even by seeing a 10% return, which reflects massive risk).

In regard to standard reverse convertible securities, we followed the case study of Apple (AAPL) stock, whose fall from $700/share to $439/share over a three-month period from 2012-13 placed reverse convertible investors in serious jeopardy of losing up to 40% of their principal when the first of the Apple reverse convertible notes came due.

The SEC order specifically named the UBS Capital Markets Structured Solutions unit as the line of business that failed to develop and implement policies and procedures regarding single stock-linked reverse convertible notes (RCNs), which led to certain registered representatives making unsuitable recommendations to customers in light of their investment profiles.

The findings state that at least 5.1% of UBS' total notional RCN sales were unsuitable, explaining that representatives sold these complex products to 8,743 UBS retail customer accounts, many of of whom had very little or no prior relevant investing experience, had indicated modest income and net worth, were conservative in their investment objectives, and/or were retired.

Thus, the SEC found, UBS' inadequacies led to many investors suffering unnecessary or unwanted risk by investing in a product with the potential for significant loss, a situation that many unsophisticated and low-risk tolerance investors wanted to avoid by virtue of their conservative investment objectives.

If a broker or financial adviser at UBS Financial Services or another firm sold you Airbag structured products or reverse convertibles that were not suitable given your investment profile, and this unsuitable recommendation resulted in the stock being put to you for a loss or otherwise hurt your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation.

Press Release: SEC Charges UBS with Supervisory Failures in Sale of Complex Products to Retail Investors (SEC)

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