Claims over UBS Options Strategy Soar
(Story updated in eighth paragraph with comment from a UBS spokesman.)
Claims against UBS Wealth Management USA over an options strategy marketed as “market-neutral” are mounting as plaintiffs’ lawyers seize on recent market volatility that some say has created losses that could reach over $1 billion.
YES portfolios plummeted when the S&P 500 unexpectedly lost 11% in December 2018, triggering an initial flurry of litigation from plaintiffs’ lawyers. They have lost a total of 33% in the aftermath of the March volatility amid the coronavirus crisis, according to Jeffrey B. Kaplan, a Los Angeles lawyer who has filed arbitration claims focusing on UBS’s alleged misrepresentation of the risk.
The YES cases are expected to be the leading edge of a tide of litigation that lawyers are preparing in the wake of the end of the decade-long bull market. They come as UBS was hoping to put behind it years of investor claims over its role as the leading marketer of Puerto Rico bonds and bond funds that it aggressively sold before they plummeted in value in 2014. It has resolved $2.5 billion of $3.4 billion in claims through settlements, arbitration and withdrawn complaints, according to its most recent quarterly report.
About 1,500 UBS clients invested some $6 billion in the YES strategy, according to Jacob Zamansky, a New York plaintiffs’ attorney who said he has 65 claims lined up for investors seeking around $120 million in damages. The first of the YES arbitrations is scheduled to begin in June in Florida, he said.
The core of the claims is that UBS misrepresented the risks of the options strategy.
“UBS represented that it would combine put and call options on the S&P 500 Index in a ‘non-directional’ manner to generate modest income and to limit risk,” said Kaplan. “UBS also stated that YES would have limited correlation to market movements.”
A UBS spokesman said that participation in the YES program was “generally limited” to sophisticated investors with a net worth of at least $5 million and appropriate risk tolerances for the options strategy.
“The benefits and risks of the YES strategy were clearly disclosed to our clients, and they acknowledged in writing that significant market movements could result in losses and that they should not participate in the strategy unless they were prepared for the potential of large losses,” he said.
Craig McCann, an economist who testifies as an expert witness on behalf of investors, posted a blog on Wednesday in which he stated that maximum losses on the out-of-the money bear calls and bull puts that UBS entered far exceeded the premiums paid for the “four-legged” options spread strategy.
It was created in 2004 for advisors at Credit Suisse’s private banking group and was introduced to UBS by Matthew S. Buchsbaum and Scott M. Rosenberg, who joined UBS in November 2015 after Credit Suisse said it was closing its U.S. brokerage operations.
Their BrokerCheck records are splotched with 32 claims from customers since 2018 over the “options overlay” strategy, with four of the claims denied or withdrawn. Damage claims range between $422,000 and $10 million, according to the database.
Losses in the YES strategy exploded this year when the S&P 500 moved out of a range that UBS’s marketers said was bound by the “Iron Condor” strategy. The S&P 500 plunged 34% between February 19 and its March 23 low as the coronavirus pandemic halted the economy nationwide.
Rosenberg declined to comment and Buchsbaum did not return a call for comment.
On his regulatory report summarized on BrokerCheck, Rosenberg dismissed client allegations of misrepresentation as categorically false.
“I implemented the investment strategy in a consistent and prudent manner,” he said of one client who he accused of focusing on one out of hundreds of trades.
He also said that he had thoroughly explained orally and in writing that the strategy could lose money in times of high volatility.