UBS Stockbroker Seeks Expungement of ARS Claim That Firm Says Wasn't Made

June 14, 2019

In a recent FINRA arbitration expungement case involving UBS, we come across an example of nonsensical regulation. To give you a sense of how stupid stupid can get -- look around and pick someone, anyone, in your field of view. Okay, fine, so let's go with that woman you picked. I will tell you that she has NEVER owned a single share of stock -- you got that? Now, see if you can answer this question: If the woman you picked were to file a lawsuit against a brokerage firm for losses in her account, what stocks do you think she would have bought and how large would her losses have been? 

Case In Point

In a FINRA Arbitration Statement of Claim filed in April 2019, associated person Claimant Becker sought the expungement of a customer complaint from his Central Registration Depository record ("CRD"). Respondent UBS consented to the requested relief and did not participate in the expungement arbitration hearing. Although notified of the proposed hearing, the customer did not oppose Claimant Becker's request and did not participate. In the Matter of the Arbitration Between Noel A. Becker, Claimant, v. UBS Financial Services Inc., Respondent (FINRA Arbitration Decision 19-00987)

As noted in pertinent part of the FINRA Arbitration Decision:

[T]he Arbitrator noted that there were no settlement documents to review in relation to Occurrence Number 1470172, as the customer was refunded his initial investment as part of an industrywide consent decree that involved paying the customer the par value of the instruments at issue. The Arbitrator noted that the refund to the customer was not conditioned on the customer not opposing the request for expungement. The Arbitrator also noted that Claimant did not contribute to the refund, nor did he participate in the decision to make the customer whole.

In recommending expungement, the sole FINRA Arbitrator made a Rule 2080 finding that the customer's claim, allegation, or information was factually impossible or clearly erroneous, and false. The Arbitrator offered this rationale:

The customer complaint arose in connection with the industrywide breakdown of the liquidity in the market for auction rate securities. The customer complaint was not against Claimant. It is factually impossible or clearly erroneous to find Claimant at fault for the alleged product failure. Claimant was not involved in any alleged investment-related sales practice violation. Any claim that Claimant was at fault for the industrywide events is false. Claimant played no role in the customer's complaint about the illiquidity of the auction rate securities market.

Let's take a quick jaunt down memory road.

August 2008 UBS ARS Settlement: The Industrywide Failure

UBS announced today a settlement, in principle, with the New York Attorney General (NYAG), the Massachusetts Securities Division, the Securities and Exchange Commission (SEC) and other state regulatory agencies represented by North American Securities Administrators Association (NASAA) to restore liquidity to all remaining clients' holdings of auction rate securities (ARS). 

Under the agreement in principle, UBS has committed to purchase a total of USD 8.3 billion of ARS, at par, from most private clients during a two-year time period beginning January 1, 2009. Private clients and charities holding less than USD 1 million in household assets at UBS will be able to avail themselves of this relief beginning Oct. 31, 2008. From mid-September, UBS will provide loans at no cost to the client for the par value of their ARS holdings. 

In addition, UBS has also committed to provide liquidity solutions to institutional investors and will agree from June 2010 to purchase all or any of the remaining USD 10.3.billion, at par, from its institutional clients. Today's news is in addition to the firm's recently announced intention to repurchase USD 3.5 billion of tax-exempt Auction Preferred Stock. 

"Today's solution provides further relief, beginning in September, to investors who have been understandably frustrated by the industry-wide failure of the ARS market. Our leading position in supporting the market and providing liquidity is clear, and now, we are the first firm to give all clients -- private, corporate and institutional the opportunity to be made whole," said Marten Hoekstra, Head of UBS Wealth Management Americas. 

"Since the breakdown in the market, UBS clients have been offered multiple liquidity options. They have been able to borrow 100 percent against the value of their holdings. The solutions announced today provide our clients with the widest range of choices in the industry, including a two-year window during which clients can either continue to earn interest or redeem their ARS at any time," Hoekstra added. 

The firm has also agreed to pay a fine of USD 150 million - USD 75 million to the state of New York and USD 75 million to other state regulatory agencies. UBS neither admits nor denies allegations of wrongdoing. 

The full cost of the proposed settlement, taking into account the projected redemption patterns of clients, the difference between the purchase prices and the current market value of client ARS holdings, and the regulatory fine related to the settlements, is estimated to be in the range of USD 900 million on a pre-tax basis, to be booked in the second quarter results. This includes reimbursements to all clients for losses incurred from sales of ARS holdings between Feb. 13 and Aug. 8, 2008. 

A provision for the costs of this settlement will be included in the firm's second quarter financial results, which will be announced on Aug.12, 2008. 

Results, including this settlement, for UBS AG for the second quarter will be consistent with guidance given by the firm on July 4, 2008.

December 2008 SEC Complaint: UBS Misrepresented ARS Safety to Customers

As set forth in the SEC Complaint under the heading "Nature of the Action":

1. This is a case in which the Defendants misled tens of thousands of its customers regarding the fundamental nature and increasing risks associated with auction rate securities ("ARS" or "ARC")) that UBS underwrote, marketed and sold. Through its financial advisors ("FAs"), marketing materials, and account statements, UBS misrepresented to its customers that ARS was safe, highly liquid investments that were equivalent to cash or money-market funds. As a result, numerous customers invested their savings in UBS's ARS that they needed to have available an a short-term basis. 

2. In the latter part of 2007 and earIy 2008, UBS's senior management was aware of undisclosed risk factors associated with its ARS program, including concerns about its ability and willingness to support the auctions. As evidence of the importance of this type of information to investors, at the end of 2007 and in early 2008, several senior executives sold all or some of their personal ARS holdings after becoming aware of the mounting institutional and market related problems facing the program. 

3. On February 13,2008, UBS determined that it would not continue to support auctions, as it had historically done, and that it would let its auctions fail. As a direct result of auction failures, over forty thousand UBS customer accounts holding more than $3 5 billion in auction rate securities had their investments rendered virtually illiquid overnight and, because of the illiquidity, many customers incurred mark to market losses on the par value of their ARS investments held at UBS. Customers who did sell their securities in the secondarymarket had to do so at a loss. 

4. By engaging in the conduct described in the Complaint, the Defendants violated Section 15(c) of the Securities Exchange Act of 1934 [15 U.S.C. Section 78o(c)] Accordingly, the Commission seeks: (a) entry of permanent injunctions prohibiting the Defendants from further violations of the relevant provisions of the Exchange Act; (b) imposition of a civil penalty against each defendant; and (c) any other relief this Court deems necessary and appropriate under the circumstances

March 2010 UBS Finalizes ARS Settlements: The Industrywide Failure

UBS Finalizes ARS Settlements / Comprehensive settlements restore liquidity to most clients (UBS Wealth Management USA. Press Release / March 2010 Update)

March 2010 Update

On March 4, 2010 UBS announced it had finalized a settlement with the Texas State Securities Board (TSSB), in conjunction with the North American Securities Administrators Association (NASAA), regarding clients' holdings of auction rate securities (ARS).  The NASAA settlement is the latest step in UBS's ongoing effort to restore liquidity to its ARS clients who were adversely affected by the failure of the ARS market in February 2008 and who continue to have difficulty finding relief.
    • This settlement allows certain clients who purchased from UBS but moved to other firms to recover liquidity.
    • UBS will provide up to $200 million of liquidity to former private clients who purchased ARS from UBS between January 1, 2000 and September 30, 2007 and transferred them outside the firm before February 13, 2008.  Please note: Institutions are not eligible for settlement provision under the terms of this agreement.
Former UBS clients may call 1-800-253-1974 for more information regarding this settlement and the steps necessary to initiate the process for recovering liquidity.

UBS previously announced the terms of its settlement with NASAA, the Securities Exchange Commission (SEC) and the states of New York and Massachusetts on August 8, 2008. Under the terms of the August 2008 settlement, UBS agreed to purchase ARS at par from "Eligible Clients" pursuant to an ARS Rights Offering prospectus dated October 7, 2008 (ARS Rights Offer (PDF, 161 KB)). All Eligible Clients under the ARS Rights Offering were sent notice letters in October 2008.  The ARS Rights Offering committed UBS to purchase USD 8.3 billion of ARS from retail clients beginning October 30, 2008 and to purchase USD 10.3 billion ARS from eligible institutional clients beginning June 30, 2010. UBS was the first major firm to announce a definitive timetable for institutional clients. The UBS ARS Rights Offering covered holders of ARS who were UBS clients at the time of the market failure, regardless of where those ARS were purchased. It also covered clients that had purchased ARS at UBS between October 1, 2007 and February 13, 2008 but transferred them away from UBS prior to February 13, 2008. Detailed information regarding the firm's settlement with the SEC is available in UBS's August 8, 2008, press release. UBS has also created a tool for investors with Eligible ARS to determine current interest rates and/or dividends for their specific ARS holdings; security identifiers (knowns as CUSIPs) were included in the letters that were mailed to eligible current and former clients. . .  

So . . . Claimant Becker and his customers were all victimized by what UBS characterized as "the industry-wide failure of the ARS market,: but the SEC Complaint alleged "UBS misrepresented to its customers that ARS was safe, highly liquid investments that were equivalent to cash or money-market funds."  

Bill Singer's Comment

Online FINRA BrokerCheck records as of June 14, 2019, disclose that Claimant Becker was first registered in 1995, and has one and only one disclosure event, which appears to be the item that will soon be expunged. As disclosed on BrokerCheck, the complaint was received by UBS on February 27, 2008 -- more than a decade ago. The BrokerCheck report filed by UBS states under the heading "Alleged Damages Amount Explanation (if amount not exact)":


It's been 11 years since UBS first posted the disclosure and, wow, the firm still doesn't know whether it is an "and" or an "or"? So, okay, lets go with the "and" option in the "and/or" and infer that the customer 1. did NOT make a claim and 2. UBS determined that the damages were less than $5,000. If that uncertainty is good enough for UBS and good enough for industry regulator FINRA, then I'm taking the firm and the regulator up on their invitation to infer the "and." Oh, and before you accuse me of spinning things, keep in mind that the Arbitrator found that:

The customer complaint arose in connection with the industrywide breakdown of the liquidity in the market for auction rate securities. The customer complaint was not against Claimant. . . .

Accordingly, despite the fact that the Arbitrator found that the customer apparently made a complaint but UBS found that the customer did not make a claim for compensatory damages (not sure how the hell you get to that point but let's just move on), UBS stated on BrokerCheck that "damages were determined to be less than $5,000." That determination is metaphysical because UBS somehow was able to determine how much a claim (which was never made) would have sought in terms of damages but for the fact that, like I said, no claim was made! To illustrate the idiocy of that logic, consider this example:

I walk into an ice cream parlor. I loooove ice cream. My wife says I love ice cream too much. She points to my love handles. I say that they're taut muscles in a relaxed state awaiting activation in an emergency. She says that I'm an idiot. Anyway, as to the ice cream thing, to be fair, I don't think I ever met an ice cream that I didn't like. In any event, imagine that I'm at the beach and it's a hot day and I walk into an ice cream parlor and then I quickly walk out without buying anything. Fat chance that's gonna happen but, hey, just go with this version of my story for now, okay? Anyway, no sooner do I leave the place without buying anything, then a FINRA regulator visits the owner of the ice cream parlor and asks how much I spent. The owner says that the devilishly handsome lawyer didn't spend anything -- and, geez, did you see the six-pack on that guy? In response, the FINRA regulator responds to the ice cream parlor guy by saying that we know that Singer didn't order any ice cream but if he did what do you think he would have ordered and how much do you think he would have spent? The ice cream owner looks at the FINRA regulator and asks: Who the hell are you buddy? Why you bothering me with this crap. The guy didn't buy anything. How the hell should I know what he would have spent if he had bought anything? The reply from the FINRA regulator is that I'm a regulator with the Financial Industry Regulatory Authority. The ice cream guys says, never heard of it -- is that some government regulator? The FINRA guys would like to lie and pretend he's from the government but pangs of conscience grab him and he says, well, not really. The ice cream guy says "not really?" -- is that like a "yes" or a "no"? The FINRA regulator says it's more like a "no" but sometimes we like to argue that we're quasi-governmental. If nothing but persistent, the FINRA regulator again asks how much the ice cream parlor owner thinks that Singer would have spent if he hadn't walked out without buying anything. The ice cream guy gives the FINRA guy a swift boot in the ass and propels him out of the parlor and onto the boardwalk. 

All of which illustrates the absurdity of stating, on the one hand, that a customer did NOT make any claim for damages, but, on the other hand, "determining" that if a claim had been made it would have be for more or less of $5,000. Yeah, I know, it's not really UBS' fault because FINRA requires that its member firms "determine" whether a claim seeking unspecified damages would likely be seeking over $5,000 in damages. Sure, I get it -- but in Claimant Becker's case, the UBS' BrokerCheck disclosure says that the public customer DID NOT MAKE A CLAIM FOR COMPENSATORY DAMAGES. 

By now, you may be wondering what is the point of this UBS shaggy-dog damages story. 

You know that claim-that-was-never-made by the customer who filed a complaint? 

You know how UBS determined that the damages for that never-made-claim would be less than $5,000? 

Well, UBS added some additional disclosure on BrokerCheck by indicating for "Status Date: 12/23/2008," a "Settlement Amount: $2,675,000.00."  

 "Settlement Amount: $2,675,000.00." 

I mean does anyone, and I mean anyone, at FINRA even bother to read the crapola posted on BrokerCheck?  How the hell does UBS report a $2.675 million settlement for a claim that was never made and for which the firm determined in good faith would only amount to "less than $5,000" ????

Making muddy waters even murkier, Becker's "Broker Statement," states in part that:


Oh, yeah, sure, that clears everything up.