Securities Fraud Attorney Blog

RIK Attorneys Won $3.2 Million for their Clients Against UBS Relating to Its YES Options Overlay Strategy

November 14, 2023 | By Ross B. Intelisano and Christopher Keogh

The investment fraud lawyers at Rich, Intelisano & Katz (“RIK”) won $3.2 million for their clients, Bret and Marion Pearlman, in a recent FINRA arbitration against UBS. The Pearlmans’ claim was for misrepresentations and omissions related to UBS’s Yield Enhancement Strategy (YES) – an options overlay strategy. It is the third largest award against UBS related to YES. Investors have tried to a final award approximately 46 YES cases against UBS and have won roughly one-half of those cases. RIK has tried only two cases to a final award and won the largest award ($5.2 million) and the third largest one. In both cases, the awards reflected over 90% of the clients’ losses as of the date of the filing of the arbitration. Read the full award here.

Options overlay strategies use underlying assets, such as equities, cash, and bonds, as collateral to buy and sell options. In its most basic understanding, UBS’s options overlay strategy, YES, periodically bought and sold options, simultaneously, to generate income from the sale of options. In many cases, YES was pitched and marketed to UBS customers as a “low-risk” strategy that seeks to enhance portfolios approximately 2-6% of their mandate annually (the mandate is the underlying amount of collateral the customers elect to use for the strategy). YES was further marketed as having limited to no correlation to the S&P 500. Additionally, in its materials and disclosures, UBS stated that the managers of the program utilized various methods to “limit” risk exposure. In reality, YES was a high-risk strategy that added significant risk to the underlying assets where potential losses were awfully disproportionate to any potential gains. The additional risks and potential losses were never fully disclosed to many customers.

RIK’s securities attorneys have represented many investors of YES and other complicated options strategies in legal actions against UBS and other firms. If you have losses related to YES or options trading strategies, do not hesitate and feel free to schedule an appointment here or call us at (212) 684-0300 for a free consultation.

Rich, Intelisano & Katz Lawyers Investigate Regulation D Offerings Issued by HJ Sims & Co. Inc.

November 18, 2022 | By Ross B. Intelisano and Christopher Keogh

HJ Sims & Co. Inc. (“HJ Sims”) appears to have used Regulation D (“Reg D”) offerings to pass its risk of loss onto its customers while it retained the potential for significant gains. A scheme like this would violate numerous FINRA Rules and regulations, including suitability, Regulation BI (“Reg BI”), and due diligence obligations. See FINRA’s Due Diligence and Suitability of Private Placement. RIK’s investment lawyers are currently investigating potential claims related to HJ Sims’ possible improper sales practices.

Reg D securities are non-public offerings designed to help operating firms raise funding, and are exempt from certain security registration requirements. This type of private placement is offered by the “issuer,” and who, under the rules, is only required to make limited disclosures regarding the price of the offering – making it more challenging for investors to determine a fair price of the private placement when compared to publicly traded investments.

In the past 10 years, HJ Sims sold 93 Reg D Offerings (listed below), where most of the issuers of the Reg D bonds were owned and/or controlled by HJ Sims executives. Because of this, not only did HJ Sims gain commissions and other fees associated with the offerings, “[i]f a Sims’ Reg D offering failed, the executives would suffer a portion of the losses but realize all the gains if an offering succeeded.” See HJ Sims Reg D Offerings: Heads, HJ Sims Wins – Tails, Their Investors Lose. Ultimately, the risks associated with the Reg D offerings were passed onto the customers. As stated by SLCG Economic Consulting, “HJ Sims ability to shift losses to its clients would naturally lead it to invest in riskier projects with unusually high likelihood of failure.” See id.

RIK Won the Largest Award Against UBS Relating to Its YES Options Strategy

September 28, 2022 | By Ross B. Intelisano and Christopher Keogh

The investment fraud attorneys at Rich, Intelisano & Katz won a $5.2 million FINRA arbitration award for their clients, George and Sandra Schussel, in a case relating to UBS’s Yield Enhancement Strategy (“YES”). Investors in YES, including the Schussels, suffered significant losses in December 2018. Many investors in YES have since filed FINRA claims against UBS. To date, over 40 of the filed claims have gone to award – approximately half have been in favor of investors while half favored UBS. RIK has been successful in representing multiple YES investors. The September 15, 2022 award of $5.2 million represents the largest YES-related award against UBS to date and an approximately 95% recovery for our clients. Read the full award here.

During the Schussels’ arbitration, RIK’s attorneys stressed that recommending a strategy that the advisor did not fully understand is inherently a breach of their fiduciary duty. After eight days of hearings, the panel unanimously awarded the Schussels over $5,200,000 including $95,000 in pre-judgment interest and $92,000 in costs. The significant award has received the following press coverage: FA-mag, Barron’s, and InvestmentNews.

UBS’s YES strategy is an options overlay strategy which uses investors’ conservative investments as collateral for iron condor options trading. UBS’s financial advisors marketed it as a moderate risk strategy designed to gain additional incremental investment income. Despite UBS’s disclosure statements, UBS never adequately disclosed the true risks of YES – that it was a high risk, low reward strategy. As such, investors in YES, including the Schussels, were shocked to discover significant losses in their YES accounts in December 2018.

Liquidating or Exchanging Annuities May Be Unsuitable for Investors

May 31, 2022 | By Christopher Keogh

Annuities are insurance contracts that make routine payments to customers either immediately or at some point in the future. This insurance contract allows investors to protect and grow their retirement savings while providing them with guaranteed income. Some brokers and financial advisors recommend selling or exchanging annuities for “better” investment opportunities. However, liquidating or exchanging an annuity comes with a high price– commissions, tax implications, and the loss of benefits associated with the original annuity. For these reasons, liquidating or exchanging an annuity without very clear financial reasons may be unsuitable for customers. The securities fraud lawyers at Rich, Intelisano & Katz, LLP (RIK) have recovered millions for investors who suffered from annuity-related losses.

When investors sell or exchange their annuities, it comes with a heavy price. First, when customers sell their annuity, they are subjected to costly fees and penalties. For example, the customer may incur surrender charges and high cancellation fees. Second, customers will lose all benefits associated with the annuity, such as legacy protection which is a death benefit to help provide a legacy for your loved ones. Third, the customer forfeits expected benefits from the annuity– the customer will no longer have guaranteed income. Fourth, taxes may become immediately due on the proceeds. Lastly, there are often high commissions associated with the sale of annuities.

Regardless of the costs and losses associated with selling or exchanging annuities, brokers and financial advisors sometimes recommend such actions to customers in order to generate commissions for themselves. Essentially, liquidating or exchanging annuities could potentially be a scheme for your broker or advisor to take money out of your savings and put it into their pocket. What’s worse is that the broker or advisor will use your money from the sale of the annuity to purchase another annuity or other investment products further increasing commissions and fees. Just like with any scheme to take advantage of customers, this is ill-suited and exceedingly improper.

Unsuspecting Investors Lost Millions Due to UBS’s Failure to Make Adequate Disclosures about Its Yield Enhancement Strategy (“YES”)

March 16, 2022 | By John G. Rich and Christopher Keogh

Many investors of UBS’s Yield Enhancement Strategy (“YES”), if not all, would never have invested in YES if UBS made full and fair disclosures related to its risks. YES was marketed as an overlay strategy for additional incremental investment income. Put simply, UBS advertised YES as an “iron condor” strategy that used customers’ investment accounts as collateral for options trading. Customers that enrolled in the strategy were required to sign disclosure documents, including margin agreements and options forms. Despite these disclosure documents, UBS never adequately disclosed the true risks of YES – that it was a high risk, low reward strategy. Because of UBS’s failure to adequately disclose the nature of YES, investors were shocked to learn about their astronomical losses at the end of 2018, and again in early 2020.

Generally, when investors trade on margin or trade options, they are required to sign risk disclosure documents. Enrolling in YES was no exception – as it is an options strategy that trades on margin. However, when YES investors were opening YES accounts, some UBS financial advisors downplayed the significance of the risk disclosure forms. For example, in several cases handled by Rich, Intelisano & Katz (“RIK”), the financial advisors dismissed the written disclosures describing them as boilerplate and/or stating that the YES portfolio manager limited risk by employing a low risk “iron condor” strategy. Representations such as these undermine the legal effect of the risk disclosure documents. Moreover, because the YES accounts are professionally managed, UBS and its financial advisors have a duty of full and fair disclosure regarding the investment the Firm recommends to its investors and to not mislead its customers. See S.E.C. v. Cap. Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963) (“Courts have imposed on a fiduciary an affirmative duty of ‘utmost good faith, and full and fair disclosure of all material facts,’ as well as an affirmative obligation ‘to employ reasonable care to avoid misleading his clients.’”) Such conduct falls well below that standard.

RIK’s lawyers have pursued several multi-million dollar arbitrations on behalf of investors to recover for losses sustained due to UBS’s YES program (read more here). It is no surprise that UBS has attempted to shield itself from liability by hiding behind the risk disclosure forms. Not only were the communications related to the risk disclosure documents improper, but the disclosure documents themselves were entirely deficient because they contained a number of ambiguous, contradictory, and misleading statements concerning risk that further undermine the disclosures’ purported legal effect. For instance, in addition to generically disclosing risks, the disclosure documents also state specifically how risks associated with YES were mitigated or limited. These mitigation statements give investors a false impression that the strategy is protected from the high risks described in the “boilerplate” disclosure documents.

UBS’s Yield Enhancement Strategy (“YES”) Is Not an Iron Condor

February 23, 2022 | By John G. Rich and Christopher Keogh

Hundreds of investors have been duped by UBS’s Yield Enhancement Strategy (YES). In its marketing materials, UBS told investors that its YES strategy was an Iron Condor, a generally low risk options “overlay” strategy designed to generate incremental income on top of that generated from a customer’s other investment assets. Losses from such a strategy are supposed to be strictly defined and limited. However, UBS’s YES strategy was not the low risk Iron Condor strategy described to its customers by UBS financial advisors and in UBS marketing materials. In fact, the way UBS implemented YES resulted in potential losses that far outweighed any potential gain. Had UBS made full and fair disclosure of the true risks associated with its YES program, most UBS customers, if not all, particularly conservative ones, would likely never have enrolled in the strategy. Unfortunately, many customers, unaware of the true risks, invested in YES and experienced severe losses in late 2018, early 2019 and 2020 when the S&P dropped. RIK’s investment lawyers are pursuing multimillion-dollar FINRA arbitrations on behalf of investors against UBS to recover losses sustained from the YES strategy.

What Is an Iron Condor?

An Iron Condor is an options trading strategy that consists of simultaneously buying and selling a four option set of S&P Index put and call options, consisting of a combination of a bear call spread and a bull put spread, both having the same expiration date. Investors profit from this strategy when the S&P Index performs, whether up or down, within a “band” defined by the strike prices of the short options and certain breakeven points defined by the long option strike prices. Most short options expire worthless because they tend to lose value as they approach expiration, known as “time decay.” When this happens the buyers of the options will let the options expire unexecuted. In that case the investor (seller) gets to keep the premiums received from the sale of the put and call options, net of the premiums paid for the long options. This is the maximum profit. (Read more about what an option is here).

With the Reopening of In-person Hearings, Investors Will Continue Recovering for Losses Sustained UBS’s Yield Enhancement Strategy (“YES”)

September 21, 2021 | By John G. Rich and Christopher Keogh

Investors lost millions in UBS’s high-risk Yield Enhancement Strategy (“YES”). Despite UBS’s claims that this was a low-risk strategy and that losses were protected by hedging put and call options, investors had substantial losses when the S&P dropped in 2018 and 2019. Even with these losses, UBS brokers continued to push this strategy onto investors. Because of market volatility in early 2020, losses ensued further, causing investors to lose millions. RIK’s investment fraud lawyers represent several claimants in multimillion-dollar FINRA arbitrations against UBS on behalf of YES investors.

Investors who suffered losses from the YES strategy began to file claims against UBS as early as February 2019. Due to the coronavirus, FINRA arbitrations were conducted by videoconference for most of 2020 and 2021 (read more about FINRA Arbitrations During the Covid-19 Pandemic here). As a result, several YES investors had their arbitration hearings held remotely. Holding a remote hearing presents a variety of challenges and hurdles for investors. Three of the most significant difficulties for a claimant to overcome in a remote hearing are gaining credibility with the arbitrators, earning sympathy, and conducting an effective cross examination of respondent witnesses.

Credibility is based on the competence of the witness and determines whether their testimony is worthy of belief. In many cases, once the panel decides which witnesses are credible and which are not, the question of right and wrong is easily reached. Panels determine credibility, in part, by observing and examining how witnesses and attorneys react to a lawyer’s questioning. When a hearing is conducted through a two-dimensional platform, like videoconferencing, the ability to effectively and fully observe witness and attorney reactions is lost.

RIK Files Several Multi-Million Dollar Claims Related to Options Trading

August 26, 2021 | By Christopher Keogh

Although some registered representatives and financial firms downplay the risks involved with options trading, in reality, options trading can be an aggressive strategy that may entail high risks. Because of the risks associated with option trading, it is generally only suitable for investors with a high net worth, experience, and an appetite for risk. Brokers, financial advisors, and financial firms sometimes ignore a customer’s tolerance for risk and improperly approve options trading in the customer’s account. Unfortunately, this can lead to tremendous losses in their accounts. RIK recently filed several multi-million-dollar cases on behalf of investors to recover for losses relating to improper options trading.

Options are contracts that grant an investor the right, but not obligation, to buy or sell an underlying asset at a set price on or before a specific date. Options trading has become popular amongst investors in recent years. To be successful, options trading requires research, discipline, and constant market monitoring. This type of trading involves high risk and requires special approval from the financial firm.

From the outset, options trading often comes with excessive fees which incentivizes brokers and advisors to recommend options trading to their clients regardless of the clients’ investment objectives and willingness to take on risk. In doing so, the broker or advisor sometimes downplays the risks associated with an options trading strategy by claiming that the only potential downside is the initial cost of the contract or that the advisor can hedge the position. Both notions can be misleading. First, the investor pays a premium for options in addition to paying high commission fees. This means the investor is at a loss the moment an option is purchased. Secondly, hedging options is highly dependent on market conditions and is an extremely risky strategy in the current volatile market.

FINRA is Cracking Down on Improper Options-Trading Approval and Lack of Supervision

August 6, 2021 | By Christopher Keogh

In recent years, options trading has become more popular with investors. Because of the high risks associated with options trading, FINRA imposes specific rules and guidelines relating to trading options and which accounts can be approved for options trading. For example, firms are required to have an options principal oversee option trading in accounts. Moreover, in April 2021, FINRA sent a notice to members reminding them that, “[r]egardless of whether the account is self-directed or options are being recommended, members must perform due diligence on the customer and collect information about the customer to support a determination that options trading is appropriate for the customer.” See FINRA, Notice to Members 21-15 (2021).

FINRA’s recent investigations and sanctions against financial institutions, brokers, and advisors for options-related violations demonstrate how serious rules relating to options approval and option trading are. For example, last month FINRA imposed its largest financial penalty ever against Robinhood Financial LLC, in part, for failing to exercise due diligence before approving investors for options trading in self-directed accounts. Below are other recent examples of options-related sanctions FINRA imposed on firms and individuals:

Cambridge Research, Inc. was censured, fined $400,000, and ordered to pay over $3,000,000 in restitutions for improper conduct relating to the firms “risky strategies” that relied on purchasing uncovered options – options where the seller does not hold the underlying stock and is required to have an option margin to show the ability to purchase the stock when needed (FINRA Case No. 2018056443801);

SPACs & the Risks of Investing in Blank Check Companies

April 14, 2021 | By Christopher Keogh

Wall Street’s fastest growing trend is investing in Special Purpose Acquisitions Companies (“SPACs”). SPACs are a way for private companies to go public without having to go through the traditional IPO process. SPACs have been around for decades but have recently gained popularity in companies seeking to go public in this period of high market volatility. Historically, SPACs were viewed as extremely risky investments. The recent rise in SPACs does not change the high risks associated with them. Some brokers and financial advisors ignore these risks and recommend customers invest in SPACs regardless of the customer’s investment profile and appetite for risk. RIK’s investment fraud lawyers have extensive experience handling these types of cases and recovering losses for customers.

SPACs, also known as blank check companies, are companies created and publicly traded for the sole purpose of buying or merging with a private company in the future, known as the target company. SPACs disclose criteria about the what kind of target company or companies it seeks. Despite these disclosures, which are usually very limited and loosely defined, investors of the SPAC have no idea what the eventual acquisition company will be. In other words, investors are going in blind.

In using SPACs to go public, private companies forego the process of registering an IPO with the SEC, meaning there is less oversight from the SEC. The SPAC process also permits private companies to go public in a substantially shorter time period than a conventional IPO. As one might suspect, the due diligence of the SPAC process is not as rigorous as a traditional IPO and no one is looking out for the best interests of investors. Even worse, SPAC managers are not incentivized to obtain the best possible deal for investors – their job is to get a merger deal, not get the best deal. Not surprisingly, this can lead to substantial harm to investors. For example, the SPAC company may be overpaying for the target company – meaning investors are losing on the deal.