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UBS Loses Lehman Structured Notes Arbitration.
Written: December 5, 2010

More than two years after Lehman Brothers imploded and filed for bankruptcy, that firmís legacy seems to be a dubious gift that keeps on giving -- and for some public investors, as well as many Wall Street professionals, that gift continues to be a world of pain.

The Red Ink Looked A Lot Like Blood

Back in 2007, when the financial world was careening off the side of the road and over the cliff, UBS was reported to be considering a merger with the increasingly desperate Lehman. At that time, Lehman purportedly had over $100 billion of its equity tied up in hemorrhaging mortgage and real estate investments,  which likely explained why the cost of Lehman CDSs (credit default swaps) had skyrocketed. In investigating the firm's financial situation as an understandable consideration for the purpose of the merger, UBS likely understood the reality of how bad things truly were -- perhaps even more so than most other market participants.

Perhaps the Definition of Risk?

Notwithstanding UBS's alleged knowledge of Lehmanís precarious financial situation, UBS continued to recommend the purchase to its customers of structured notes issued by Lehman, which were essentially a funding vehicle for Lehman by which that firm was able to secure loans with little, if any, collateral. Moreover, itís not like Lehmanís structured notes were exactly liquid investments in the dark days of 2007 and beyond. Still, for whatever reason, a number of Wall Street firms, including UBS, recommended these structured notes to the public.

Repo 105

Among the now ticklish problems for UBS is that while the firm was recommending the purchase by its clients of Lehman structured notes, UBS was lending money to Lehman pursuant to fully collateralized short-term loans at high rates of interest Ė now known as part of the Repo 105 program.

For a superb explanation of the Repo 105 program, read "Lehman's Repo 105 Counterparties Barclays, Mizuho, UBS, Deutsche Bank, And KBC May Have Attempted To "Squeeze" The Bank" (March 12, 2010) at

So Ė on the one hand UBS is profiting from the commissions/fees it generated via the sales to UBS clients of Lehman notes, and, at the same time, UBS was profiting from fees and interest that were generated by the firmís collateralized loans to Lehman.

By late 2008, the Lehman structured notes were largely illiquid Ė and certainly thatís an understatement by the time of the firmís bankruptcy. As to UBSís Repo 105 program with Lehman, well thankfully for UBS, it was largely able to pull the plug on its exposure before the likelihood of repayment was nil. The net result of all the dealing and alleged self-dealing is that by the time of Lehmanís bankruptcy, UBS clients who were invested in Lehman structured notes were largely stranded; whereas, UBS had jumped ship in terms of its own exposure to Lehman and wound up in a fairly strong net basis.

The Stuff of Lawsuits

UBS argues that it did not engage in unconscionable double-dealing. That argument is now being tested as UBS raises it in the form of its defense to investor claims. What has apparently troubled a number of public customer lawyers and prompted the filing of numerous lawsuits is precisely that seeming conflict.  After all, how could the same brokerage firm recommend investing in structured notes from Lehman (largely uncollateralized or poorly so) when, at the same time, that same brokerage firm is insisting upon fully collateralized loans from Lehman and only providing funds on the basis of relatively high interest rates? 

Case in Point

In a Financial Industry Regulatory Authority (FINRA) Arbitration Statement of Claim filed in November 19, 2008, Claimants Steven and Ellen Edelson alleged unsuitability, misrepresentation and omission, wrongful conduct, fraud, negligence, and breach of conduct against Respondent UBS. Claimants invested $529,688.00 in "100% Principal Protection Notes" and "Return Optimization Securities with Partial Protection" issued by Lehman Brothers Holdings and co-underwritten by UBS (hereinafter referred to as the "Lehman Structured Products"). Claimants requested rescission, or in the alternative, compensatory damages in the amount of $529,688.00, plus punitive damages, interest, attorney's fees, and costs of the proceeding. In Matter of the FINRA Arbitration Between Steven Edelson and Ellen Edelson, Claimants vs. UBS Financial Services, Inc.,Respondent (FINRA Arbitration Case 08-04357, December 2, 2010).

Respondent UBS denied the allegations made in the Statement of Claim and asserted various affirmative defenses.

This FINRA arbitration proceeded under the FINRA Public Arbitrator Pilot Program, which allows parties to choose whether to have a non-public arbitrator on the panel. On November 3, 2010, the FINRA Arbitration Award was served without indication that this case having proceeded under the Public Arbitrator Pilot Program. Therefore, the award was recently amended to reflect that the case proceeded under the Public Arbitrator Pilot Program.

The FINRA Panel found Respondent UBS liable for and ordered it to pay to Claimants compensatory damages in the amount of $529,688.00. Claimants were ordered to assign any remaining right, title, and interest in the Lehman Structured Products to Respondent.


clear pixel A Not-So Opulent Hedge Fund Goes Belly Up

This is a story that may seem a bit complicated but, in reality, itís a fairly basic tale. Stripped of all its Wall Street jargon, we are once again confronted with the all-too-familiar tragedy in which a misguided soul made a mistake and tried to undo the damage ó only to find that the problem went from bad to worse.

For starters, we have Opulent Lite, LP, a California limited partnership that was a hedge fund with approximately 70 investors and assets under management of approximately $30 million. Next, we have Trueblue Strategies, LLC, an investment adviser that provided advised Opulent Lite,  Now, enter, Neil Godbole, age 29, who was the sole principal and owner of Trueblue Strategies, and  beginning in 2005, was wholly responsible for managing Opulent Lite, including its trading decisions, recordkeeping and communications with investors

Apparently starting sometime around 2005, Godboleís trading strategy was to invest most of Opulent Liteís funds in short-term treasury bonds that would mature at the end of the fundís monthly trading period. The remainder of the cash was invested in S&P index options that would expire at the end of the monthly trading period.

So far, so good ó and then, so far, so bad.  READ the entire article at:


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